Tax Essay
Business Taxation
Introduction
This report is divided into two main parts. In the first part, the badges of trade are considered and how they would be applied to Ali situation. In the second part, the principles of VAT, i.e. taxable persons, registration and deregistration, imports and exports, categories of supplies, different accounting schemes, and the administration of VAT, are discussed.
I.
Income tax is charged under the trading income provisions of Income Tax (Trading and Other Income) Act 2005 Part 2 on the profits of any “trade, profession or vocation whether carried on in the UK or elsewhere” . Accordingly, all self-employed have trading income regardless of their business activities.
In the absence of a satisfactory statutory definition of “trade”, the Royal Commission on the Taxation of Profits and Income suggested certain objective tests, known as “the badges of trade”.
There are said to be six badges of trade as follows: * The subject matter of the transaction.
The sale of goods that neither produce direct income nor give personal enjoyment to its owner is likely to be a trade. Therefore, it is unlikely that commodities or manufactured articles will be a form of an investment rather than a trade. The purchasing and selling the lands or houses is more difficult to assess. * Length of ownership: a quick sale is likely to be a trade.
The short period of ownership in Wisdom v Chamberlain 1968 was a factor to the advantage of trading as was the fact that, in Johnston v Heath 1970, the individual had contracted to sell the asset before he had acquired it.
* Frequent similar transactions.
* Work being done to the property before resale.
* Forced sales to realise cash are unlikely to be a trade.
* Motive – the intention to make a profit suggests trade.
Applying all these tests to the given case, it can be stated that Ali’s activities are in the nature of trade. First of all, Ali purchases boats to
Introduction
This report is divided into two main parts. In the first part, the badges of trade are considered and how they would be applied to Ali situation. In the second part, the principles of VAT, i.e. taxable persons, registration and deregistration, imports and exports, categories of supplies, different accounting schemes, and the administration of VAT, are discussed.
I.
Income tax is charged under the trading income provisions of Income Tax (Trading and Other Income) Act 2005 Part 2 on the profits of any “trade, profession or vocation whether carried on in the UK or elsewhere” . Accordingly, all self-employed have trading income regardless of their business activities.
In the absence of a satisfactory statutory definition of “trade”, the Royal Commission on the Taxation of Profits and Income suggested certain objective tests, known as “the badges of trade”.
There are said to be six badges of trade as follows: * The subject matter of the transaction.
The sale of goods that neither produce direct income nor give personal enjoyment to its owner is likely to be a trade. Therefore, it is unlikely that commodities or manufactured articles will be a form of an investment rather than a trade. The purchasing and selling the lands or houses is more difficult to assess. * Length of ownership: a quick sale is likely to be a trade.
The short period of ownership in Wisdom v Chamberlain 1968 was a factor to the advantage of trading as was the fact that, in Johnston v Heath 1970, the individual had contracted to sell the asset before he had acquired it.
* Frequent similar transactions.
* Work being done to the property before resale.
* Forced sales to realise cash are unlikely to be a trade.
* Motive – the intention to make a profit suggests trade.
Applying all these tests to the given case, it can be stated that Ali’s activities are in the nature of trade. First of all, Ali purchases boats to
Bibliography: Lymer A. and Hancock D. Taxation. Policy and practice, 9th Edition. London: Thomson, 2002/2003 Revenue Law Principles and Practice Melville A. Taxation. Finance Act 2005. 11th Edition. Edinburgh: Pearson Education Limited, 2006. Reports The Final Report of the Royal Commission on the Taxation of Profits and Income (1955: Cmnd 9474) “Dorchester yacht broker James Williams jailed for VAT fraud”, http://www.bbc.co.uk/news/uk-england-dorset-17482296 (23 March 2012) http://www.legislation.gov.uk/ukpga/1994/23/contents – accessed (17th of December 2012) http://uk.accaglobal.com/uk/members/technical/advice_support/tax/income_tax/2011/badgesoftrade – accessed (17th of December 2012) http://www.opsi.gov.uk/acts/acts2005/20050005.htm – accessed (17th of December 2012) http://www.taxationweb.co.uk/tax-articles/business-tax/the-badges-of-trade.html – accessed (17th of December 2012) [ 36 ]. Assuming that boats are not boat trips under zero-rating passenger transport, vide HMRC Reference:Notice 744A (December 2009).