BIM70505 - Business changes: commencement: general principles

Under the current year basis of assessment for income tax the date on which a trade starts is of less significance than formerly. In addition to this, ICTA88/S401 ( BIM46351) now gives relief for certain pre-trading expenditure. But the point remains important (for example, the date of commencement of trading can determine when an accounting period of a company starts or ends (CTM01400 onwards) and the timing of capital allowances (CA11800)).

There is very little case law specifically on when a trade has been ‘set up and commenced’ (ICTA88/S60 (5)).

The case of Fry v Burma Corporation Ltd [1930] 15TC113 at page 129 shows that the words ‘to set up and commence a trade’ should be given their ‘ordinary and natural meaning’.

The classic definitions of trade in the House of Lords judgements in Ransom v Higgs [1974] 50TC1 stress the active nature of trading - the need to be providing goods or services, to be trading with someone ( BIM20100).

The courts have distinguished between preparing to commence business and actually commencing business. As a general rule a trade cannot commence until the trader:

• is in a position to provide those goods or services which it is, or will be, his or her trade to provide, and
• does so, or offers to do so, by way of trade.

The length of the setting up phase may vary (it can be particularly long where complex modern technology is involved). But once the business meets these criteria then it has commenced trading. The activity need not be on a large scale. But the production and sale of a small amount of stock-in-trade resulting from, for example, the trial run of a process would not necessarily mean that a trade had started (the nature of the activity may be characteristic of testing rather than of the trade to be carried on).

The case of Napier v Griffiths [1990] 63TC745 underlines that whether a trade has commenced or not is a matter of fact. In the absence of any evidence to the contrary, the taxpayer was held to have commenced trading when he entered into his first contract of engagement as an electronic designer.