Share dealing for Irish taxpayers - where we are now

The question of whether an activity of buying/selling shares (or other financial instruments) is regarded as trading can sometimes be a difficult one to answer. From a tax perspective the outcome will be significant, but this is still an area with frustratingly little Irish guidance.

The Irish legislation definition of trade provides no real assistance here confirming that “trade includes every trade, manufacture, adventure or concern in the nature of trade.”

The current Irish Revenue guidance on the subject stems from 2003 and the introduction of the 12.5 percent corporate tax rate for trading activities. This guidance is specifically for companies, and it places significant emphasis on the six “badges of trade” as identified in the UK Royal Commission report in the 1950s. Revenue has also published a summary of its determinations in a corporate context. It is interesting that when Revenue published commentary on cryptocurrency, they acknowledge that an individual could be carrying on either trading or investment in a cryptocurrency context (which has some similarities to share dealing). However, they did not provide any detail on factors which would assist determining same.

Trading or Investment

The classification is crucially important and can often result in significantly different levels of tax

There are few Irish court cases dealing with the issue of what constitutes a trade; mainly dealing with transactions in land and this author is not aware of any on “the atrociously difficult area” of dealing in financial assets such as shares. It is even difficult to point to authority from the Irish Courts on the persuasiveness of the badges of trade in an Irish context. In recent times, the Tax Appeals Commission have placed weight on them and indeed the Perrigo High Court case (albeit not opining on the matter) acknowledged that these are regularly used but “these factors are no more than a guide. The weight to be given to the factors will vary according to the individual facts and circumstances of each case”.

Importance for Irish tax purposes

The categorisation of share dealing profits should be either trading, meaning a Case I categorisation, or investment, meaning Capital Gains Tax (CGT) rules apply.

Individuals categorised as carrying on a trade for share dealing purposes are subject to tax at a combined rate of up to 55 percent. This contrasts with the CGT rate of 33 percent for investment gains. Trading losses can offset profits of the same trade. Finance Act 2014 limited the “sideways” offset of trade losses against other income. Where an individual is trading in a “non active capacity”, then such offset is capped at €31,750 per year for most trades. This is a statutory test and includes a requirement that the individual be personally engaged in the activities for an average of at least 10 hours a week. In contrast, CGT losses are available to shelter other capital gains but there is generally no restriction on the type of offset, so for example property losses could offset share gains. Loss restrictions apply in circumstances involving connected party disposals, development land etc.

For companies, trading categorisation brings entitlement to the 12.5 percent rate on such profits. If assets are held as investment and not trading, then tax at the CGT rate of 33 percent applies to gains on disposals.

For both individuals and companies, there are other nuances which could have impact. To determine Case I income, the starting point is accounting profits, and this can mean (for example) that unrealized gains are taxable. This is in contrast with investment profits which are taxable only on a realized basis. Furthermore, only specific deductions are available against CGT gains but for trading gains, the allowable deductions can be broader, driven mainly by the wholly and exclusively criterion.

A common client query is whether activities should be carried out in a corporate structure. Generally speaking, it is usually more tax efficient to carry out trading activities in a company and hold passive investments personally. Clearly every client situation is unique and for example, if an individual required personal access to profits on an ongoing basis, then the answer could be different.

Guidance from UK cases

UK cases are persuasive in the Irish courts. The issue of what constitutes a trade has been addressed on many occasions in the UK, recently in context of HMRC challenging the allowance of “sideways” loss relief on share dealing activities which the individual had categorised as trading. While the Irish rules on allowance of such losses are not the same, the outline principles held by UK courts relate to trade status and are a useful guide. The following concepts are noteworthy:

Default status for individuals is investment

The oft quoted case of Salt v Chamberlain outlines the approach here … “Where the question is whether an individual engaged in speculative dealings in securities is carrying on a trade, the prima facie presumption would be… that he is not. It is for the fact finding tribunal to say whether the circumstances proved in evidence or admitted take the case out of the norm”. This was echoed in Cooper v Clarke which provides a good summary of the principles by Norse J including “First, marketable securities, being income-yielding assets usually capable of appreciating 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.”

Look beyond the badges of trade

There is doubt that the original Badges of Trade can be properly used to analyse share trading transactions; they provide some guidance but are not definitive in each case – it is “one of overall impression”.

Corporates might have lower bar for trading status

In the case of Lewis Emanuel v White, the fact that the taxpayer was a company was influential in the decision “An individual may do as he pleases: a corporation must act within the limitations of its memorandum of association……. one expects a trading company’s activities, apart from capital investment, to be by way of trade.” However, it is worth noting that the view of HMRC is that a company could nowadays enter speculative transactions which, while not being investments, might also not amount to trading.

UK First Tier Tribunal cases

To illustrate the difficulty in determining status, it is useful to highlight some relatively recent UK First Tier Tribunal cases (similar to the Irish Tax Appeal Commission) on share dealing categorisation for individuals – Ali, a pharmacist by profession, Manzur a retired surgeon, and Gill – an established securities trader.

In the former case, Ali had given up his active role as pharmacist and devoted himself full time to day trading with between 750 to 1,800 trades per year and spending 20 to 35 hours a week directly on the pursuit with additional hours on research. He incurred share dealing losses. The case turned on his (unwritten) business plan which “unsophisticated as it was”, was pursued in a sufficiently organised manner. This dislodged the prima facie presumption that individuals engaging in this kind of speculation are not trading.

The decision is in contrast with the earlier case of Manzur, who had around 300 trades in a year with an online stockbroker. The judgement placed weight on various factors including the time involved (2 hours daily) and the fact that Manzur supplemented his own knowledge with advice garnered from brokers. It was held his activities amounted to the management of a portfolio of investments rather than trading.

The most recent case of Gill is noteworthy for the comment in the judgment disagreeing with an assertion that to be trading, the operations needed to be carried on in the same way as those which are characteristic of ordinary trading in that line of business. Gill was a securities trader, devoting all his working time to the pursuit. HMRC had argued that he was risk-friendly, and his methods seemed ‘haphazard’ to support their contention that he was not trading. However, the tribunal held that the size, frequency, and rapid and continuous turnover of transactions, along with the fact that he had a deliberate and organised scheme of profit-making, “took him out of the norm” so that his activities were trading.

Conclusion

HMRC have relatively detailed commentary on the subject with their overall approach echoing the cases noted above – “for individuals we take the view that transactions in shares which do not amount to investment are speculative transactions falling short of trading unless there are particular factors which take the case out of the norm”. As part of their commentary, they also provide a non-exhaustive list of 20 factors to consider. These would appear to be a good start point for an Irish individual analysis also.

It is difficult to predict how an Irish court would decide cases in this area. The line between trading and investment can often cause individuals some concern, particularly due to the tax rate differential. In the absence of cases, publication of Irish Revenue commentary outlining their approach to the matter would be a welcome development.

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