Badges of trade: Do you know about them?

Badges of trade are the tests conducted by the court for a transaction to be referred to as a trade. The definition and constraints of a trade is not defined by any legislation. In order to define this word in any particular case, the authority is left completely in the hands of a court. Function of the court is now to develop a series of tests on the issues related to the transaction. After clearance of all the tests, the person is said to be carrying out trading. These tests are then known as badges of trade.

Seeking Profit and transacting frequently:

For a transaction to be interpreted as trade, the badges of trade provide the proof that the subject has a profit seeking motive. There may or may not be profit involved in the transaction. But if there is one, it cannot be understood as a trading deal. The subject needs to earn profit from the transaction. This is because, unless the subject earns a profit, the transaction is not taxable. It is necessary for the taxpayer to demonstrate his motive. Only the explanation of existence of profit in the transaction is not enough as evidence for the transaction to be given the tag of a trade.

Another criterion for the transaction to be called trading is that the transaction has to occur more than once and that too with a higher frequency. For an illustration, if a person wants to sell an old refrigerator, and buy a new one, and he does again with the new refrigerator after three years, his transaction would not be considered trading. It is because the authorities will be unable to proof any kind of profits that he has made so far.

Single and multiple trade badges:

The badges of trade could be either single or multiple, depending on the type of profit made by the subject. The HMRC searches for links in case of any transaction. Links provide a very apparent picture of the kind of transaction done with the kind of motive sought by the subject. According to these links, a badge of trade is set for the transaction, and as the number of badges increases, the transaction paves its way to be called as a trade. So in case of direct link, half the work of HMRC is done. Rest of the work for them is to find out the more intricate badges which could be applied for the complete proof.

The way the subjects arranges for finances, the span until which he owns the product, the fact that he owns a sales organisation for that product, his reasons that linger to purchase, and the reasons of sale; all these factors are responsible in deciding for the badges of trade.Badges of trade contain all the details in its ID number. Only the reference to the badge Id is enough to decipher the kind of transaction the subject is dealing into. All countries have their own trade badges, but all of them compulsorily have their own protocols for it.

John Handson is sales manager of one of the name tags manufacturers,he writes many articles about badges.