Trading or investing? Understanding the badges of trade
Indicators of trading activity and HMRC guidelines
In 1986, four brothers bought a plot of land on the advice of a property developer, financing it with an overdraft. They sold it just three months later, doubling their money. One admitted it was a “speculation,” while another claimed it was an investment—despite the lack of income potential and reliance on short-term borrowing.
This case, Marson v Morton (1986), became pivotal in defining the badges of trade—the criteria used to determine whether an activity constitutes trading. Although the court ruled the transaction was an investment, the case clarified key indicators such as financing methods and intention.
The badges of trade remain a critical framework for assessing trading activity, ensuring individuals and businesses comply with UK tax laws. If your activity counts as trading, it could mean paying Income Tax or Corporation Tax on profits. This framework has become especially relevant in today’s gig economy, where side hustles have become more common.
In this article, we’ll explore the badges of trade in the UK, their implications and how HMRC uses them to classify activities to help you avoid misclassification and penalties.
What are the nine badges of trade?
The badges of trade are nine key indicators HMRC uses to evaluate whether an activity amounts to trading. They serve as a flexible framework rather than hard-and-fast rules, meaning no single badge guarantees trading status. Instead, HMRC considers all relevant factors holistically.
Here’s a breakdown of the nine badges of trade and how they apply.
1. Subject matter of the transaction
If you’re selling items typically associated with trade (e.g. goods or commodities), you might be considered to be trading. Personal-use items (e.g. heirlooms) are less likely to qualify.
2. Frequency of transactions
Regularly engaging in buying and selling activity points to trading. Occasional or one-off sales probably won’t meet this badge.
3. Length of ownership
Short-term ownership before a sale suggests trading—particularly if assets are sold to capitalise on market conditions.
4. Supplementary work or effort
If you refurbish or enhance an asset before selling it, HMRC might consider you a trader.
5. Motive or intention
When your primary goal when purchasing an item is resale for profit, it’s likely that you’re trading.
6. Circumstances of sale
Organised sales efforts, such as advertising or marketing campaigns, are closely associated with trading activities.
7. Source of finance
Financing purchases through loans or credit, with repayment relying on sales proceeds, suggests a trading mindset.
8. Connection with existing trade
When transactions are linked to an established business (e.g. a retailer selling stock), trading is strongly indicated.
9. Profit-seeking motive
A clear intent to generate profit through the activity is often the most decisive badge.
Trading and side hustles: what you need to know
There is no separate “side hustle tax” in the UK, but these activities may fall under HMRC’s general trading guidelines.
Since the 2017/18 tax year, the UK has offered a trading allowance for individuals engaging in casual or part-time trading. If your gross income from self-employment or side hustles is £1,000 or less in a tax year, you don’t need to declare it or pay tax. But if your income exceeds £1,000, it may be subject to Income Tax, and you’ll need to register with HMRC.
A more recent requirement, effective from January 2024, mandates that digital platform operators report transactions to HMRC. This means platforms like eBay, Etsy, Amazon and others must inform HMRC about users who meet certain thresholds for activity. This aims to improve tax compliance and help HMRC track online sales more effectively.
If you’re running a side hustle via an online platform, it’s crucial to be aware of this new reporting requirement. Even if your activity seems small or occasional, you may need to declare your earnings to HMRC, especially if they exceed the trading allowance threshold.
How are trading activities classified?
Not all trading activities are created equal. From casual or one-off ventures to organised e-commerce or property dealings, each trading classification has unique characteristics that HMRC evaluates using the badges of trade. It’s important to understand these distinctions so you can make sure you’re tax compliant.
Casual trading
Even irregular or one-off sales (e.g. at markets) can be classified as trading if they meet multiple badges of trade.
Property trading
Buying and selling properties for profit, especially with short ownership periods or significant renovations, is often treated as trading.
E-trading
Online platforms like eBay, Etsy, or Amazon make it easier to engage in trading. If you’re consistently selling for profit online, you may meet the badges of trade.
Hobby vs. trade
Activities like crafting or collecting may start as hobbies, but can become classed as trading if done regularly or for profit.
Why the badges of trade matter
If your activity meets the badges of trade, HMRC may classify it as trading, which carries important tax obligations. You’ll need to:
- Register with HMRC as a sole trader, partnership or company.
- Pay Income Tax or Corporation Tax on trading profits.
- Keep accurate records of transactions, financing and marketing efforts to avoid penalties.
Failing to correctly classify your activities could result in investigations, fines or other penalties. To stay compliant, you should assess your activities regularly against the badges of trade, registering with HMRC if they align and seeking advice from a tax expert to minimise risks.
Get in touch with us to find out if your activity constitutes trading. We can help protect your financial interests and stay on the right side of HMRC regulations.
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We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.