Evaluation of Badges of Trade and Taxability of Business Profits

Taxation

TABLE OF CONTENTS
Introduction......................................................................................................................................3
Question 1........................................................................................................................................3
Question 2........................................................................................................................................4
Question 3........................................................................................................................................5
Part A...........................................................................................................................................5
Part B...........................................................................................................................................6
Part C...........................................................................................................................................7
Question 4........................................................................................................................................8
Part A...........................................................................................................................................8
Part B...........................................................................................................................................8
Part C...........................................................................................................................................9
Part D...........................................................................................................................................9
References......................................................................................................................................11

INTRODUCTION
Tax is a levy on the profit derived by the trading and the professional activity (Hoynes, Miller,
and Simon, 2015). The income tax Act describes the activity which is regarded as trading, and it
is known as “Badges of Trade”. The present study is about the evaluation of the badges of trade
along with the taxability of the business profits by considering relevant tax provisions. In this
study description regarding the allowed and disallowed expenses from the profit of the business
is also stated. Further the registration requirement under the vat, return, and payment of vat
liability and the eligibility of the flat rate scheme for the businesses has been discussed.
QUESTION 1
The income tax is a levy on the profit which is earned by the person from a business activity or
by profession or vocation (Saad, 2014). In the income tax of the United Kingdom, for
determining whether the transaction is considered as trading or not, “Badges of Trade” test is
defined which are as follows-
 When a person enters into a transaction with the objective to earn the profit from the
transaction, then it is regarded as a trade according to the income tax rules.
 If the person regularly deals with the same activity, then the same is regarded as a
trade. In the case of “Pickford v Quirke”, the taxpayer buys the mill for the trading
purpose, but due to the worse condition, the taxpayer sale all the items with the
objective to earn profits. The taxpayer regularly sale the items of the mill (Elsevier
UK Ltd, 2010). Therefore this transaction is considered as profit from trading.

 If the person, after purchasing any asset, modifies it with the objective for enhancing
the sale. Then it is a trading activity.
 Nature of transaction is such that, even the single transaction also be regarded as
trading. In other words, the person is not required to carry out day to day activity of
the sale and purchase, but the single transaction of the sale and purchase also leads to
the trading activity (Elsevier UK Ltd, 2010).
 If there is a direct link between the existing business and selling of any item by the
person, then it constitutes the profit from trading activity.
 Financing arrangement such as obtains the loan for purchasing the asset and only
when the asset is sold, and then the loan is repaid. It is also regarded as trading
activity. In the case of “Wisdom v Chamberlain” the taxpayer obtained the loan for
buying the mould of silver bullion. Due to the non-repayment of interest from the
money, the taxpayer sold the mould. The profit is regarded as a trading profit.
In the present study, Desai enters into a buying and selling activity of the antiques and restoring
on a regular basis and making the profit (Elsevier UK Ltd, 2010). After considering all the above
aspect, Mr Desai vocation is termed as trading.
QUESTION 2
Part A
Difference between Tax Avoidance and Tax Evasion
Tax Avoidance Tax Evasion
Tax Avoidance refers to Reducing tax Tax Evasion refers to Reducing tax liability