Taxation : Sample Assignment PDF

TAXATION ASSIGNMENT
Purpose of Report
The report seeks to clarify and provide insights on HMRC Tax law regarding various issues which has
been detailed here-in-under. The report is just a prima facie view based on current laws and shall hold
good from Mr. Desai and any person taking cognisance of the same cannot make the firm
accountable.
Facts
Mr. Desai has been engaged in various activities which are subject to tax under Her Majesty Revenue
and Customs and has sought our advice to understand the tax implications of the proposed activities
on the business. The activities that Mr. Desai has been engaged in following activities has been
detailed here-in-below:
(a) Vocation of collecting antiques and restoring;
(b) Business of small Antiques;
(c) Payment of fine form Business funds on behalf of his son;
(d) Trading Business;
For the aforesaid activities Mr. Desai wishes to understand the implications of the same in terms of
tax laws and how the same shall be accounted.
Analysis
Question 1
A. Whether Vocation can be classified as trading?
In terms of HMRC tax law trade has not been exclusively defined. However, certain activities like
venture in the nature of trade are specifically included in the purview of trade. Accordingly, the
meaning of trade shall be taken from ordinary meaning. Thus trade shall be defined as which
normally involves commercial operations by a trader who provides goods or services to his or her
customers in exchange for a reward. Thus, whether a certain activity can be defined as trade depends
on the fact and circumstance of the case.
Further, the term vocation has a wide meaning relating to the manner in which an individual passes
his way of life and shall indicate a calling. Further, the same shall not be related to related a religion
or high minded service to others.
The Characteristic of trade as has been defined under recent judgements in the following manner:
The honourable Courts have taken a stand that under a holistic view of tradingthe following
characteristic shall exist
(a) Existence of a bilateral relationship under which trader supplies goods or services to a customer
in return for reward.
(b) If the activity looks like something which is represented as trading, the same shall be treated as
trading.
Further, another principal has been established that transaction which has been solely carried out to
get tax advantage cannot be categorised as trading [ CITATION ogl17 \l 1033 ]
Further, the law defines the nine badges of trading include:
(a) Profit Seeking Motive;
(b) Number of Transactions;

(c) Asset Nature;
(d) Whether similar trading transaction exist or interest exist;
(e) Changes to the asset;
(f) Manner in which the sale is carried out;
(g) Source of Finance;
(h) Time interval between purchase and sale;
(i) Method of acquiring goods or services
In the present case, Mr. Desai has been carrying on the transaction a regular basis and has been
buying sometimes in large quantities to make profit. Thus the same can be characterised as trade on
the basis of 9 badges and the relevant case laws.[ CITATION THE18 \l 1033 ]
(a)Rutledge v CIR – CS 1929, 14 TC 490,
(b)Pickford v Quirke – CA 1927, 13 TC 251
(c)CIR v Fraser [1942] 24TC49
Question 2
Difference between tax evasion and tax avoidance
Tax evasion means reducing the tax liability by illegal means while tax avoidance shall mean
minimisation of tax liability while acting within the four walls of tax laws and not violating it by
finding out grey areas;[ CITATION Sur15 \l 1033 ]
Tax evasion is known as concealment of tax while tax avoidance is known as hedging of tax.
The actions under tax evasion are illegal and objectionable both in terms of morality while under tax
avoidance the same is immoral on ground of bending of tax law to one advantage.
The actions of tax evasion are illegal while tax avoidance are legal.
Example: Tax evasion is not disclosing a revenue in income tax return while tax avoidance shall
involve taking deduction for items on which act is silent.
Remedial Steps
The remedial steps that can be taken by HMRC to counteract tax avoidance has been detailed here-in-
below:
(a) Introducing Disclosure schemes;
(b) Imposing penalty;
(c) Introduction of laws relating to General Anti Avoidance Agreement (GAAR);
(d) Introducing new schemes like POTAS;
(e) Punishment like imprisonment;
(f) Special dedicated team to find out means to explore the tax avoidance and tax evasion
schemes;[ CITATION Tac17 \l 1033 ]
(g) Introducing new laws and amending existing laws from time to time;
(h) Staffing the department and setting up Vigilante team
Question 3
Part A
The general rule that governs whether or not Expenditure is allowed or disallowed when computing
trading profit is that expenditure which is not exclusively or wholly linked for the purpose of business
shall not be allowable. Thus on the basis of the same personal expenditure incurred for self or other

which are not linked with trade are not allowable as expense for the purpose of computation of tax
liability.
Part B
Part 1: In terms of Section 58 of Income Tax (Trading and other income) Act 2005, the term
incidental cost to obtaining finance shall include expenditure on account of fees, commission,
advertisement etc and shall be allowed as deduction. Since in the present case, the expenditure is
exclusively linked with obtaining finance, the same is tax deductible.[ CITATION OGL18 \l 1033 ]
Part 2: Under the tax law of UK, the expenditure incurred for repair and renewal is allowed as
expenditure. However, if the expenditure is incurred for replacing an asset or making a significant
improvement to the asset shall be treated as capital expenditure. Further, the law states replacing a
part of the asset is repair. In the present case, since Mr. Desai has spent Sterling 4200 for installing
new windows which are part of factory building, the same shall be treated as repair and allowable.
[ CITATION BIM18 \l 1033 ]
Part 3: In term of Income Tax Law of UK, a fine paid by employer that are the liability of an
employee shall be allowed as deduction under the act if the employee is taxed on the same as
employment income. Further, the law stated only fines which are compensatory in nature are
allowable and any fine which is punitive shall be disallowed. Thus, in the present case, the
expenditure shall not be allowed as there has been no employer employee relationship. Further,
assuming the same as punitive it shall not be allowable.[ CITATION OGL17 \l 1033 ]
Part 3A: In terms of UK tax laws, deduction is allowed with respect to asset which has been used for
the purpose of business whether old or new. In the present case, since the asset has been used for
business purpose the same shall be allowed as expenditure. Further, the car satisfies all other criteria
of capital asset.[ CITATION ABr18 \l 1033 ]
Part 4: In term of UK law expenditure incurred for renewal of lease for a period less than 50 years is
an allowable expenditure. Further, any portion of legal cost that relate to payment of premium for
renewal of lease in not deductible. In the present case, the legal fees has been incurred solely for the
purpose of renewal of lease for 21years and does not encompass any premium. Hence, the same shall
be allowed.[ CITATION Ded18 \l 1033 ]
Part 5: In terms of UK tax laws, to determine the treatment of receipt of compensation as capital or
revenue in nature one need to look at the nature of compensation whether the same is in respect of
loss or injury. Further, the payment in respect of loss is not allowed to be treated as capital receipt and
is taxable as income.
In the present case, the expenditure incurred by the company has been party recovered in the form of
insurance compensation and thus the same shall be taxable in the hands of the company.[ CITATION
The185 \l 1033 ]
Part 6: From Assessment year 2013, a new section 4B has been inserted under the Act which states
that receipt of interest by business shall not be included unless the same is from a business of financial
service like banks etc. The same shall mean interest from loan to supplier shall not be taxable in the
accounts of the company and hence the receipt shall be outside the business purview of taxability.