HMRC are highly suspicious of individuals who say they are trading by dealing in shares and similar financial instruments. A whole section of their Business Income Manual (BIM56800+) is devoted to the topic, including analysis of the extensive case law.
Unless the person is a regulated share dealer, HMRC will assume that the share dealing activity doesn’t amount to a trade. If HMRC are forced to concede that there was a trade they will argue that the activity was not conducted on a commercial basis, so that any losses can’t be set against the taxpayer’s other income of the same year or carried back.
This was HMRC’s approach in challenging the set-off of losses of over £4m made by Mr Gill in 2010/11. However, they picked the wrong target.
Gill had all the attributes of a professional shares and securities dealer, albeit an independent one. He started trading while he was a student in 1995 and continued on a full-time basis from 1997/98 to the present day. His share dealing business had been very profitable for many years until 2008/09 to 2009/10.
He worked by himself in his home office, but in close collaboration with several brokers from different financial institutions. His office was set up with all the facilities a dealer in an institution would use: high powered computers with four screens, office phone and a TV to monitor the financial markets. He also subscribed to online tools, dealing platforms, and newsletters to assist with share dealing.
HMRC argued that his activities were not a trade, primarily because he didn’t draw up a business plan. The judge considered that the extensive evidence provided by Gill and his witnesses demonstrated that he was trading.
HMRC contended the trading was not commercial, focusing on the two years of losses, saying the trading was casual and haphazard. The judge accepted that the taxpayer had been over-confident but found nothing to that suggested this was a problem. He concluded that Gill was trading commercially, with a view to making a profit.
The judge also ruled that HMRC’s behaviour in trying to introduce materials very late in proceedings was unreasonable, and that HMRC should bear Gill’s costs in challenging those materials, which were excluded from the evidence.
Written by the Tax Advice Network