Case law confirms that in order to decide whether a particular
asset of the business is trading stock you first need to establish
the nature of the business. An asset will be trading stock of the
business consists of acquiring that asset with the intention of
selling it at a profit. That is why land can be trading stock for a
builder but a fixed asset for another business. Exceptionally it is
possible for an trader to carry on two separate businesses where
the same type of asset in one business is trading stock and in the
other a capital asset.
The best known case is Gloucester Railway Carriage and Wagon
Company Ltd v CIR [1925] 12TC720. The company manufactured or
bought wagons and then either sold them or hired them out.
Warrington, LJ thought the crucial question was
“a question of fact – did the
appellants carry on separate trade or business concerned
exclusively with the letting on hire of wagons appropriated by them
to that purpose, or was the letting of the wagons merely one means
of earning profits in the business carried on by
them?” He believed there was sufficient evidence to
support the Commissioners’ finding that “the company
carried on one trade only, that of manufacturing and dealing with
wagons for the purpose of profit, and that selling or letting the
wagons was nothing but two modes of earning profits in the one
trade.” North Central Wagon and Finance Co., Ltd v Fifield
[1953] 34TC59, was another case where the courts found that there
was a single trade although here the wagons were purchase rather
than manufactured.
In both cases of Spiers & Son Ltd v Odgen [1932] 17TC117,
and Grenville Building Co Ltd v Oxby [1954] 35TC245, the builders
built for sale, but on occasions let buildings before selling them.
The profits on the sale of the let buildings were recognised as
trading profits.
In Rees Roturbo Development Syndicate Ltd v Ducker [1928]
13TC366, a company was formed to acquire and exploit patents, and
throughout its existence its only assets were patents from which it
received royalty income. It sold some of the patents. In his
judgement Rowlatt, J said
“In one sense the words ‘capital
asset’ are words of art, because you do not have one set of
assets representing capital and another set of assets representing
income, of course; but what is meant by the phrase ‘capital
asset’ is that this is an asset which represent fixed capital
as opposed to circulating capital, that is to say, that this is an
article which is possessed by the individual in question, not that
he may turn it over and make a profit by the sale of it to his
advantage, but that he may keep it and use it and make a profit by
its use. Then if an article of that sort is sold at a profit, that
profit is not a profit of trade.”
J Bolson & Son Ltd v Farrelly [1953] 34TC161, concerned a
company carrying on both a shipyard business and a passenger
carrying business. In the course of its passenger carrying business
it bought certain ships, used some of them for carrying passengers,
and then sold them. In the Court of Appeal Jenkins LJ drew
attention to
“the cheap rates at which these vessels
or some of them were bought, the large sums which were spent on
reconditioning them, the profits made on their resale, the number
of these transactions, and the frequency of their
recurrence” and thought the Commissioners were right
to conclude that the trade consisted not only of the passenger
business but also the purchasing, reconditioning and sale of ships.
The special circumstances of hire trades are discussed at
BIM33040.
