Under the self-assessment system the question of whether a business is, or would be trading, is decided initially by the owner itself. However, sometimes it is difficult to decide if the activities would be assessed to income tax or not. Badges of trade are important because can help analyse if the transaction should be taxed per Income Tax principals. First badge, called subject matter of the transaction, aim to analyse the natures of the goods involve in a transaction. That can help establish if the transaction is an investment, goods are bought for own use or it is a stock in trade. We have to justify that the assets was bought for any other purpose then sell it. In your case the cars which you bought cannot be treating as an investment and they are not use by you or your family. That can indicate there are bought for trading transitions. Second test is the length of the period of ownership. If the asset bought is retained by the new owner for extended period of time, it indicates that the asset could have been bought for personal use of the buyer. Cars which you are buying are kept by you for the time needed to do an improvement, and then cars are sold. Using this badge we can deduct that the length of time you own the assets indicates trading intentions. The next badge is frequency or number of similar transaction by the same person. Situation when the transaction is more frequent will be regarded as trading. In your case, sales commitment of one car triggers buying another one. There is no information exactly how many cars and how often you are selling them, but I can designate that it is repeating transaction, which point to a trading. Another badge is supplementary work and marketing. This badge treats about any work added and modifications to improve the assets have been done by the owner. In situation when we are doing any improvement to the asset which make it more attractive to the buyer, it is possible that the transaction will be treated as a trading. You are buying the cars and repairing them, also you do hire your friend to do the body works repairs that makes the cars more attractive and expensive, therefore profitable. This indicates a trading transaction. Finally we will look at motive and reason for sale. If the asset was bought with intention to resell it in the short term that can indicate a trading transaction. When you are buying the car and your intention is to repair it and sell with the profit that will point on trading nature of the transaction. Perhaps, if the asset was sold because of urgent need of cash, it is less likely to be a trade. You are selling cars because you need capital to buy another one and along to this, want to save money to set up your business which is not an urgent need, therefore it is a trading. On a balance of all the badges of trade you are trading in cars and therefore you should register with HMRC as a sole trader.
Now I am going to introduce you to a UK’s VAT system. Value added tax is an indirect tax which is charge on the supply of variety of goods and services. Business charges the VAT on all sold goods and services, which is called Output VAT and is paid to the HMRC. VAT charged on goods and services purchased by the business are called Input VAT and can be reclaimed from HMRC. Difference between Output VAT and Input VAT gives us the net amount paid to or reclaimed from HMRC. Taxable person is a person (an individual, partnership, company or other body which supplies the goods or services) who is selling taxable supplies and should be registered for VAT. Person must register for VAT if the sales of taxable supply in 12 month period exceeds a threshold, which equals to £79,000 (historic turnover), or expects to be over that figure in the next 30 days (future turnover). In historic turnover the person has to notify HMRC within 30 days of the end of the relevant month, in which that person exceeded the threshold, but registration will take effect within 30...
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