This article uses doctrinal analysis of UK tax law to address the question in political economy of where the ‘production boundary’ around value creation lies. It concludes that the ‘classical’ production boundary around material production may be encountered as an emergent feature of forensic investigations of the ontology of surplus in real world commercial contexts. This is particularly important for political economists of the global production network because of the contrasting structural phenomenon whereby value is predominantly added in immaterial production processes.
Within the wider aggregation of exchange-mediated phenomena analysed by today’s mainstream economists as ‘the economy’ there continue to exist the circuits of material production and consumption that were a discrete object of analysis for political economists in the classical tradition. While those circuits are mediated by exchange, and so the transactions that propel them form part of that wider economy, they are also a physical process where matter is metabolised into physical commodities, a quantity of which cycles back into further such metabolism of matter. This cycling back occurs either because the metabolised matter goes on to be consumed as means of further such material production (tools, machinery, vehicles, transportation infrastructure, raw materials &c) or because it is consumed as wage goods for the workers operating those means of material production.
Owing to the pre-eminent position of early nineteenth century economist David Ricardo in the classical tradition of economics that concerns itself specifically with these material circuits, one might refer to it as ‘the Ricardian machine’. Broadly speaking the Ricardian machine consists of all of the tools, machines, vehicles, industrial and transportation infrastructure and raw materials in use in the sphere of production of material commodities, plus the labour of the people whose work is to operate those tools, machines, vehicles &c, plus the material commodities those people consume, plus the resulting material commodities that are produced. The Ricardian machine (which in many contexts is the thing which political economists of the classical era were referring to when they used the term ‘capital’) objectively exists as a dynamic physical system. And however much the amounts of money flowing in other parts of the economy may dazzle and mesmerise, that machine just carries on metabolising matter into (i) further metabolism of matter, and (ii) a surplus. It is (in the era in which the capitalist mode of production prevails at least) self-sustaining, self-reproducing, constantly demanding improvements in its processes, and growing.
One way to characterise the contrast between the Ricardian machine and the economy as a whole is to say that the two phenomena correspond to (respectively) a narrower and a wider ‘production boundary’. A production boundary is the expression of a theory of value in the form of a boundary around those activities which create value, separating them from those activities that do not create value.
In the classical tradition the purpose of the concept of value is to account for capitalist surplus, which confronts us simultaneously as a cash surplus in the form of profit and as a physical surplus in the form of more commodities being produced than are used up. A concept of value distinct from price is required in this tradition because the commodities constituting the physical surplus are heterogeneous, and so (in order to make the specifically physical surplus as amenable to quantitative analysis as the cash surplus to which it seemingly corresponds) an objective property must be attributed to them which makes them commensurable notwithstanding their heterogeneity. The rootedness of the classical perspective in this central phenomenon of physical surplus means that in the classical value-theoretical framework immaterial output cannot embody value, however profitable it is. This is because it is not meaningful of immaterial output to say of it that more is produced than is used up. And the production boundary subtended by the classical understanding of value is accordingly the one around the Ricardian machine.
The question of production boundaries in political economy is crucial in understanding our world today, because of the overwhelming importance of intangible assets in the global production network. There exists a substantial body of critical global value chain literature which analyses this phenomenon by reference to a broad distinction between ‘value creation’ and ‘value capture’, and this distinction requires a value-theoretical foundation in order to be operationalised effectively.
The weakest such foundation would be the concept of economic rent in mainstream economics, which as a general rule accords all apparent factors of production a role in ‘value creation’ but accepts the possibility of enhanced returns to an actor or factor of production by reference to market imperfections. More expansive claims along these lines can be made by reference to the traditional distinction in Marxist political economy between ‘productive’ and ‘unproductive’ labour, because that way entire business functions (advertising, marketing and sales for example) may thereby be determined to be exclusively implicated in value capture as opposed to value creation. But that distinction is highly contested, among other reasons because it is seemingly at odds with Marxist value-theoretical principles as widely understood today, and with major strands of Marxist politics. In addition (and highly inconveniently for the purposes considered here) it commonly includes within its implied production boundary some of the labour implicated in immaterial output e.g. labour of a technical nature. This creates problems that require formal Marxist economics to solve, and that in turn silos the conclusions into a relatively inaccessible and depopulated disciplinary space.
The value-theoretical foundation possessing the strongest alignment with the analytical desideratum identified in the foregoing paragraphs would be the classical production boundary that demarcates the Ricardian machine. This would identify as value-creating only the material production processes at the bottom of the famous ‘smile curve’ of value added in global value chains (i.e. raw materials extraction, agriculture, manufacture, bulk transportation and so on), and identify as value-capturing all the processes up the sides of the smile curve, whether or not of a technical nature (i.e. branding, marketing and advertising, but also design, R&D and so on). It is possible to find hints of this kind of approach in the literature on value capture in the global production network; for example leading global wealth chain scholars Leonard Seabrooke and Duncan Wigan write that ‘value requires […] the transformation of physical states’. And the classical approach is expressly deployed in Quentin (2022). But generally the approach is avoided, perhaps (for Marxists) because of concerns about the alleged ‘crude materialism’ of the classical school, or perhaps (for non-Marxists) because of the association with Marxist ‘parlour games’ regarding the distinction between productive and unproductive labour.
This reluctance is curious however, for the simple reason that the Ricardian machine objectively exists. Yes, the laws that propel it onward in its dynamic are social laws rather than physical laws as the Marxist critique of classical political economy reminds us, and yes the question of precisely which workers can be said to be implicated in that propulsion can become pointlessly pedantic, but we are nonetheless talking about a real (albeit unfathomably complex and dynamic) object in the physical universe. And the purpose of this article is to substantiate that observation by describing an encounter with the Ricardian machine, but not an encounter with it that takes place in the broadly classical tradition of political economy. Rather, it is an encounter with the Ricardian machine that takes place in a discipline only very obliquely related to classical political economy, with only peripherally intersecting concerns and methods, i.e. law. Specifically, the body of law interrogated for that purpose is cases in UK tax law to do with the charge to tax on trading profits, which is (whether in the form of corporation tax on companies or income tax on individuals) the UK tax levied on the accounting profits of businesses (‘trading profits’, to use the jargon), to the extent falling within the territorial scope of the tax one way or another, subject to adjustments required by law (e.g. disallowed deductions; transfer pricing adjustments and so on).
By way of background, in the well-known case of Ransom v Higgs, Lord Reid explains that the word ‘trade’ is ‘commonly used to denote operations of a commercial character by which the trader provides to customers for reward some kind of goods or services’. Broadly speaking, therefore, the production boundary that is implied by the concept of trading (as it is commonly used, according to Lord Reid) corresponds to the production boundary around the entire market for goods and services. Typically, in seeking to draw that boundary for UK fiscal purposes, commentators and the courts will follow the approach of a 1955 Royal Commission, and identify a number of ‘badges of trade’. These badges of trade are derived from the relevant case law, and when they are present they assist in determining whether as a matter of fact the activity in question amounts to a trade or venture in the nature of trade, so as to determine whether the charge to tax arises. Typically, too, commentators and the courts will bemoan the fact that no amount of analysis of the case law can make the concept more determinate or grounded in principle. The UK charge to tax on trading profits therefore suggests that the production boundary around the entire market for goods and services is not one that can be drawn clearly and objectively. And this inference should not be surprising – the badges of trade include subjective factors such as the subjective purpose of the transaction, and the motive behind the acquisition of the asset in the first place.
That overall inference disguises an important subtlety, however, which this article identifies. The UK charge to tax on trading profits also operates the classical production boundary around the Ricardian machine, and determinations within that boundary (in contrast to the general case) do appear to be grounded in principle. That conclusion is elaborated in this article in three steps.
First, in contrast to the general case, it is noted that the subjectivities of the participants do not appear to be relevant to a finding that trading revenue has arisen, in circumstances where the underlying production process takes place within the classical production boundary. This topic is addressed obliquely because there exists no directly on-point case law where (a) taxpayers produce commodities for reward within the classical production boundary but (b) the subjectivities of the participants suggest something other than a trading analysis (and indeed it is hard to imagine such a scenario). The two oblique approaches are (in Section 2) one-off transactions taking place within the classical production boundary, and (in Section 3) a circumstance where the objective status of a production input as being within the classical production boundary has the consequence that the transaction is treated as being over a trading input notwithstanding that subjectively the producer of it did not think they were producing that input for reward.
Secondly, it is observed that the subjectivities of the participants, rather than being merely of relevance, are crucial to a finding that taxable trading income has arisen in circumstances where the underlying production process takes place outside the classical production boundary (Section 4).
Thirdly (and, it is suggested, most persuasively), in exceptional circumstances where there is no subsequent act of exchange (i.e. there is no ‘reward’, as it is labelled in Ransom v Higgs), and so the production process must stand on its own as the basis for a finding that taxable trading income has arisen, that finding may be made in circumstances where the underlying production process takes place within the classical production boundary, but not where it does not (Section 5).
The following figure illustrates schematically the aforementioned features of the case law analysed in this article.
Sections 2 and 3 show that the subjectivities of the participants to the transaction are not relevant to circumstances within the classical production boundary whereas they are crucial (as shown in Section 4) to the demarcation of the heavily shaded boundary in the figure. Section 5 shows that the lightly shaded region is brought within the scope of the tax. The classical production boundary is therefore observed by judges to the extent that only production within the classical boundary is (a) treated as an objective matter, and (b) taxable even in the case of transactions where there is no reward.
The core point is that these are seemingly emergent features of a mechanism which, on the face of it, does not need to distinguish between activities inside and outside the classical production boundary. The distinction emerges nonetheless because (so this article claims as a matter of political economy) the terrain of production possesses the classical production boundary as an objective feature of its relief, whether or not you are positively seeking to map that feature as opposed to some other feature. Those who litigate tax matters are not playing parlour games – there are real-world fact patterns at play in these cases and real-world fiscal outcomes – and yet here the parties are in the cases considered below carefully delineating the classical production boundary without having the slightest intention of doing so – and without any discernible juridical basis for doing so – simply because (like that exceptional feature of real-world topographical relief of which this was famously said) ‘it is there’.
This article is therefore an interdisciplinary exercise of a specific (and perhaps peculiar) nature. It uses the traditional methods of the discipline of law (i.e. ‘old school’ legal doctrinal analysis unencumbered by critical jurisprudential developments), to make a point in political economy or (alternatively put) in heterodox value theory. The remainder of the article is more or less pure doctrinal analysis of UK tax law (meaning that conclusions are drawn from the pattern that emerges from the decisions taken by the courts in authoritative cases, assisted by the things the judges themselves say about those decisions when taking them), and yet no claim of significance in the field of UK tax law is being made. The intended readership is political economists for whom it may be of interest to see these alien methods from a different discipline addressing a fundamental question in political economy i.e. where does the boundary around value creation lie? The answer that UK tax law gives is that subjectively it lies around the entire market for goods and services but objectively it lies around the Ricardian machine. And by extension the intended readership of this article is political economists of the global production network because they are people for whom the distinction may matter.
Before proceeding it should be noted for the benefit of readers unfamiliar with the operation of law in the UK that the doctrine of ‘precedent’ means that sometimes the law being applied today comes from very old cases indeed. So, for example (and perhaps surprisingly) where a point of law was established in an old case, that old case will continue to be the ultimate authority for that point, even where much more recent cases exist applying the point to much more modern circumstances. Unless otherwise noted, the cases cited here are all still good, authoritative law, notwithstanding that the judicial observations may seem quaint and the transactions themselves possibly even quainter. Indeed several of the quaint-seeming cases cited here would find themselves expressly cited in even the most cursory summary of the current law in this area.
As a further preliminary observation, while UK law is treated with a degree of respect in many jurisdictions around the world (i.e. so-called ‘common law’ jurisdictions) it is of course far from universal. It is for that reason that the argument here is described above as an ‘encounter’ with the Ricardian machine, i.e. an encounter in the specific context of UK tax law. A similar exercise could certainly be conducted by reference to another body of law, however, and indeed an early (and unpublishably long) draft of this article was a comparative exercise on this topic as between the UK jurisprudential ontology of trading and the value added tax concept of a ‘supply for consideration’, as it emerges from case law developed by Court of Justice of the European Union.
2 The Subject Matter of the Transaction
The argument in this article begins (as many discussions of the UK jurisprudential ontology of trading do) by focusing specifically on the idea of a ‘venture in the nature of trade’; i.e. an isolated transaction which is nonetheless treated as a trading transaction rather than being a disposal of a capital asset. If a person operates a business comprising multiple transactions over a consistent set of inputs and outputs over time then a finding having the consequence that the charge to tax on trading profits applies would be a finding to the effect that those transactions amount to ‘a trade’ i.e. operations of a commercial character by which the trader provides to customers for reward some kind of goods or services – leading (broadly speaking) to income tax for an individual and corporation tax for a company. A one-off transaction by contrast might ordinarily be treated as a capital transaction, often with favourable tax consequences (e.g. a lower rate), but it is possible for such a transaction, too, to attract the charge to tax on trading profits if it amounts to a ‘venture in the nature of trade’. Much judicial energy has been expended on the question of when a capital transaction becomes such a ‘venture’, but seemingly without great clarity having emerged. As one senior judge once said: ‘as far as I can see there is only one point which as a matter of law is clear, namely that a single one-off transaction can be an adventure in the nature of a trade. Beyond that I have found it impossible to find any single statement of law which is applicable to all the cases and circumstances’.
Again and again, what saves the court from embarrassment in these circumstances is the doctrine to the effect that the question is one of fact rather than of law. Procedurally, what this doctrine means is that the finding can only be appealed beyond the first instance tribunal of fact if it could not reasonably be made on the evidence, or there was no evidence upon which it could reasonably be made. Substantively what the doctrine means is that precisely the same facts could be determined to (a) give rise to a trade or venture in the nature of trade, or (b) not give rise to a trade or venture in the nature of trade, and neither conclusion would be wrong in law provided it is one of those cases where, on the evidence, it could go either way. What we may be able to do notwithstanding this epistemological indeterminacy, however, is identify a category of cases which on their facts appear always to go one way or, where they are found to go the other way, they are overturned because an appellate court holds that the finding could not reasonably be made on the evidence, or there was no evidence upon which it could reasonably be made. One such category (and this is the crucial first step in the argument in this article) is cases where isolated transactions are over assets the production of which falls within the classical production boundary. These are always determined to be ventures ‘in the nature of trade’.
Indeed, several of the most famous cases on whether or not the UK charge to tax on trading profits applies, which are resorted to again and again as authorities in this area generally, are cases within that precise category. In Martin v Lowry, for example, a person with no connection to the linen trade bought some 44 million yards of surplus aeroplane linen from the UK government as a one-off isolated transaction, and then proceeded to sell it piecemeal into the wholesale linen market. It was found as a fact to be a trade and the taxpayer’s appeal failed with unanimity among the judges who heard it all the way up to the House of Lords. Indeed Rowlatt J in the High Court did not need to hear from counsel for the tax authority in order to find in its favour.
Rutledge v The Commissioners of Inland Revenue  was a similar case involving a giant consignment of toilet paper. In Rutledge the consignment was disposed of in one go rather than piecemeal and was nonetheless found to be a venture in the nature of trade, that finding being unanimously supported on appeal. In Cape Brandy Syndicate  the isolated transaction was over a large quantity of South African brandy which was blended with French brandy, re-casked, and sold on. One might add to these examples T Beynon And Co, Limited v Ogg (Surveyor of Taxes) , in which the transaction was over wagons which the taxpayer was in the habit of acquiring as agent for its clients but which in one isolated instance it took an order of in its own name and then sold them on for a profit, and F A Lindsay, A E Woodward and W Hiscox v The Commissioners of Inland Revenue, in which the asset was a large quantity of whisky. In Lindsay, which reached the Scottish Court of Session, there were two other issues, and the Lord President of the court, Lord Clyde said of the question whether the transaction was a venture in the nature of trade ‘[i]f that were the only question in the present case, I should not waste a moment on it’.
As explained, these cases where the output arises within the classical production boundary always go this way, and yet in textbooks and in tax law lectures they are bundled in with cases on transactions over assets such as land which do not always go this way, and together broadly framed as illustrations of what an indeterminate area this is. To be fair, one of the aforementioned ‘badges of trade’ is characterised as ‘the subject matter of the transaction’, and transactions over income-generating assets are said to be less likely to be treated as ventures in the nature of trade, but discussion of this particular badge of trade never goes so far as to consider the possibility that, so far as output arising within the classical production boundary is concerned, the conclusion that these transactions are trading transactions is a matter of law, rather than a question of fact that could go either way.
That possibility would, however, be wholly consistent with what happens on appeal with these cases within the classical production boundary where the first instance finding is that the transaction is not a venture in the nature of trade. In Commissioners of Inland Revenue v Fraser, for example, the isolated transaction was another quantity of whisky. The first instance tribunal ‘on consideration of the facts and arguments submitted to them, decided by a majority […] That an adventure in the nature of a trade had not been carried on; that merely an investment had been made and subsequently realised, and that the profit was not assessable to Income Tax.’ This finding was overturned on appeal. The Lord President of the Court of Session, Lord Normand, said:
I can scarcely consider [the transaction] to be other than […] in the nature of a trade; and I can find no single fact among those stated by the Commissioners [i.e. the first instance tribunal in this case] which in any way traverses that view. In my opinion the fact that the transaction was not in the way of the business (whatever it was) of the Respondent in no way alters the character which almost necessarily belongs to a transaction like this [emphasis added].
On the thread of that ‘almost’ hangs any doubt that may be entertained that turning over for profit an output arising within the classical production boundary, even as a one-off transaction, is (in contrast to the general principle) ‘necessarily’ a trading transaction, as a matter of law, if found to exist objectively on the facts. Material commodities are produced within the classical production boundary by the application of labour to material means of production, and the profits arising from a person interposing themselves between the production of those commodities and their consumption are seemingly profits arising from a venture in the nature of trade, as a matter of law. And this conclusion seemingly follows quite strictly, and without further inquiry into any of the various factors (e.g. the subjectivities of transaction participants) generally said to lead to indeterminacy in this area.
But this simple point is really only a glimpse of something which seems to run much deeper in the jurisprudence of the UK charge to tax on trading profits than a mere implied categorisation of outputs into material commodities on the one hand and other transaction subject matter on the other. The principle appears to be (as Karl Marx argued when challenging Adam Smith’s simplistic distinction between material and immaterial output) to do with, not the properties of the output per se, but to do with its participation in circuits of production in which labour is posited by the production process as an input. The section which follows illustrates this principle in operation in a very different and much more subtle context.
3 Circulating Capital and the Labour Process within the Classical Production Boundary
The UK charge to tax on trading profits distinguishes between ‘revenue’ (i.e. income, although both receipts and expenditures can be of a ‘revenue’ nature) and capital. The distinction between revenue and capital is often characterised by reference to an analogy with an apple tree; the apple is revenue and the tree is capital. If your output is apples and you buy or sell a tree, the tree transactions do not go into the computation of your apple profits. What this distinction means is that, in cases where it is in dispute as between HM Revenue & Customs and the taxpayer whether a receipt or expense is on revenue account or capital account, the courts are accustomed to performing what is in effect an objective analysis of a taxpayer’s business, in order to determine whether the receipt or expense pertains to (a) what one judge has referred to as the ‘income earning machine or structure’, or to (b) the process of operating that machine for profit.
Drawing this distinction can be difficult in the context of receipts from activity outside the classical production boundary, and there is a long history of judges and commentators complaining about it for that reason. Indeed in order to avoid these difficulties, at least insofar as concerns the taxation of corporate profits, receipts and deductions arising from transactions involving debt or intangible assets are now taxed in accordance with special statutory regimes which sidestep the revenue/capital distinction and follow accounting treatment instead. But in the case of production processes within the classical production boundary the distinction remains between the ‘income earning machine or structure’ and the throughput of that machine in the form of raw materials and product.
The courts sometimes deploy the classical concepts of ‘fixed’ and ‘circulating’ capital in connection with this distinction, and in some instances the version of the concepts deployed is expressly the one originally defined by Adam Smith as being to do with the material components of the production process:
Adam Smith described fixed capital as what the owner turns to profit by keeping it in his own possession, circulating capital as what he makes profit of by parting with it and letting it change masters. The latter capital circulates in this sense.
As regards operating the distinction in practice, Romer LJ offered the following discussion in Golden Horse Shoe (New), Ltd v Thurgood (H M Inspector of Taxes):
The determining factor must be the nature of the trade in which the asset is employed. The land upon which a manufacturer carries on his business is part of his fixed capital. The land with which a dealer in real estate carries on his business is part of his circulating capital. The machinery with which a manufacturer makes the articles that he sells is part of his fixed capital. The machinery that a dealer in machinery buys and sells is part of his circulating capital, as is the coal that a coal merchant buys and sells in the course of his trade. So, too, is the coal that a manufacturer of gas buys and from which he extracts his gas.
In the case at hand, however, he was required to apply the distinction with a degree of sophistication not evinced by these examples, since it involved the conundrum of how mining is to be analysed for these purposes. And it is in the context of mining that we find our subtler but more compelling illustration of the unacknowledged principle seemingly at play in cases within the classical production boundary.
As Lord Radcliffe explained in Commissioner of Taxes v Nchanga Consolidated Copper Mines, the ‘special circumstances of the extraction industries’ have the consequence that they ‘regularly convert part of their fixed capital for which they have paid into part of their stock in trade which they sell’. In other words they buy land on capital account and sell what they extract from it on revenue account. This means that miners do not generally get a deduction for land, as they would from an input in the form of a commodity in circulation, even though they sell what they extract from it as a commodity which they put into circulation. The Golden Horse Shoe case concerned a fact pattern which placed this rule under some strain, but which yielded a fascinating outcome.
New Golden Horse Shoe Ltd was formed to take possession of certain retained rights over some land; rights which enabled the company to process gold mine tailings deposited on that land in order to extract additional gold missed by the primary extraction process. The UK tax authority, accustomed to denying mining companies deductions in relation to their real property acquisitions on the aforementioned basis that real property (albeit that it might include mining rights) is fixed capital for miners, denied the company its deduction, and the company appealed. The matter reached the Court of Appeal, which held that (in contrast to the naturally occurring deposits in which gold may be found) the tailings were circulating capital, and so the company won their deduction.
The court’s reasoning (with reference in particular the judgment of Lord Hanworth MR at 299) was that the tailings were in the nature of ‘raw material already won and gotten’ (i.e. already circulating capital) and therefore the process was not within the usual exception for circulating capital brought into being from fixed capital by mining. Crucially, from the perspective of the argument here, this ‘winning and getting’ that was performed by the previous miner was a process that took place as a matter of objective analysis, even though (and this is what lies at the heart of the case for us) from the subjective perspective of the previous miner the tailings were a waste product. The underlying labour process rather than the subjectivity of the person selling it was what marked stuff which would otherwise be fixed capital as a commodity already in circulation in the hands of the person to whom it was sold. It had – tracking here the Marxian elaboration of the classical production boundary noted above – been physically placed into circulation as such by workers.
What this section and the previous section serve to illustrate is that subjectivity appears (prima facie at least; the conclusion will be reinforced in Section 5 below) to play no part in the analysis of trading transactions if they take place within the classical production boundary. But the underlying argument illustrated by the Golden Horse Shoe case is that what judges have regard to in these cases is not merely the objective properties of the subject matter of the transaction, but its position in circuits of objective material production such as, in classical political economy, are analysed as producing a physical surplus. The section which follows explores the contrasting situation outside the classical production boundary, where profitability arises without any such physical surplus as an underlying corollary.
4 The Subjective Ontology of Immaterial Production
The case of Graham v Green  is authority for the proposition that gambling is not a trade, and it contains certain helpful and much cited observations from renowned tax judge Rowlatt J who has already been mentioned. In Graham v Green Rowlatt J refers to a case decided by him a couple of years previously, Ryall v Hoare, in which he distinguished the proceeds of trade from mere transfers, as follows:
A person may have an emolument by reason of a gift inter vivos or testamentary, or he may acquire an emolument by finding an article of value or money, or he may acquire it by winning a bet. It seems to me that all that class of cases must be ruled out, because they are not profits or gains at all.
Referring back, in Graham v Green, to this observation in Ryall v Hoare, he said:
In the course of my judgment I said that a mere receipt by finding an object of value, or a mere gift, was not a profit or gain, and I hardly feel much doubt about that. I further said that the winning of a bet did not result in a profit or gain. Until I am corrected, I think I was right in that. Whether it is a gift or whether it is a finding, there is nothing of which there is a profit […] When you come to the question of a bet it seems to me the position is substantially the same. What is a bet? A bet is merely an irrational agreement that one person should pay another person something on the happening of an event. A agrees to pay B something if C’s horse runs quicker than D’s or if a coin comes one side up rather than the other side up. There is no relevance at all between the event and the acquisition of property. The event does not really produce it at all.
Both the gambler and the trader receive ‘property’ (i.e., in this context, money), but in the case of the gambler the element of production is absent: the event of the horse winning the race does not ‘produce’ the gambling winnings, and so the receipt is the same as a gift for these purposes: a mere transfer. But what constitutes production for these purposes? As we have seen, within the classical production boundary it is an objective matter. Commodities are produced within the classical production boundary by the application of labour to physical capital. But what about production outside the classical production boundary? How are receipts in such cases to be distinguished from mere transfers? Is it possible that in fact a mere transfer could be a trading receipt, on the basis that receipts are within the production boundary around the entire market for goods and services whenever the participants to the transaction subjectively consider them to be? This section argues that that is indeed the case.
The starting point is that, as a general rule the mere soliciting of transfers is not trading. But the question whether or not something is a gift is a subjective one. This is uncontroversially the case for the converse situation of the subjectivity of the participants taking a payment outside the scope of the charge to tax on trading income even where it has the appearance of being a reward for services, provided of course that we are outside the classical production boundary. In British Legion, Peterhead Branch Remembrance and Welcome Home Fund v IRC (1953) 35 TC 509 a charity organised weekly dance parties for three years, and in that case the facts took the taxpayer over the hurdle and into trading, but the case is significant for the sheer height of that hurdle. Notwithstanding over 150 ticketed dance parties, the case was treated as being on the borderline, and the Lord President of the Scottish Court of Session, Lord Cooper, said in his judgment that he himself would have found no trade had it fallen to him to make the first instance finding of fact. In his analysis the charity was ‘merely using some of the trappings of trade as a means of procuring subscriptions or donations not properly related to any service […] or to any commodity’ rendered by it. And so, while the pure soliciting of gifts is said to not constitute trading activity, even the provision of dance parties for reward could also fall short of trading, provided that subjectively the participants to the transaction perceive it as a gift.
The argument here is that, just as a reward for a service can be taken outside of the scope of trading by the subjectivities of the transaction participants, the pure soliciting of gifts can be brought within it by the same means. This proposition can be explored by considering the example of ‘findom’, which is a category of sex work. In IRC v Aken  a sex worker – specifically a professional dominatrix – was found to be trading by virtue of providing a service in exchange for reward, and (all else being the same) a finding such as the one made in Aken would be made in respect of any category of dominatrix services, including findom. Findom, however, is objectively indistinguishable from the receiving of gifts.
Findom operates much like the professional domination of the popular imagination, except that in the case of findom the fetishised act is not corporeal chastisement of the client but the taking of the client’s money. Journalist Abi Wilkinson wrote about the subject for the magazine Huck, noting that practitioners of findom use social media accounts to solicit clients (who are referred to as ‘paypigs’). One practitioner she interviewed
[…] periodically meets up with one guy for short amounts of time. She meets him at a cashpoint and he withdraws between £100 and £200 to hand to her. She then walks away without saying anything. In emails, she tells him what she bought with his cash. ‘Often I’m just lying,’ she confides. ‘I’ll say I’ve bought shoes or lingerie or something sexy, when actually I’ve bought stuff for the house or paid an electricity bill.’
As already noted, one must suppose on the basis of the Aken case that this activity is taxable as a trade. Further, the domestic expenditures which the practitioner uses the money for would not be deductible, and the social media presences are free, so the ‘profit’ of that trade resembles a transfer insofar as it is the entire gross receipt. So what is the element of production, distinguishing the client’s payment from a transfer, once the features which might be present in any event in the case of gifts are stripped away?
If someone wants to give a person a regular gift of cash, and in order to do so it is necessary for the recipient to accompany the giver to a cash-point each time, this would not ordinarily cause the sequence of gifts to assume the status of a reward for services. It might be said that the visit to the cash-point is given in exchange for the money, but the visit to the cash-point is also to effect the exchange of money and it is difficult to see how an exchange of money can be given in exchange for itself. As for the emotional labour consequent upon the cash, which as the Wilkinson article makes clear is substantial and burdensome, it is nonetheless perfectly normal for gifts to necessitate burdensome emotional labour on the part of the recipient, and yet no-one thinks that issuing gratitude in some form, telling the giver of it what you have spent some cash on and so on, makes gifts taxable.
Strip away these elements that might be present in the context of a gift in any event, and the implications is that the production element of a trading analysis can be brought into being purely by the subjectivities of the transaction participants. This should not be a controversial claim. Stepping back from Rowlatt J’s choice of words in that dictum in Graham v Green, it is no part of existing learning on this topic that there needs to be an objective act of production in order for trading to exist. It is the claim made in Sections 2 and 3 of this article to the effect that the production element is an objective matter in the context of production within the classical boundary that is the controversial one. But proceeding on the basis that both claims are true, the picture that emerges is that what constitutes production for the purposes of the production element of the juridical ontology of trading is either (a) objective production within the classical production boundary, or (b) literally anything else (including the mere receiving of transfers), provided that (as Hamlet might put it) ‘thinking makes it so’.
It is in relation to this latter possibility that the element of commerciality becomes particularly significant. The Court of Appeal in Aken  cited Lord Reid’s dictum (which we have already seen) regarding the specifically commercial nature of the acts amounting to a trade, over and above the mere fact of constituting the provision of goods or services for reward (‘operations of a commercial character by which the trader provides to customers for reward some kind of goods or services’). What we are referring to when we speak of ‘commerciality’ is a set of contextual or extraneous features of the taxpayer’s course of conduct which are typical of specifically business transactions – for example advertising so as to attract customers or clients. It resonates with another of the badges of trade; the badge regarding ‘the way the sale was carried out’.
The significance for present purposes of the commerciality element is this: if attention is paid to commerciality as an objectively observable characteristic of a transaction or series of transactions, then that obviates the need to consider the subjectivities of transaction participants. It raises a presumption that the reward arising in respect of the production element is not a transfer. In British Legion, Peterhead Branch the court made clear that if the reward is found to be a gift from the subjective perspective of the participants then commerciality does not make the activity a taxable trade, but in ordinary cases of trading the opposite finding is not necessary; commerciality is enough. This has great significance for the present argument: what it does is obviate the need to consider the production element altogether. Commerciality and exchange are sufficient. If commerciality is present then production in category (b) above – i.e. ‘anything, provided that thinking makes it so’ – does not need to be anything at all. Which is why (as in the case of findom) it does not matter that it is in fact (for these purposes, as discussed above) nothing.
This analysis is supported by the fact that insurers pay tax on their profits, considered in the context of Rowlatt J’s observations in Graham v Green quoted above. He said that a bet on a horse is not a productive act because the bet is irrational and any winnings are not actually produced by the victory of the horse. By way of comparison, the business of an insurer may be characterised – as it was in the case of Liverpool And London And Globe Insurance Company v Bennett (Surveyor Of Taxes), as follows:
It embarks its funds in its business simply by having money ready to pay its debts with. We are not here concerned with manufactories or the maintenance of a stock which is to be sold. The business of insurance consists in making promises to pay, by way of indemnity, in futuro and contingent sums in consideration of present payments of money, and the whole business therefore, apart from the wisdom and prudence with which it is conducted, consists in being ready to meet the liabilities if they accrue, and to the extent to which they accrue, out of one class of funds or another.
Just as in the case of the horse winning, there is nothing about the insured contingencies failing to eventuate which in any meaningful sense ‘produces’ the insurer’s profits. We are not (as the case puts it) ‘concerned with manufactories or the maintenance of a stock which is to be sold’. The insurer’s business differs from the gambler’s activities not because there is production going on in an insurance business which does not take place when a gambler’s horse wins, but because in the case of an insurance policy the bet is generally a rational one on the part of the insurer (having been commercially assessed to be so by its staff) and the insurer goes about seeking people with whom to place such bets with the requisite degree of commerciality. The commerciality itself is therefore the be-all and end-all of production in the insurer’s case.
What appears to emerge from these cases, then, is this. The objective classical production boundary is being operated by the courts, and where the transaction is within it there is trading. The existence of trading outside that boundary is a subjective matter generally determined by reference to an inquiry into commerciality, (i) as a proxy for subjectivity where it is not expressly inquired into, and (ii) without the need for any inquiry into whether any production is objectively happening at all.
Of course, commerciality is also treated as a relevant consideration in cases within the classical production boundary, and so it could be countered that the distinct operation of that boundary argued for here is illusory. One defence of the argument here might be that, while commerciality is treated as a relevant consideration within the classical production boundary, there exists no case within the classical production boundary where an absence of commerciality took the taxpayer out of the charge to tax on trading profits.
In order to positively prove the point however, we would need a case where a taxpayer acted in a way as to objectively place themselves within the classical production boundary, but without the exchange element such that the transaction was altogether outside the commercial sphere. If in such a case the tax charge arose nonetheless, this would bear out the argument in this article. And still better would be a contrasting case, similar except for the fact that the production falls outside the classical production boundary, where the tax charge does not arise. As it happens these two cases actually exist, and they do indeed have those contrasting outcomes. They are considered in the section which follows.
5 Production Without Exchange
In Sharkey v Wernher the taxpayer was a breeder of horses which made her a producer of commodities in the form of livestock. As a personal hobby she also owned racehorses. On one occasion, having raised them in her trading capacity, she transferred five horses from her stud farm to her racing stables. Not wishing to obtain an unwarranted tax advantage, she effectively disallowed her own deductions in relation to the breeding of the horses by treating her trade as having received, for accounting purposes, an amount equal to their breeding costs. The House of Lords went further: in what may perhaps be the most controversial decision in the whole corpus of UK jurisprudence on the charge to tax on trading profits, it was held that the correct amount to enter into the accounts for tax purposes was not the breeding costs but the market value. In other words the court treated her as having created the value that she would have realised had she sold the horses for what they were worth at the point she appropriated them to her hobby, in effect treating the objective processes of material production to the point of exchange as having imbued the commodities in question with additional value not ontologically dependent on any actual price realised in exchange. This outcome was described by Lord Radcliffe as ‘better economics’.
The contrasting case of Mason v Innes concerned professional author Hammond Innes. It should be acknowledged at the outset that the taxpayer in Mason v Innes was paying tax on his profits as a ‘professional’ rather than as a trader, which is technically a separate head of charge, but one in relation to which the same principles should generally apply. The difference between the two cases could just be a difference between the two heads of charge, but that difference should not be an arbitrary one, and the contention here is that the difference lies in the fact that professional production invariably lies outside the classical production boundary.
Hammond Innes, having written a book (eventually published under the title The Doomed Oasis) transferred the copyright to it to his father as a gift. Had this transfer been effected by way of exchange for consideration (e.g. with a publishing house) the proceeds would have entered his professional accounts as a (subject to deductions, of course) taxable receipt. The UK tax authority sought to apply the logic of Sharkey v Wernher and treat the market value of the copyright as a receipt of the taxpayer’s profession but the Court of Appeal declined to do so, holding that the taxable receipt was nil (notwithstanding that Hammond Innes had incurred not insignificant deductible travel costs researching the novel). Lord Denning made the following observations:
Suppose an artist paints a picture of his mother and gives it to her. He does not receive a penny for it. Is he to pay tax on the value of it? It is unthinkable. Suppose he paints a picture which he does not like when he has finished it and destroys it. Is he liable to pay tax on the value of it? Clearly not. These instances – and they could be extended endlessly – show that the proposition in Sharkey v Wernher does not apply to professional men. It is confined to the case of traders who keep stock-in-trade and whose accounts are, or should be, kept on an earnings basis, whereas a professional man comes within the general principle that when nothing is received there is nothing to be brought into account.
Thinking forward to the case of Aken, Lord Denning could equally have said ‘suppose a sex worker has sex with their lover or spouse; are they liable to pay tax on the value of it?’ Lord Denning’s example of the painter who destroys a painting they don’t like instead of selling it is particularly telling, but (as he says) the examples could be extended endlessly. Consider, by way of further illustration, the example of a professional programmer who works through the night on a free open source software project in addition to their ‘day job’ working as a freelancer on some finance sector institution’s payroll administration overhaul. That open source night-work creating software for anyone to use free of charge could not realistically be treated as an act of taxable production as Lady Wernher’s production of racehorses was.
In an article in the British Tax Journal in 2005 Roger Kerridge considered the possible reasons for the difference between the two cases and rejected the possibility that it reflects a difference of treatment between ‘goods’ and ‘services’. His grounds for doing so were that the distinction between the two is a vague one. He gives the example of a painter painting a painting to order, which would be (in Kerridge’s view) a service, and a painter painting a painting and then selling it, which would make it (in Kerridge’s view) ‘goods’. And it is indeed hard to see why a difference so flimsy should be treated as determinative of anything. But, again, recourse to the more sophisticated classical idea of circuits of material production yielding surplus (as opposed to superficial categorisation of outputs) comes to our aid at this juncture. Overwhelmingly (if not 100% exclusively) output for luxury consumption such as fine art is not going to re-enter the circuit, either as means of production, or as a wage good for the workers performing the low-wage materially productive labour those means of production predicate. But even if (exceptionally) a factory worker or agricultural labourer buys a painting, the low-capital-intensity labour of the painter, which takes place over periods of time per unit of output which are essentially arbitrary, is still manifestly not of a kind which capital is going to be predicating as an input in the relentless circuits of production where more commodities are produced than are consumed by those who produce them. And this is the case irrespective of whether or not (recalling Kerridge’s point) the painting is a commission.
Until Sharkey v Wernher was placed on a statutory footing in 2008 (in such a way, it might be noted, as can only apply to material goods), it was widely thought amongst UK tax industry professionals – at least insofar as recollections of informal conversations between the author and other practitioners are concerned – that the decision was simply wrong. All it would take to get the position for traders aligned with the position for professionals, many such practitioners thought, was a brave enough taxpayer with the resources to appeal the point all the way to the House of Lords (now the Supreme Court). This article agrees with Lord Radcliffe that in fact Sharkey and Wernher, even in hindsight with the contrasting subsequent case of Mason v Innes in view, was actually ‘good economics’, provided your economics is of the classical kind. Indeed, the same is true of the ‘venture in the nature of trade’ cases addressed above; to view them through the lens of classical political economy is to see the distinctions that they draw (so often derided as arbitrary) come into focus, and start to make sense.
To conclude: viewed through the lens of classical political economy, the charge to tax on trading profits may be understood as a tax on activities falling within either of two overlapping groups. Activities within the classical production boundary are always taxable. The other group is activities which are to be understood as taxable trading on the basis of (a) receipts referable to the activity, accompanied by (b) sufficient indicia of commerciality to raise the presumption that they constitute trading receipts on a subjective level, potentially subject to (c) an enquiry into the actual subjectivities of the participants to the transaction or transactions in question. It is the second group that suffers from the defect of irredeemable indeterminacy that bedevils this area of law, since no objective production of ‘goods or services’ of any kind is required in order for a person’s activity to fall within it. The classical production boundary by contrast is an objective one, and it is emergent as such in the cases, because the Ricardian machine is something which objectively exists, and so a determination as to whether or not a taxpayer objectively participates in it is something upon which a court can rely for the purposes of fiscal determinations without recourse to subjective considerations.
As noted in the introduction to this article, that conclusion reinforces the theoretical basis for claiming that value creation takes place only at the bottom of the ‘smile curve’, such that all immaterial business functions in the global production network are to do with value capture. It was also noted in the introduction that that claim (or a weaker or less expansive version of it at least) is implicit in a wealth of critical literature on the economic predicament of the world in the 21st century. And something of that critical perspective on the economic predicament of the world in the 21st century has even seeped into the literature on international tax norms.
There is of course a reason why the literature on international tax norms in particular should engage with value-theoretical principles insofar as they potentially underlie that critical perspective, and that is because for the best part of a decade from 2012 onwards the OECD pursued a programme of reform of international corporate tax norms founded on the guiding principle that profitability should be allocated to where ‘value is created’. The literature on the OECD’s reforms – and the participants in the reform process themselves – have tended to eschew engagement with formal value theory, however. That being the case, it has been argued that formal value theory of one kind or another, had attention been paid to it, might have usefully informed both the process of developing these norms and the critique of them.
Indeed there is a specific category of policy-making activity in the international tax arena to which, on the face of it, the conclusions in this article might seem directly relevant, and that is policy-making geared towards apportioning profitability around multinational groups for tax purposes in accordance with allocation factors. Examples might be the unitary taxation by formulary apportionment that applies internally between states in the United States of America, the Common Consolidated Corporate Tax Base that is proposed to apply between member states of the European Union, and the proposals under Pillar 1 of the current round of corporate tax reform negotiations at the OECD. What these approaches have in common is that they aggregate some or all of the profitability of multiple entities and allocate it according to factors such payroll, assets and sales (as distinct from, say, book profits adjusted for tax purposes in accordance with a market value approach to intra-group transactions). And it might be thought that the notion of the Ricardian machine as the source of value would suggest a specific set of allocation factors.
Operationalising the notion of the Ricardian machine to yield an allocation mechanism for the purpose of such a policy would be a fascinating exercise, requiring careful thought around some core value-theoretical questions in the classical tradition. It is not simply a matter of allocating profitability to physical assets, or headcount, of course, because not all assets and not all workers participate in the circuits of material production of commodities that in aggregate constitute the Ricardian machine. In addition, there is an unresolved question having to do with whether it is meaningful to speak of individual workers or individual assets producing value in a quantitative sense, since the dynamic to which the concept of value applies is, in important ways, a system-wide one. But there is a prior policy obstacle to be surmounted before any of these questions is reached, which is that the policies in question here only allocate profitability around the group, or downstream in the value chain to a market jurisdiction. In no instance, actual or proposed by policy-makers, is this policy capable of allocating profitability upstream in the value chain to where production takes place, if it does not take place in-group. And since value capture out of the Ricardian machine does not require the actor doing the capturing to own or control the assets or labour producing the value, this means that vast swathes of value creation within the Ricardian machine is barred from having profitability allocated to it by the formal boundaries of the multinational group.
That said, it is nonetheless the case that formal value theory has been noticeably absent from policy debates in this area, and this article shows that in fact there is an interdisciplinary dialogue to be had – there may be as much for theorists of value to learn from tax norms as there is for tax scholars and tax technocrats to learn from value theory.
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