Table of content
2. Definition of “Badges of trade”
3. Analysis of Harjit’s hobby
4. Calculations of income tax and national insurance payable
The aim of this report is to analysis the transactions that engaged by Harjit on his hobby the selling and buying activities of his rock memorabilia collection whether it would be assessed to income tax or not according to the UK tax system. If his hobby constitutes a trade, the income he earned from the transactions will be taxed per the Income tax (Trading and Other Income) Act 2005 assuming that he is a UK resident and, his income from employment is taxed per the rules in the Income Tax (Earnings and Pensions) Act 2003. (Melville, 2011)
Before examining Harjit’s case, it is necessary to understand the meaning of “badges of trade”. This is also one of the requirements in this assignment, which to discuss the “badges of trade” in detail. Therefore, an elaborate study for the concept of “badges of trade” was included in the main body of the report.
Assuming that Harjit’s hobby was assessed to be trade in nature and subject to income tax by the Income tax (Trading and Other Income) Act 2005, a calculation of his income tax and national insurance payable was prepared consisting of the corresponding trading income.
All concepts and definition listed in the report are using the secondary research method. (Saunders, Lewis and Thornhill, 2009)
2. Definition of “Badges of Trade”
“A self-employed person may be conducting a trade or may be exercising a profession or vocation.” (Melville, 2011, P.115) Those profits are all charged to income tax by the Income tax (Trading and Other Income) Act 2005. (Melville, 2011) ‘Trade’ concerns its trade nature on its own facts for each case. (HMRC BIM20201, n.d.) “Over the past years, the Commissioners and the courts examined the facts and looked for the presence or absence of common features or characteristics of trade.” (HMRC BIM20201, n.d.) Detailed meaning of “trade” is listed in the Business Information Manual BIM24045 of HMRC and was enclosed in the appendix of this report.
In the case of Ransom v Higgs (1974), Lord Wilberforce considered trading transactions are usually concerned the exchange of goods or services for reward. There must be some way to providing the business for addressing customers. (Lee, 2007)
Six “badges of trade” had been defined in 1955 by the Royal Commission on the Taxation of Profits and Income to distinguish between trading and non-trading activities. (Combs, Dixon and Rowes, 2010) Nowadays, it was expanded to nine. (HMRC BIM20205, n.d.) When deciding a taxpayer whether carried on a trade or not, single test is not conclusive and it is suggested considering all criteria of “badges of trade” together as reference and attached each of them depending on the actual situation. (Melville, 2011) The criteria are:
* Subject matter of the transaction
What is the nature of the asset?
If the asset was purchased for personal enjoyment or held as source of income, the sale of the asset should not be treated as trade income but subject to capital gain instead. Conversely, if the asset was acquired neither for providing personal enjoyment nor yield income, then the only benefit from this asset perhaps is selling and the profit arisen from the sale will be treated as a trading profit. (Melville, 2011)
In the case of Rutledge v CIR (1929), the taxpayer has made profit by buying and selling one million toilet rolls. By applying the concept of badges of trade, the subject matter of this activity was interpreted as trading. (Melville, 2011)
* Length of the period of ownership
How long that the asset was being owned by the taxpayer?
Was the transaction owned in a long...
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