Business Taxation Study Material

This study material on Business Taxation covers topics such as taxable income, employment vs. self-employment, different VAT schemes, and more. It includes solved assignments, essays, and dissertations to help you enhance your understanding of the subject. Whether you're a student or a professional, this study material will provide valuable insights into the world of business taxation.

Business Taxation

Table of Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................5
a) Employment vs. self-employment...........................................................................................5
b) Preference for self-employment..............................................................................................6
Question 3........................................................................................................................................8
a) Six badges of trade..................................................................................................................8
b) Different VAT schemes.........................................................................................................10
Question 4......................................................................................................................................12
a) Inheritance tax.......................................................................................................................12
b) John’s capital gains tax liability............................................................................................13

Question 1
Taxable income:
Taxable income is the amount of income used to calculate taxes for a state individual or
corporation for a given tax year. It is commonly referred to as adjusted gross income (gross
income, called “gross income,” and no deductions or exemptions are allowed during that tax
year). Taxable income includes salary, bonuses and tips, investment income and earned income.
£ £
Sales 82,500
Less: Cost of Sales 37,200
Gross Profit 45,300
Add: Rents receivable 1,200
Bank interest receivable 80
Profit on sale of non-current
assets 510 1,790
46,890
Less: Wages and salaries 22,620
Business rates and insurance 1,750
Heating and lighting 2,170
Repairs and renewals 4,280
Telephone 880
Motor Expenses 3,250
Sundry expenses 1,650
Bad and Doubtful debts 640
Credit card interest 120
Loss on sale of non-current asset 70
Depreciation 2,500 39,930
Net profit for the year 6,960
Add: Salary (200 per week)* 10,400
Add: 1/4th telephone expenses 220
Add: 1/5th motor expenses 650
Add: Business entertaining 520
Less: Trade debts written off 440
Less: Provision for bad debts 200 11,150
Taxable income 18,110
*It is assumed that there are 52 weeks in a year

Question 2
a) Employment vs. self-employment
However, there are some staff members whose status is unclear. For example, you can work
from home and use your computer, but that's worse than an organization where someone controls
and manages things. In this case, you need to decide whether you are an employee or a
freelancer. The payer is not sufficient to confirm your circulation. Payers are biased because they
lack the financial costs and responsibilities of hiring staff (see explanation below). So, if you are
unsure about your condition, answering the following questions can help.
 Do you have control over how your job is done, i.e. working independently without
supervision?
 Do you have more than one "client"?
 Can I contact other customers at any time?
 Can you submit your work?
 Can you refuse the job?
 Do you have the tools and equipment you own? For example, do you use your own
computer, pay for a software subscription, are you responsible for repairing or updating
work equipment in the event of a breakdown?
 Do you sell yourself?
 Can you hire someone for work without permission?
 Do you take risks and responsibilities for the work you do? Can I still pay if I can't get it
right?
 Do you have a written contract outlining your working conditions?
 Are you billing the customer?
 Have you worked for a particular job?
Employees often have a variety of rights, including laws against unfair violations. Holiday and
severance pay and other benefits (including company contributions to health, pension and life
insurance plans). These risks and costs are borne exclusively by the self-employed.

In addition to calculating and deducting payroll taxes, employers have to pay extra taxes to
employees. Private entrepreneurs are responsible for measuring and paying taxes.
Employees can take out employment insurance while the EI for self-employed workers is subject
to varying prices and benefits if applicable.
Self-employed people have the right to claim some work-related deductions from their income
which will reduce their income tax, including home office, car and telephone costs. Employees
can receive this type of allowance, but it is more limited.
Loans, mortgages and credit cards are often easier to obtain because employees are believed to
have a more stable income. Self-employed people often have an irregular income stream and a
high risk of liquidity recovery, which can adversely affect access to credit.
b) Preference for self-employment
The monetary law of 1972 decreased the interest for these organizations. The Ministry of
Finance has ordered laws expecting subcontractors to deduct charges from the development
business except if they work with the organization when they can get everything by doubt of far
and wide tax avoidance.
Presently, brief laborers were recruited where they were treated as "paid" office laborers, except
if the organization had an agreement with a restricted organization. Organizations in the
development and different ventures needed to abstain from stressing over numerous "specialists"
beating and leaving, and it turned out to be practically unthinkable for one individual to get a
new line of work through another office instead of through a restricted organization.
The allure was expanded by the Finance Act 2002, which set an underlying corporate expense
pace of 0% (once in the past 10%) for organizations whose benefits don't surpass £10,000. This
proceeded until 2005 when it was suspended.
Against this background, the 1999 IR35 Budget Communication gives interval measures to keep
people from avoiding government duties and protection through corporate use. It produced
results on April 6, 2000 and keeps on being known as IR35.
Be that as it may, managing organizations actually has the accompanying focal points:

• Entrepreneurs procure a lowest pay permitted by law and make good on a base duty and public
protection by acquiring a profit pay from the organization's benefits after expense. Circulation
expense will presently don't be collected except if the project worker is needed to pay the duty at
a higher rate.
• This saves public protection reserves (no Northern Ireland in profits) and income since profits
don't pull in PAYE.
• Corporate expense rates are fundamentally lower than personal assessment and public
protection.
• Entrepreneurs, for example, IT and different experts have the chance to telecommute. This can
prompt massive expense investment funds (see beneath).
• Contractor renting organizations save bosses' public protection costs.
IR35 intends to forestall circumvention of duty and government protection by regarding business
visionaries as representatives for charge purposes. In any case, because of laborers under the
work law, for example, ailment stipend, occasion recompense, maternity annuity, and so on, the
remittance isn't gotten.
The IR35 work test is explicit to annual duty and public protection and may give various
outcomes for a similar reason.
Case Study
1. Lime IT Ltd v. Justin, SPC2002
Applies to IR35:
The citizen organization has consented to give IT administrations to different client explicit
ventures (M) through offices. It was relied upon to require a year to finish the task.
The organization (utilizing F as a sole worker) was relied upon to work around 37 hours out of
every week, or as much as M's sensibly required, and the agreement incorporated another
statement that the organization could ship off different representatives. During the term of the
agreement, the citizen worked with 4 different clients. F. worked in one of M's workplaces and to
some extent from his home office. A stay with four PCs here was for a citizen organization.

Deferral: It was important to "watch" the arbiter and conclude whether to recruit or
independently employed without a go between. As per the realities introduced, the relationship
will act naturally utilized.
Curiously, the complainant was disappointed with the IRS hearing, and Justin (HM Revenue and
Customs) was likewise disappointed with taking care of the case and left a long note that he gave
direction. At the point when he initially distributed his perspectives on the utilization of IR35, he
dealt with new, disliked laws and rules that were especially wrong.
Question 3
a) Six badges of trade
While brand name tests are not comprehensive, HM Revenue and Customs is utilized to decide if
a movement is an authentic monetary/business action or a coincidental action that could profit by
an interest. When choosing whether a side interest has been dependent upon tax collection, it
ought to be deliberately thought of.
Plainly in the wide case law on this matter, the choice of the organization's exhibition or not is
regularly muddled. Indeed, HMRC and the court believe it's essential to take a gander at the
10,000 foot view and not glance at every "symbol" independently or depend a lot on the
exchanging symbol. Sometimes, citizens will contend that the leisure activity is really being
exchanged for certain tax reductions identified with making exchange misfortunes.
HMRC considers the following 9 exchanging pins out of the 6 pins examined underneath as a
feature of an overall examination concerning whether a pastime is a genuine work.
1. Rationale to adapt: The goal to adapt can unmistakably demonstrate your exchanging action.
Nonetheless, this by itself isn't sufficient. Salt v. Chamberlain, Ch D 1979, 53 TC 143; [1979]
Research expert STC 750 endured a misfortune in the financial exchange in the wake of
attempting to foresee the market. The misfortune happened after numerous years and in excess of
200 exchanges. Basically it wasn't viewed as exchange and capital. We presumed that private
value exchanging would never be exchanged. Capital increases charge applies to these

exchanges. For another situation, Rutledge v. CIR-CS 1929, 14 TC 490, the citizen was on a
work excursion to Germany, where the citizen purchased 1 million tissues. At the point when he
got back to England, a heap of tissue was offered to one individual for benefit. The benefit from
purchasing and exchanging enormous amounts of products simultaneously was "the experience
of nature." This case was taken in light of the fact that it was anything but a buy for one's own
necessities or venture purposes.
2. Number of Transactions: Transactions can be exchanging exercises. This is better on the off
chance that you have occasional and precise exchanging. This is Pickford v. Eccentricity CA
1927, 13 TC 251. Partner bought a cotton plant for business use, yet when it was bought it was in
more terrible condition than initially suspected. At that point Syndicate chose to annihilate the
processing plant and sell it individually for benefit. This was rehashed a few times with a few
factories. Because of the tedious idea of the exchange, the benefit was recognized as addressing
the exchange benefit and was liable to burden.
3. Resource Characteristics: A significant case in this field is Marson v. Morton-Ch D 1986, 59
TC 381; STC 463; [1986] 1 WLR 1343. Bought here to protect land for venture. The land was
not beneficial. Nonetheless, he got a structure license. The last was sold as an undesirable offer.
The exchange was a long way from the citizen's standard business (potato exchanging) and was
not of business premium as it resembled a speculation. The arrangement was not courageous.
Another illustration of intelligence on Chamberlain-CA 1968, 45 TC 92; 1 WLR 275; [1969] 1
All ER 332s consider the rule of "Pride in Ownership of Assets" that doesn't produce pay.
Citizens purchased two huge bars of cash to forestall the downgrading of the pound. It is smarter
to purchase and back some with an advance. Since it was bought in a brief timeframe for benefit.
Exchanging was characteristically dangerous and esteemed as exchanging benefit.
4. Presence of business or comparable interests: This is the CIR v. Fraser [1942] 24TC498. For
this situation, the citizen was a logger who purchased a lot of bourbon with gems. At that point
he sold bourbon through revenue driven office. In his choice, the appointed authority noted:
Recognition measure. In particular, the real connection among respondents and bourbon is
equivalent to by and large exchange. "
5. Changes in accessibility: It is imperative to distinguish changes or adjustments to the resource
that could make the resource more attractive. Cape Brandy Syndicate v. CIR-CA 1921, 12 TC

358; [1921] 2 KB 403 individuals from the Wine Syndicate framed a different organization to
buy cognac in South Africa. Some were delivered east, others were shipped off London, blended
in with French brands, repacked and sold for benefit. Citizens attempted to demonstrate that the
exchange was basically capital because of the offer of the venture. It was believed that an
exchange or business was completed and estimated as an exchange acquire.
6. The most effective method to Sell: HM Revenue and Customs controls that an exchange is
consistently a rule on the off chance that it follows a "non-questioned exchange" exchange. CIR
v. Livingstone et al. 11TC538 methods three autonomous people who together bought a payload
transport. The boat was changed over into a liner and sold for benefit. It was the principal
transport purchased by three individuals. The exchange result has happened and the income
figuring has been affirmed
b) Different VAT schemes
Some of the different types of VAT schemes have been discussed below:
1. VAT Annual Accounting Scheme
Organizations enrolled as VAT payers regularly send VAT discounts and installments to HM
Revenue and Customs four times each year. Be that as it may, with the yearly VAT detailing
plan, you just need to do this once every year. This one-time report expects to encourage
independent venture the board. During the year, the organization's VAT is paid dependent on a
year ago's government form (or a harsh gauge if this is the first run through). After recording
your yearly government form, you will be paid or discounted the contrast between your genuine
VAT and your prepaid sum.
To partake in the program, your business should be enlisted as a VAT payer, and your yearly
VAT available turnover should be under £135 million. You are not qualified on the off chance
that you are bankrupt, have not been educated regarding VAT installments or discounts, left the
framework over the most recent a year, or have a place with a division or gathering of a VAT
paying organization. - Enrollment.
2. VAT Cash Accounting Scheme

This framework permits purchasers to pay VAT on deals in the wake of paying you, and VAT on
stock after installment to the provider. This is not the same as the standard method of introducing
information and paying assessments regardless of whether the receipt has not been paid.
To meet all requirements for the program, your business should be enlisted as a VAT payer and
your assessed available VAT turnover throughout the following a year should not surpass £1.35
million. Company can utilize this framework on the off chance that you utilized a single amount
installment a year ago, delayed your VAT discount, or submitted a VAT related infringement.
In the event that you are qualified, you can join toward the start of the VAT detailing period and
you don't have to report it to HM Revenue and Customs.
3. VAT Margin Scheme
The VAT edge framework is utilized by vendors of collectibles, frugality, workmanship and
different assortments. The framework demands charge on the contrast between the sum the
organization pays for the item and the sum it sells (rather than burdening the absolute deals cost).
To join the framework, you should simply keep definite records of qualified things and show
them on VAT revelation. These things should contain a receipt for everything and stock book.
There are a few exemptions for the VAT edge framework. There are special cases, particularly
for speculations, adornments and metals, just as all buys subject to VAT. There are additionally
unique conditions for utilized vehicles, barters, pawn shops, ponies and horses.
4. Capital Goods Scheme
Capital merchandise plans are utilized by organizations to apply for VAT waivers or discounts
for resources, for example, land, land or gear gained for resale yet utilized by the proprietor for
different purposes. This can be deliberate or an adjustment in the real circumstance.
Basically, this plan permits organizations to scatter their initially proclaimed VAT across their
resources throughout the long term. Everything VAT can be repaid if the resource is utilized
uniquely for business purposes. For business and individual use, you can guarantee a bit of the
VAT, which is known as a "halfway waiver".
5. Retail VAT Scheme

The retail VAT plot is simply accessible to retailers and has a yearly turnover barring deals duty
of under £130 million. Organizations that blend retail and non-retail can likewise utilize the
framework; however just for retail use (non-retail stock should be accounted for consistently).
There are three regular VAT merchants utilized by various organizations.
 Point of Sale Scheme -times used to ascertain and enroll VAT discounted.
 Apportionment Scheme - Shared dissemination framework times used to purchase
products available to be purchased.
 Direct Calculation Scheme -for organizations that sell just a modest quantity of deals at
a fixed VAT rate and sell a large portion of their deals at various rates.
Question 4
a) Inheritance tax
The British inheritance tax system is controversial and unpopular. Market Financial Solutions'
Paresh Raja explains some tax issues and discusses possible reforms. At the Conservative Party's
2019 meeting in early October 2019, British Prime Minister Sajid Javid publicly stated that the
British Inheritance Tax (IHT) law needs long-term reform. Recognizing that he saw the general
opposition of the IHT community, the minister even suggested that the so-called death tax
government could give up entirely.
IHT schemes vary according to national jurisdiction. Looking at Germany, for example, small
inheritance is tax-free and a differential scale is used that takes into account family relationships
and inheritance values before issuing the final invoice. The standard rate of inheritance tax is
40%. You are only charged for the portion of the property that exceeds the specified criteria.
Some gifts made during a lifetime may be subject to tax upon death. Depending on when the gift
was made, "cone relief" can mean that the inheritance tax on the gift is less than 40%. Other
benefits, such as Business Relief, allow you to transfer certain assets without reducing
inheritance taxes or invoices.
Total value of the estate = £880,000
Nil rate band = £325,000 (threshold free amount)

Tax chargeable amount = £880,000 - £325,000 = £555,000
According to the UK’s tax law, inheritance tax rate is 40% of chargeable amount.
Thus, the total inheritance tax that will be payable as a result of Peter’s death is:
40% of £555,000 = £222,200
b) John’s capital gains tax liability
Value of the house gifted to John = £420,000
Profit from sale of house = (£496,400 - £5,200 - £2,800) - £420,000
= £68,000
Thus John’s capital gain tax liability = £68,000