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Case law on selling toilet rolls

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In these unprecedented times with drones on the streets of Spain ordering people to go home amid nationwide coronavirus lockdown, people scared to open their pension valuation letters following the biggest stock market crash in 30 years and families being kept apart due to fears of the young stealth carriers infecting the vulnerable older generation, I am reminded of the Lewis Carroll quote: ‘Why, sometimes I’ve believed as many as six impossible things before breakfast.’ 

Boris Johnson has put industry on a war footing to transform production lines so manufacturers can make ventilators to equip the NHS. There are notices on the shelves of supermarkets begging people to only buy what they need, shoppers cannot lay their hands on dry pasta, the toilet roll aisle is completely bereft of supplies and hand sanitiser is as valuable as gold (or arguably more so following fall in value of gold last week). 

There are inevitably those that seek to benefit from panic and are beginning to buy up stocks of the much-coveted goods for onward sale at a profit. But how should such transactions be taxed?

With fears of the coronavirus leading to panic buying supplies, one Australian family of six mistakenly bought 48 boxes as opposed to 48 rolls of toilet paper. That’s 12 years’ worth of supply at their current rate of usage. They have decided to sell the toilet rolls and donate the profits to charity. 

Reading about their ‘fat finger’ trade took me back to my tax exams and the badges of trade. In 1955, a review by the Royal Commission on the Taxation of Profits and Income reviewed UK case law and identified six badges of trade. This starting point has been supplemented by case law, and HMRC now list nine badges. One of these is the nature of the asset. 

It seems our fascination with toilet rolls long precedes the coronavirus, with a tax case in 1929 (Rutledge v CIR (1929) 14 TC 490) where an UK individual on a business trip to Germany bought one million toilet rolls, which were then sold in one transaction for a profit. The court decided that the profit should be taxed as income, as opposed to a capital receipt. The taxpayer put forward the argument was there was a single transaction, thus pointing towards a capital as opposed to income receipt. Despite this, the subject of the transaction was not deemed to be of a capital nature as the purchase was made neither for the taxpayer’s own use nor for investment purposes.

At a later date, the courts brought in the concept of ‘pride of possession’ being an indicator of a capital, as opposed to trading, asset. Our Australian family may just have an argument for such pride based on the pictures of them sitting on a throne made entirely of toilet rolls!

By applying the badges of trade those looking to gain from their spoils of the war will need to disclose any profits on the sale of scarce items such as toilet roll as trading income as opposed to a capital gain. 

Sheena McGuinness, RSM UK (RSM UK’s Weekly Tax Brief)

Issue: 1480
Categories: In brief