Tax Essay

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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 sell them later even if his hobby is renovation. He does it to yield an income not for a “pride of possession”. Ali trades the boats as soon as they are ready. The transactions are systematic and repeated. Ali undertakes supplementary work to raise the value of the asset. Also, he spends money on improvements and modifications before every sale. Clearly, Ali’s purpose is to resell renovated boats at a profit. His intention is to set up his own business in the future. Moreover, such factors as connection with existing trade (Ali works in a machine shop in a shipyard during the week) ; sales organisation (Ali trades trough the local press and the Internet); and method of finance (the business is self-financing: the new purchase is paid out of the proceeds of the sale), may be examined.

II.
The VAT legislation is to be found in the Value Added Tax Act 1994, as amended by subsequent Finance Acts.

A taxable person is one who is either registered or required to be registered. It can be an individual or partnership, company, club, association or charity. If the taxable supplies reach, or will reach, the registration threshold (usually adjusted annually) the taxpayer is required to register with HMRC. However, any trader making a taxable supply can register voluntarily irrespective of his turnover level. To be a taxable person you must be making supplies in the course of a business, which is any form of economic activity even without an intention to make a profit. A taxable person pays the tax to the Customs, having charged the customer for it. The VAT registration requirement is laid on the person. Therefore, an individual may operate several businesses but will have only one VAT registration.

On the registration process, the taxpayer submits Form VAT 1 to his local VAT office at the end of any calendar month, if the value of his taxable supplies over the previous 12 months exceeds the registration threshold exclusive of VAT. Registration is also...
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