Income tax and trading
You pay income tax on the profits of a trade. It is usually clear whether you are trading - for example a builder, shopkeeper or dentist all know that they are trading.
However, there are some grey areas where an activity may or may not be a trade, or you may consider your activities not to be taxable.
The information below should clarify your tax position, however it can't cover all circumstances. You should seek help from us or a qualified accountant if you are not sure, as there are penalties for not disclosing taxable income.
Statements to determine trading
If you can answer 'yes' to any of the following statements then you are probably trading:
- I make regular sales
- I buy items so that I can sell them again to make a profit
- I sell through an online shop with an internet auction site
- I advertise my services
- I regularly attend car boot sales or similar to buy and sell items for my personal profit
- I repair or modify items or split things into smaller quantities to make more profit on them
- I sell things quickly to obtain a profit (although I deliberately hold onto some items if there is more chance of making a profit from them in the longer term)
- I am already running a business and am selling items related to that business (these sales should already be included in your accounts)
- I have borrowed money to pay for what I am selling
- I am making goods and selling them for a price that covers the cost and marked up with the intention to make a profit (as opposed to selling items as a result of a hobby and only wanting to cover your costs)
Badges of trade
We always look at the facts of the case, and one tool that assists us is called 'the badges of trade'. The badges of trade are derived from UK case law and are used by HMRC. These will not be used in every case and some badges, depending on the answer, can point either towards or away from a trade being carried out.
The current badges of trade are as follows:
- profit-seeking motive
- the number of transactions by the same person
- the nature of the goods sold
- the existence of similar trading transactions or interests
- changes to the goods
- the way the sale was carried out
- the source of finance
- the interval of time between purchase and sale
- the method of acquisition of the goods
No single factor is necessarily conclusive. We would always look at the overall position before arriving at a decision.
If you'd like further information on the badges of trade, see the HMRC website.
'The badges or indicators of trading' on HMRC website
Buying and selling shares
If you are just buying and selling for yourself with your own money it is unlikely that you are trading. This is more in the nature of speculation or gambling. Established traders in shares and other financial derivatives work to limit the exposure to chance in a variety of ways. As well as having customers who they sell to and buy from, a trader will:
- quote prices that will be spread to achieve profits
- make profits by dealing quickly in large volumes
- limit their exposure to market movements by 'hedging' with derivative instruments
- have to follow strict rules about risk exposure
Therefore, while a share trader does buy and sell shares which may make a profit or loss from market movements, it is not the only way they seek to make a profit. This is only a small part of a far more complex trading operation.
Trading outside of Jersey
If you are resident for tax purposes in Jersey then you must declare your income from any source, including those that arise out of the Island. This includes any trading activities.