Business Taxation

BUSINESS TAXATION

TABLE OF CONTENTS
QUESTION- 1.................................................................................................................................3
a) Computation of the trading profit before the deduction of the capital allowances..................3
QUESTION- 2.................................................................................................................................4
a) Criteria used for distinguishing employment from the self employment................................4
b) Why do people prefer self-employment rather than being employed, resulting in so many IR
35 cases?......................................................................................................................................6
QUESTION 3...................................................................................................................................6
a) Six Badges of trade .................................................................................................................7
b) Different VAT schemes available for VAT registered business ............................................8
QUESTION 4...................................................................................................................................9
a) Inheritance tax payable as the result of death of Peter ...........................................................9
b) Capital gain tax liability of John for the tax year 2020 /21...................................................10
CONCLUSION .............................................................................................................................11
REFERENCES..............................................................................................................................12

QUESTION- 1
a) Computation of the trading profit before the deduction of the capital allowances
Income Statement for the year ended 31st March 2021:-
Particulars £ £
Sales 82500
Less: Cost of Sales 37200
Gross Profit 45300
Add: Rent Receivable 1200
Bank Interest Receivable 80
Profit on sale of non-current
asset
510 1790
46890
Less: Wages and Salaries 22620
Business rates and insurance 1750
Heating and Lighting 2170
Repairs and renewals 480
Telephone 220
Motor Expenses 2600
Sundry Expenses 1650
Bad and doubtful debts 440
Credit card interest 120
Loss on sale of non-current
asset
70
Depreciation 2500 36410
Net profit for the year 10480
Capital allowances are allowed as deductions for the purpose of computing the taxable
income of the business. They can be referred to as the relief that is provided to the tax payers in
respect of the capital expenditures of the business (James, 2016). The limit of such allowances is
prescribed by the Income tax act which shall be allowed as deduction.
In order to compute the trading profit of the business certain permissible limit of the
deductions allowed has to be subtracted from the income statement of the business. Certain
deductions which are to be reduced from the profit and loss statement are:-

a) The amount that is drawn as salary by Linda from the business is being made part of the
salaries and wages in the income statement. The salary is £200 per week which can be
£10400 approximately for the year. This does not form part of the capital allowance in
reference to tax regime so it shall remain debited in the income statement.
b) The installation of the improved heating system is a capital expenditure of the business which
has been allowed as the deduction for the purpose of computing the tax liability. This
amount shall be deducted from the statement of profit and loss to come to the trading
profit (Boadway and Tremblay, 2016). Whereas the remaining two elements shall remain
in the income statement.
c) HMRC which is the tax authority of UK has decided that one quarter of the telephone costs
and one fifth of the motor expenses are made by the business for the private use. So these
expenses cannot be considered as the business expenses for the computation of the
taxable income and neither can be made part of the trading profit of the company. And so
they are to be removed from the trading profit.
d) The sundry expenses of the business include the business entertaining expense which are
carried on by the company for entertaining their employees. The capital allowance for
such expenses is allowed up-to 50% which is £520*50%= £260. So half of the expense
shall remain in the income statement and the remaining shall be removed to ascertain the
trading profit of the business (Isabelle, 2016).
e) The provision that is set aside for the bad and doubtful debts shall not form part of the trading
profit and so the effect has to be removed from the income statement of the company.
The trade debts written off shall be included in the income statement and so no changes
are to be made in its respect.
QUESTION- 2
a) Criteria used for distinguishing employment from the self employment
Self employed- A self-employed person is one who does not work for a specific employer paying
a specific amount of salary or wages. They work for themselves and establishes a direct contact
with the clients. They are highly skilled in the work they perform like freelancers, traders,
investors, agents and the lawyers. They enjoy a degree of power but simultaneously are subject