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December 16, 2014

The ‘Badges of Trade’ approach – Eugene Blaney v HMRC

The case of Eugene Blaney v HMRC illustrates the use of the ‘badges of trade’ approach in determining whether or not activities amounted to a trade for the purpose of claiming relief for Capital Gains Tax.

Although the relief in question was abolished in 2008, how the courts came to the decision that Mr Blaney’s racehorse breeding activities did not amount to a trade is still very much relevant.

As noted above, Mr Blaney was a racehorse breeder who held horse racing events on his land for seven years. He sold his land and included the disposal on his tax return for capital gains tax purposes, along with a claim for taper relief which was only available to business assets.

The principal issue in the case was the nature and extent of Mr Blaney’s horse breeding activities and whether they amounted to trade.

In determining whether or not the horse breeding activities amounted to trade, the tribunal looked for the presence or absence of common features and characteristics of trade, known as the badges of trade. The badges of trade considered in this case and their relevance to the decision are as follows:

1) The number of transactions

Although a one-off transaction is capable of being trade, the lack of repetition suggests that it is not commercially driven trade.

Although Mr Blaney owned three broodmares at various stages during the seven year period, there was no evidence of any sales of foals produced by these horses. Therefore, although breeding racehorses is precarious and can result in in intermittent sales, this suggests that Mr Blaney’s activities were not trade.

2) Relationship to other activities of the taxpayer

If the transaction in question is related to the occupation of the taxpayer, then the transaction is more likely to be regarded as a trade transaction. The activity of horse breeding was not related to Mr Blaney’s trade as a house builder. Therefore the activity of horse breeding was related to his general enjoyment of horses.

3) Nature of the subject matter

The nature of an asset can be of great importance, as some assets as generally realised by way of trade. For instance, the trade of chemicals would very likely be considered a trade, whereas the purchase of classic cars could be considered for personal use or enjoyment. In this case, it was considered that an owner and trader of horses will almost certainly derive personal enjoyment from ownership.

4) Changes to the asset

If an asset was repaired, modified or improved to make it more easily saleable or saleable at a greater profit, this may point towards trading. It was accepted that broodmares and foals require considerable care and attention and racing horses can increase the value of the horse. Therefore, in appropriate circumstances, horse racing could be considered as working on an asset to increase its value. However, there was no evidence provided to the court suggesting that any foals were raced by Mr Blaney.

5) Profit-seeking motive

Intention to make a profit on re-sale is an indicator of trading. However, if there was an intention to hold the trading object indefinitely, that suggests a pure investment rather than a trading deal.

Whilst there were no sales of horses, the tribunal accepted Mr Blaney’s argument that the purpose of breeding was to sell the foals for racing and that he lived in hope that he would breed a winning horse.

6) Enjoyment

If the item provides enjoyment for the purchaser, this indicates an intention to buy for personal satisfaction rather than to trade purely for the purpose of making a profit. It was considered that this was one of the most significant factors in this case, as Mr Blaney enjoyed owning and racing horses.

In light of the badges of trade above, it was held that Mr Blaney’s principal motivation was his love of horses and horse racing rather than to realise a profit. This, and the fact that there was very limited reliable evidence as to the scale of his horse racing activities, meant that the tribunal was not satisfied that he was anything other than a small-scale breeder.


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