First-tier Tribunal (Tax)

[2010] UKFTT 580 (TC)

 

 

 

 

 

 

TC00830

 

Appeal number:  TC/2010/174

 

 

 

Income Tax – Losses on transactions involving stocks and shares – Whether trading losses – No – Investment activity by individual in managing a portfolio – Appeal dismissed

 

 

FIRST-TIER TRIBUNAL

TAX CHAMBER

 

 

                                             DR K M A MANZUR                            Appellant

 

 

                                                                      - and -

 

 

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                     REVENUE AND CUSTOMS ($ [type of tax])  Respondents

 

 

 

                                                TRIBUNAL:  DR K KHAN (Judge)

                                                                         CAROLINE de ALBUQUERQUE

 

 

 

Sitting in public in London on 14 October 2010

 

Susan Rahman and Majibur Rahman, for the Appellant

 

Nicola Parslow for the Respondents

 

 

© CROWN COPYRIGHT 2010

DECISION

 

Introduction

 

1.         This is an appeal against an amendment by Her Majesty’s Revenue and Customs (“the Commissioners”) to the self-assessment of the Appellant for the year ended 5 April 2007 and an assessment made for the year ended 5 April 2008.

 

2.         The main issue concerns whether the Appellant share dealing activities constituted trading which is  to be taxed as trading income rather than investment income.  If treated as investment income, the Appellant wishes to offset losses made and if trading income and a profit is realised then this would be taxed at the higher rates of tax.

 

3.         The Tribunal was provided with two bundles of documents, one dealing with legislation and authorities and another dealing with correspondence and other documentation.  The Appellant provided a small pack of papers which outlined their grounds of appeal and supporting materials.

 

4.         It should be noted that the Statement of Case was filed late pursuant to an application made on 7 April 2010 and under rule 25(4) the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“The Tribunal Rules”).

 

Relevant Facts

 

5.         The Appellant’s return of income for the year ending 5 April 2007 included a claim for losses, amounting to £28,289, which was sought to be set against his general income for that year.

 

6.         The parties have reached agreement on 14 July 2008 that self-employed income of £690 and rental income of £348 was omitted from the Appellant’s return for the year ended 5 April 2007.  These are  not the subject of  appeal. Following a statutory review the omitted rental income for the year ended 5 April 2007 was reduced to £174.

 

7.         The Appellant , a retired surgeon,  had used capital accumulated over the years of approximately £160,000 to invest in stocks and shares .  As of 30 June 2008, the Appellant had continued to conduct transactions in stocks and shares using the facilities offered by NatWest Stockbrokers (online).

 

8.         As a result of the share transactions losses resulted.  The Appellant has made a claim for the losses arising to be set off against other income for the year ended 5 April 2007 and 5 April 2008.  The loss arising for the year end 2008 is £81,553 of which £26,520 was set against general income for the year ending 5 April 2008.

 

9.         An enquiry under section 9A Taxes Management Act 1970 was commenced on 1 July 2008 for the year ended 5 April 2007.

 

10.       The enquiry for the year ended 5 April 2007 was closed on 1 September 2009 by issue of a Closure Notice under section 28A Taxes Management Act 1970.

 

11.       An assessment under section 29 Taxes Management Act 1970 was made on 30 January 2009 for the year ending 5 April 2008.

 

12.       The facts are not disputed.

 

Law and Legislation

 

13.       The relevant sections referred to were as follows:

 

1.         Section 29 Taxes Management Act 1970

2.         Section 28A Taxes Management Act 1970

3.         Section 380 Income and Corporation Taxes Act 1988

4.         Section 64 Income Tax Act 2007

 

 

14.       The cases referred were

 

1.         Cooper v C&J Clarke 54 TC 670

2.         Lewis Emmanuel & Son Ltd v White 42 TC 369

3.         Salt v Chamberlain 53 TC 143

4.         Marson v Morton & Others 59 TC 381

 

Appellant’s submissions

 

15.       The Appellant says that the transactions are trading transactions since they were conducted during a very short period, maximum two weeks for each transaction, and there are “thousands of transactions” conducted in one year.

 

16.       The Appellant accepts all the risk relating to the transactions and acts as the person trading on his own behalf.  He uses his own equipment but uses the facilities of a stockbroker to buy and sell shares on a fixed fee basis (approximately £12 per transaction).

 

17.       The Appellant says that the transactions are the buying and selling of shares which constitutes a trade.  The Appellant says that the cases referred to by the Respondents related to gambling and are not relevant.

 

18.       The Appellant has complete control of the buying and selling transactions and the transactions fit within the “badges of trade”.  To elaborate , the Appellant says that the shares were acquired for trading purposes, held for a short period, the transactions are similar in character and carried on in significantly the  same way, the broker’s fee arises regardless of whether a profit is made and the risk is personal to the Appellant.All these factors indicate  trading transactions.

 

19.       The Appellant does not dispute the level of losses but does dispute that the transactions are not trading transactions.

 

The Respondents’ submissions

 

20.       The Respondents say that the transactions are not  trading transactions.  The transactions do not fit into the norm for  trading  by an individual.  The transactions are not high volume, there are no customers or clients and the Appellant does not have the requisite qualifications for a share dealing business and is not regulated by the Financial Services Authority. The Appellant is a customer of NatWest Stockbrokers.These all indicate investment rather than trading activity.

 

21.       The Respondents draw reference to the Appellant’s own evidence when he says  that he is managing his own investment portfolio.

 

22.       It is evident from the trading transaction log that several of the shares were held for long periods (six months or more) and the Appellant conducts most transactions in a two hour window in the afternoon, which does not support the conclusion that the transactions are trading.

 

23.       The Respondents draw reference to the fact that there are under 300 transactions in one year and the manner in which the investments are made suggest a speculative type of investment .  They find support for this view in the case law.

 

24.       The Respondents say that it is not an adventure in the nature of the trade.  They say that an ordinary trader in shares would have the following characteristics:

 

(1)       Customers who buy and sell regularly and to whom products are marketed;

(2)       Make profit from large transactions;

(3)       Limit risk exposure  using hedging and derivative instruments;

(4)       Operate within strict rules on risk;

(5)       Do not trade on  own account.

 

The Respondents seek confirmation of the assessments for 2007 and 2008.

 

General conclusion

 

25.       The Tribunal does not believe the transactions carried out by the Appellant  can be treated as trading transactions.  They are more in the nature of the management of an investment portfolio which necessitates changes in investment by  buying and selling shares with some investment stock  held for longer periods.  The Appellant in a letter dated 26 October 2009 stated,  “I have full control over my portfolio of shares and am the sole bearer of any risk and reward associated with my financial transactions”.  This confirms an approach based on the portfolio management of shares which are held as investments.

 

26.       The Appellant conducted business by speculating on shares over the short and longer term.    This concept is best explained by Pennycuick J in Lewis Emmanuel & Son Ltd v White [1965] 42 TC 369 at 377.

 

“The word “speculation” is not, I think, as a matter of language, an accurate antithesis either to the word “trade” or to the word “investment”: either a trade or investment may be speculative.  On the other hand, it is certainly true, at any rate in the case of an individual, that he may carry out the whole range of financial activities which do not amount to a trade but which could equally not be described as an investment, even upon a short term basis.  These activities include betting and gambling in a narrow sense.  They also include, it seems to me, all sorts of Stock Exchange transactions.  For want of a better phrase, I will describe this class of activities as gambling transactions …”

 

27.       The Judge in this case did not accept that an individual speculating on price movement in shares without intending to hold the shares, even as a short-term investment, was trading.  He considers that such transactions are analogous to gambling, and fall short of trading.  To fully understand the difference between trading and investment it is best  cmpare investment activities with those  who are established traders.

 

28.       There is no definite checklist for determining whether an individual is trading or not.  The “badges of trade” provides some guidance but it is not definitive in each case.  In the case of Salt v Chamberlain [1979] 53 TC 143 at 154, he states:

 

“… I doubt whether the question whether in any given case a person is or is not carrying on a trade is capable of solution by the application of a logical progression of propositions culled from decided cases.  The question is, I think, one of overall impression”.

 

29.       The Appellant says that the shares are held for a limited period of time, one to two weeks, and traded frequently.  The reality is that the transactions, numbering between 240 and 300 for the year, are sometimes carried out frequently and other times the shares are held as investments for a longer period of more than six months.  The number and frequency of transactions and the short-term nature of those transactions is not necessarily conclusive of the fact that there is a trading activity.  It is important when looking at share trading to see whether the transactions and operations in question are conducted in the same way as other traders in shares who operate established businesses.

 

30.       Share trading by established businesses have certain characteristics.  They usually have customers and make profits in trading large volumes of shares frequently.  There is a degree of hedging to decrease risk exposure and there are clear rules on the risks exposure over a period of time.  These businesses buy and sell shares in order to make profit from the anticipated movements of the share price in the market but this is not the only way in which to make profit.  They act as both wholesalers and retailers in trading stock and their business are usually regulated by a financial regulatory authority.  The transactions may number in the thousands rather than the hundreds.  The basis of the business is fundamentally different.  For this reason, it is easier to classify the dealings of a company as trading than those of an individual. Share dealing by an individual is more likely to give rise to a capital gains tax charge.  One cannot rely on the number or frequency of transactions alone to establish a trade.

 

31.       In the case of Cooper v E & J Clark [1982] 54 TC 670 at 676, Norse J laid down the following principles for a company trading in shares:

 

“First, marketable securities, being income producing assets usually capable of increasing in value, are prima facie purchased and sold by way of investment and not by way of trade.  Secondly, a series of purchases and sales may sometimes, if carried out pursuant to a deliberate and organised scheme of profit-making, amount to a trade.  Thirdly, it is easier to characterise a series of purchase and sales as a trade in a case where they are made by a trading entity as opposed to an individual. Fourthly, in the case of a trading entity that characterisation is more easily made where the purchasers and sales are substantial in relation to its other activities, all the more so where they are of frequent occurrence and extend over a long period of time …”

 

32.       The Appellant in our case had a sum of money (£162,000) and had retired from his practice as a doctor.  He decided to deal in shares as a way of augmenting his retirement income.  This is perfectly legitimate and is perhaps done by many people in that position.  Indeed the share dealing fees were fixed in this case but individuals  often set up accounts where they trade in shares and pay a percentage of transaction costs as a fee.. The individuals concerned often refer to their activities as dealing in shares  perhaps in the colloquial sense of the word.  It is more accurate to describe this type of activity as one relating to the management of a portfolio.  This would involve maximising the profitability or value of the portfolio, having a strategy for investing and undertaking share transactions with a view to providing some balance within a larger group of income producing assets.  In this case, the Tribunal believe that this is what has occurred with the Appellant.  The share transactions, which are not numerous an entire years, are really transactions in the nature of investments.

 

33.       It is evident in looking at the ten pages of transaction guide provided by the Appellant (which the Respondents do not dispute) several of the stocks purchased are held for long period.  The Tribunal has not done an analysis of the percentage of stock which is held for a long period as opposed to that which has been held for a short period.  It is also evident that only a percentage of the capital which the Appellant has allocated for share dealing has been used for share dealing.  Further, the Appellant seems to undertake the transactions on a very part-time basis (two hours in the afternoon).  This suggests a very peripheral activity, which while not conclusive of being trading or investment, does suggest that other parts of the day may be allocated to other activities or managing other investments which the Appellant may hold.  This supports the view that it may be part of a portfolio of activities.

 

34.       The Appellant, in support of the trading argument says that he engages a professional brokerage firm who study the market and offer information about buying and selling shares and who understand the risk and profit.  This supports the view that the Appellant is depending on others for expertise and would suggest an activity more in line with an investment with the brokerage firm providing investment advice.

 

35.       In the circumstances, the Tribunal believe that the activity undertaken by the Appellant is an investment activity and confirm that the amendment to the self-assessment for the year ending 5 April 2007 in the sum of £2,501.76 and for the year ending 5 April 2008 in the sum of £3,712.58 would stand.  There are no issues of costs.  The appeal is therefore dismissed.

 

36.       This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

 

 

 

 

 

DR K KHAN

TRIBUNAL JUDGE

 

RELEASE DATE: 17 November 2010