Badges of trade which are used in determining an activity as a trade or not. By Johnson Yesaya. LL.B

PRELIMINARY

Tax collection is a task which is done by almost all world countries for the purpose to collect contributions from income generated from employment, business or trade and investment. Tax collection is an efficient way by governments to collect money for the purpose to be able to provide services to their citizens. Tax collection is not a random task, Article 138 of the constitution[1] provides that, “No tax of any kind shall be imposed save in accordance with a law enacted by Parliament or pursuant to a procedure lawfully prescribed and having the force of law by virtue of a law enacted by Parliament”. The Article provides a basis or foundation of tax collection and  there are several other laws, rules and regulations which provide modes of tax collection, time frame for tax payment, taxable gains or income etc. Tax are collected in accordance to the laws and no income is subject to tax unless the laws requires so. In United Republic of Tanzania, taxes are collected under The Income Tax Act[2] and The Income Tax Regulation[3]. The Tanzania Revenue Authority [T.R.A] is a statutory body established for the purpose of Tax collection. TRA was established under Tanzania Revenue Authority Act[4] in 1995 and started its operation on July 1 of 1996. TRA is generally given all powers concerning taxation and implementation of Income Tax Act, its rules and regulations.

The statutory functions of the Tanzania Revenue Authority include (i) to administer and give effect to the laws or the specified provisions of the laws set out in the First Schedule to Tanzania Revenue Authority Act, and for this purpose, to assess, collect and account for all revenue to which those laws apply; (ii) to monitor, oversee, coordinate activities and ensure the fair, efficient and effective administration of revenue laws by revenue departments in the jurisdiction of the Union Government; (iii) to monitor and ensure the collection of fees, levies, charges or any other tax collected by any Ministry, Department or Division of the Government as revenue for the Government; (iv) to advise the Minister and other relevant organs on all matters pertaining to fiscal policy, the implementation of the policy and the constant improvement of policy regarding revenue laws and administration; (v) to promote voluntary tax compliance to the highest degree possible; (vi)to take such measures as may be necessary to improve the standard of service given to taxpayers, with a view to improving the effectiveness of the revenue departments and maximizing revenue collection; and (vii)to determine the steps to be taken to counteract fraud and other forms of tax and other fiscal evasions; (viii)to produce trade statistics and publications on a quarterly basis; and to perform such other functions as the Minister may determine.

With regard to income from trade, it has been an intricate exercise for the tax authority to define trade for the purpose of determining taxable income, due to this, there established what called badges of trade so as to enable tax authority to determine if activity is a trading activity (business) which is required by the law to be taxed.

BADGES OF TRADE

Is there a profit motive? This is the first of the badges which is used to determine if an activity is a trading activity. This expresses that, an activity to be considered as a trade, it must have a motive of making profit. Tax is always collected from income and not capital gains, there must be all elements which indicates that the activity is for a purpose of making profit apart from capital gain so as to establish that an activity is a trading activity. There are situations in which the purpose of the transaction of purchase and sale is clearly discernible. Motive is relevant in such circumstance. If it can be inferred from surrounding circumstances in the absence of direct evidence of the seller’s intentions and even, if necessary, in the face of his own evidence.[5]

For-instance, in the case of CIR vs. Fraser[6] the transaction involved purchase of whisky at lower price and resale at higher price. Later, the court ruled that, “goods were purchased with a clear intention of reselling at a profit hence the transaction constituted trading and proceeds thereof income liable to income tax”. The profit motive is not always a necessary requirement to determine a trade, it is applicable as an indication of trading. In business, there must be transactions of different prices between a seller and a buyer, a seller who seek profit will sell his products at a higher price more than the one used to buy that product.

The frequency and number of transactions by a similar person. This badge of trade discloses that, where there are several dealings on the same product by a person it is a trade. The presumption is based on the experience that, trading activity is repetitive or of the similar kind or nature as it was observed in the case of H. Co. vs. CIT[7] that trading implies some continuity and repeated acts of buying and selling in same or other lines of business. For an activity to be a trading activity, repetitive dealings or transaction on products or goods are not always necessary. Even a single transaction can constitute trade depending on nature of other badges of trade.[8]

The number of transactions of similar nature by a same person are necessary in establishing trading activity. In the case of Pickford vs. Quick[9], the appellant bought a mill which intended to be used in a trade, unfortunately the mill was falling apart and it was no longer suitable for a trade as it remained as parts and not a one functioning machine. Appellant decided to sell those parts of the machine one by one and he indeed made a great profit. The profit made from these transactions were taxed as trading profits because of the number of transactions of a similar nature.

In the case of Martin vs. Lowry[10], the appellant was Agro-machinery businessman, he bought a large quantity of linen to resale at higher price. He used seven months to finish all linen, the court held that, the profit made was subject to tax as the activity done by appellant was a trading activity as it was done repeated for almost seven months by a same person on a similar product.

Length of ownership. The longer the length of ownership of property tells no trading activity, the shorter the length of ownership then more likely to be a trading activity. A trader or businessman always purchase goods and possess them for shorter time while awaiting to resale it at a higher price. A good which is intended for business cannot stay that much longer without being transferred to another person, goods which are not intended for business may take too longer under possession and ownership of one person. The taxing authorities use this badge to determine if activity falls under trading activity or not by looking at the length of time of possession or ownership of property by one person before being transferred to another person. If the time of ownership by a seller is shorter, it’s likely that, the good transferred intended for business. But when the time of ownership of goods by a seller was too longer, it is likely that the goods were bought by a seller for personal enjoyment or use and not for business purposes.[11]

Underlying asset has been modified? This is another among badges of trade which enable taxing authority to determine an activity if is a trading activity or not. Someone who buy an asset and modifies it in a way that such asset become of more value or more merchantable, it is likely to say such asset is for profit making and it is for trading activity. But, even if the asset does not undergo several modifications, it doesn’t always mean it is not meant for business. Even the assets which are not modified may be part of trading transaction regardless of being unmodified.[12]

The case of Cayzer vs. CIR[13] is a best authority of the concept that, large development expenditure is likely the product is for trading purposes. Also, the case of Cape Brandy Syndicate v. CIR[14] is a best example of a concept that, of the concept that, large development expenditure is likely the product is for trading purposes. In this case, the taxpayer obtained a large quantity of brandy, then the brandy was blended with different French brandy before re-packing it and selling it again. This was ruled by court of law to be a trade on the basis that the original brandy had been modified through the blending process.

Similar trade. If a transaction is similar to existing business carried by a taxpayer, it is likely that the transaction is a trading activity. For-instance, if a taxpayer is a mechanic and happens that he sells a car, the transaction is likely to be a trading transaction due to a link established between an existing trade and a transaction which is relevant to the existing business. Another example is, a construction company which deals with erection of buildings. When happens that company sells or buy a building, the transaction is likely to be a trading transaction due to the connection between the construction company and selling of a building. See Cooke v. Haddock [1965] 39 TC 64.[15]

The nature of the asset. This principle looks at the asset, does the asset bought for investment and with intention to make profit at future, or purchased as a personal asset for personal use, or assets purchased in connection with a trade such as machines. In the case of Marson v. Morton[16], a land was purchased with investment intention, no profit or income was generated from that particular land for all time when land was possessed. The land was later sold following unsolicited offer.

It was ruled that, the land transaction by a taxpayer was not a trading activity connected to his business (potato merchant) as it was regarded as an investment, the transaction was not an adventure in the nature of a trade.

In Wisdom v Chamberlain the court relied on the principle ‘pride of possession’ assets that generate no income. In this suit, a taxpayer bought two large quantities of silver bullion to counter the effects of the devaluation of the pound, the purchase of silver bullion partly financed by loan.

It was ruled by court that, the purchase was on short term basis to realize profit and hence the transaction was a trading activity subject to tax.

The source of finance. The source of finance is an important badge of trade in determining whether an activity is a trading activity or not. Finance taken to buy asset is likely that an asset is for profit making since the payment of debt will depend on sale of that particular asset at a profit price so as to be able to pay a debt or loan used to purchase such asset.

This was clearly  demonstrated in Wisdom v Chamberlain[17] where a taxpayer bought two large quantities of silver bullion to counter the effects of the devaluation of the pound. The purchase was made partly financed by loan, was done on a short term basis hence it wa likely that, the taxpayer intended to resale the silver at a profit price to repay debt or loan.

The way the sale is carried out[18]. If the sale or an activity is carried on a manner that it will benefits the organization or a person carried such particular transaction, it is likely that an activity is a trading activity. In business any transaction intends to make profit, if a transaction is not a trading activity, it is very difficult to see struggle towards profit making. The way transaction carried out it may be an evidence to distinguish what transaction constitutes trading activity.[19]

In the case of CIR v Livingston and others[20], three unconnected individuals jointly bought a cargo vessel, later the vessel was converted into a steam-drifter and sold for a purpose of making profit. The court held that, the transactions constituted trading activity and the transaction was intended to make profit. Within the decision the judge stated:

“I think the test, which must be used to determine whether a venture such as we are now considering is, or is not, in the nature of “trade”, is whether the operations involved in it are of the same kind, and carried on in the same way, as those which are characteristic of ordinary trading in the line of business in which the venture was made.”

Reason for acquisition or sale. This is among badges of trade which may disclose if an activity is a trading activity or otherwise by looking at the reason for acquisition or sale. For-instance, an asset which is obtained due to inheritance or gift, it is unlikely to constitute it as a trading transaction. Also, an asset purchased with intention of holding it for a long time, it cannot be considered as a trading asset even if a buyer change his intention to own asset for shorter term. [21]

In Taylor v. Good[22], the taxpayer was a businessman who carried two retail businesses and used to live with his wife at one of the flat of shops. A taxpayer had an idea in his head to purchase another place for residential purposes. Later the taxpayer purchased at auction, a property with 17 rooms and near 10 acres of land. During inspection of the building he found that the property was not at good condition but his intention was to conduct some minor repair over building and to start living there. Later a wife came with a new idea of demolishing the existed buildings and developing new residential properties on land to offer it for rent. A taxpayer accepted the wife’s proposal and he received offers from several developers for the site and he accepted one, the inland revenue issued an assessment to income tax on the grounds that this was a venture in the nature of trade. The appellate court allowed the taxpayer’s appeal, holding that, on the facts found or conceded, there was no evidence of an adventure in the nature of trade and should, instead taxed as a capital gain.

CONCLUSION

The badges of trade are as good as human rights, they go together, they’re un-alienable. One badge cannot be used to determine an activity as a trading activity, they are both applied together to give a conclusive answer on whether a particular activity is a trading activity or not. The taxing authorities relies on these badges when they found themselves at a dilemma that they cannot establish or understand if an activity is a trading activity or not, they’re worldwide used since the mode of tax collection is likely the same in all jurisdiction.

REFERENCE

BOOKS

LUOGA F.D.A.M. MAKINYIKA, “A source book of income tax law in Tanzania”, University of Dar es Salaam.

E.Kitime & D. Mwamlangala., “laws of taxation in Tanzania”, 2017. P.98-106

STATUTES

The Income Tax Act, [CAP 332 R: E. 2009].

The Income Tax Regulation, G.N No 464 published on 5/11/2004

The Tanzania Revenue Authority Act, No 11 of 1995

 

CASELAWS

CIR vs. Fraser, 24 TC 498.

H.Co. VS CIT, 1 EATC 65

Pickford vs. Quick (1927) 13 TC 251.

Martin vs. Lowry (1927) AC 312

Cayzer vs. CIR  24 TC 491.

Cape Brandy Syndicate v. CIR [1921] 12 TC 358

Taylor v. Good, 1974

 

OTHERSOURCES

Crowe, “Badges of Trade”, available at <https://www.crowe.com/my/insights/crowe-perspectives--badges-of-trade> accessed December 30, 2021.

Accablobal, “badges of trade”, available at < https://www.accaglobal.com/my/en/technical-activities/technical-resources-search/2011/august/badges-of-trade.html> accessed December 30, 2021.

Lexisnexis, “badges of trade”, available at <https://www.lexisnexis.co.uk/tolley/tax/guidance/badges-of-trade-01> accessed December 30, 2021

RPPAccounts, “badges of trade”, available at <https://rppaccounts.co.uk/the-badges-of-trade-used-by-hmrc/> accessed December 30, 2021

Kpsimpson, “what are badges oftrade”, available at <https://www.kpsimpson.co.uk/what-are-the-badges-of-trade/> accessed December 30, 2021

Txationweb, ‘badges of trade”, available at < https://www.taxationweb.co.uk/tax-articles/business-tax/the-badges-of-trade.html> accessed December 30, 2021

Etctax, “badges of trade” available at <https://www.etctax.co.uk/knowledge_centre/badges-of-trade-is-there-a-trading-activity/> accessed December 30, 2021.

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[1] The Constitution of United Republic of Tanzania, Cap 2 of 1977 as amended. Art. 138

[2] The Income Tax Act, [CAP 332 R: E. 2009].

[3] The Income Tax Regulation, G.N No 464 published on 5/11/2004

[4] The Tanzania Revenue Authority Act, No 11 of 1995

[5] Crowe, “Badges of Trade”, available at <https://www.crowe.com/my/insights/crowe-perspectives--badges-of-trade> accessed December 30, 2021.

[6] CIR vs. Fraser, 24 TC 498.

[7] H.Co. VS CIT, 1 EATC 65

[8]Accablobal, “badges of trade”, available at < https://www.accaglobal.com/my/en/technical-activities/technical-resources-search/2011/august/badges-of-trade.html> accessed December 30, 2021.

[9] Pickford vs. Quick (1927) 13 TC 251.

[10] Martin vs. Lowry (1927) AC 312

[11] Lexisnexis, “badges of trade”, available at <https://www.lexisnexis.co.uk/tolley/tax/guidance/badges-of-trade-01> accessed December 30, 2021

[12]RPPAccounts, “badges of trade”, available at <https://rppaccounts.co.uk/the-badges-of-trade-used-by-hmrc/> accessed December 30, 2021

[13]Cayzer vs. CIR  24 TC 491.

[14] Cape Brandy Syndicate v. CIR [1921] 12 TC 358

[15] Kpsimpson, “what are badges oftrade”, available at <https://www.kpsimpson.co.uk/what-are-the-badges-of-trade/> accessed December 30, 2021

[16]Marson v. Morton [1986] 1 WLR 1343

[17] Ibid

[18] E.Kitime & D. Mwamlangala., “laws of taxation in Tanzania”, 2017. P.99

[19] Txationweb, ‘badges of trade”, available at < https://www.taxationweb.co.uk/tax-articles/business-tax/the-badges-of-trade.html> accessed December 30, 2021

[20]CIR v Livingston and others 11TC538

[21] Etctax, “badges of trade” available at <https://www.etctax.co.uk/knowledge_centre/badges-of-trade-is-there-a-trading-activity/> accessed December 30, 2021.

[22] Taylor v. Good, 1974