Article by Francis Fitzpatrick, Barrister in the Chambers of John Gardiner QC. This article appeared in the November 2005 issue of Tax Adviser.
The traditional view taken by the Inland Revenue, and indeed generally subscribed to by tax advisers, was that an individual would hardly ever be able to establish that he was carrying on a trade in shares. An individual speculating on the Stock Exchange was regarded as engaged in an adventure other than trading, sometimes characterised as gambling rather than trading. This view has been thrown into doubt by two factors. The first factor is the decision of the Special Commissioners and the High Court in Wannell v Rothwell
where the High Court found that the Special Commissioners must have found, as a matter of fact, that the individual was carrying on a trade in not particularly unusual circumstances, although the Revenue won for other reasons. The second factor is the increased sophistication of the type of trading undertaken by individuals with the advent of the internet.
Given the infamous internet-company share-dealing boom of recent years, the characteristic pattern was of individuals making profits at the height of the boom and then making substantial losses as the boom collapsed. This makes the question of trading of more importance, since a finding of trading, as opposed to an activity subject to capital gains tax, allows a more flexible use of losses.
For all of these reasons, it is time for a reassessment of the traditional view as to when a person can be said to be carrying on a trade in shares and to review the relevant factual issues.
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November 2005 by