Business Taxes

1.4.Interpret case law to determine if a company is trading and is therefore subject to the 12.5% corporate tax rate

There is no useful definition of “trading” under Irish statute law but there is a significant body of case law on this subject. However, the majority of these cases have been heard by the courts in the UK, the decisions of which, while persuasive, are not binding on the Irish courts.

The approach of the courts has been to examine the specific facts of an individual case and look for the presence, or absence, of common features or characteristics of trade.

Case law

Noddy Subsidiary Rights v IRC [1966] 43 TC 458

One of the most relevant cases in this area is the UK case of Noddy Subsidiary Rights v IRC (43 TC 458).

In this case, the Noddy Subsidiary Rights Co Ltd (“the Noddy company”) was established “to carry on and develop the business of exploiting and turning to account” certain intellectual property rights, i.e. copyright and trademark licenses in the Enid Blyton character, Noddy.

The Noddy company retained an assistant on the staff of an associated company to act as general manager for its (the Noddy company’s) business. This general manager devoted half of his time to working for the Noddy company and was assisted by two other individuals who were also employed by the associated company. The general manager was paid by the associated company for the work he undertook for the Noddy company. The general manager was actively involved in running the business of the Noddy company and arranged for many copyright licences to be granted by the company to various manufacturing companies.

The court (on appeal) held that:

where a person owns an item of property and grants licences under it, those activities might, according to the circumstances, amount to carrying on a trade;

given that the manager spent half his working time managing the Noddy company’s affairs, that he actively sought out customers at toy fairs, that he exercised skill and labour of a continuous and varied kind when dealing with the licences when granted, the only reasonable conclusion was that the company was carrying on a trade. This was even though the Noddy company had no separate office or staff of its own.

Therefore, in establishing trading status it was important to demonstrate that in addition to licensing the intellectual property, the Noddy company had retained the services of a skilled individual who, supported by assistants, was responsible for the running of its business.

Pairceir v EM (2 ITR 596)

This case concerned an appeal by a taxpayer regarding the treatment of income arising from the letting of premises.

The taxpayer argued that this income should be treated as trading income as she was involved in the negotiation of leases and the ongoing management of the premises.

It was held that the income would not be considered to be trading income as the law was clear that rental income could not be considered to be trading income in any circumstances.

Lupton v FH & AB (47 TC 580)

This case considered a situation where a loss arose to a taxpayer with respect to a number of share transactions. The matter for consideration was whether these transactions gave rise to a trading loss.

The taxpayer was a company engaged in a trade of dealing in stocks and shares. However, the shares which were the subject of these particular transactions were acquired on the basis that a dividend would be received and the shares sold back to the vendor shortly after acquisition. This process is known as dividend-stripping and resulted in a lower tax charge for the company.

Due to the nature of these transactions and the fact that the purpose of the transaction was to receive a dividend and sell the shares at a loss, the tax authority argued that the shares did not form part of the stock in trade of the company at any time.

The court held that the transactions in question were tax devices and were not trading transactions.

In general, the courts have found it easier to say whether a trade exists than to actually define ‘trade’ or ‘an adventure in the nature of a trade’.