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:
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.
