Taxation and Its Implications on Mr. Desai: A Study

This study discusses the tax implications on Mr. Desai in the UK, including trading, tax avoidance vs. tax evasion, income tax, VAT registration, and VAT flat rate scheme.

Running head: TAXATION
Taxation
Name of the Student:
Name of the University:
Authors Note:

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Contents
Introduction:....................................................................................................................................2
Answer 1:.........................................................................................................................................2
Answer 2:.........................................................................................................................................3
Part a:...........................................................................................................................................3
Part b:...........................................................................................................................................4
Answer 3:.........................................................................................................................................4
Part a:...........................................................................................................................................4
Part b:...........................................................................................................................................4
Part c:...........................................................................................................................................6
Answer 4:.........................................................................................................................................7
Part a:...........................................................................................................................................7
Part b:...........................................................................................................................................7
Part c:...........................................................................................................................................7
Par d:............................................................................................................................................8
References:......................................................................................................................................9

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Introduction:
In the United Kingdom (UK) the responsibilities in relation to the collection of taxes,
state support payments and administration of different regulatory regimes are vested on the non-
ministerial department of the country called Her Majesty’s Revenue and Customs, here in after
to be referred to as HMRC in this document. Taking into consideration the guidelines provided
by HMRC the discussions have been made in this document about the tax implications on Mr
Desai.
Answer 1:
To describe what constitutes trading the Corporate and Business Tax Law Notes have
specified six badges of trade. It is important use these badges of trade to assess whether
particular operations conducted by a person is a trade or not.
Six badges of trade are discussed below to assess whether Mr Desai is carrying on a trade or
vocation.
Subject matter of realization: The subject matter of realization is to be assessed to determine
whether particular activities carried on a person is to be assessed as trade or not (James, 2016).
Ownership duration: In case the objective is to conduct the operations in the long run then the
operations and activities conducted by the persona can be assessed as trading.
Transactions frequency: The frequency of transactions should be considered, i.e. whether the
transactions are regularly taking place or are few and far between. In case the transactions are
regularly taking place then these shall constitute trade.

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Supplementary or the work is for business organization: Are the transactions are supplementary
in nature or there is proof of business organization. In case the transactions are supplementary in
nature then these shall not be considered as trading activities (Burkhauser et. al. 2016).
Motive and intentions behind transaction: The motive and intentions behind entering into
transactions shall be evaluated. If the motive behind entering into transactions is to earn profit
then the transactions shall constitute a trade.
In Denman J in Partridge v Mallandaine the difference vocation and trade has been clearly
outlined by the honourable judge. The intention of the person entering into different transactions
shall be given the most important consideration to determine what constitutes trade and what
constitutes vocation (Miller and Oats, 2016).
In this case since the intention and motivation behind entering into the transactions was to earn
profit and the transactions are large in quantity hence, the transactions carried out by Mr Desai
shall constitute trading.
Answer 2:
Part a:
As per section 5 of Income Tax Act 2005 income tax is charged on the amount of profits
from trade, profession and vocation. Non-payment of eligible of income tax to the credit of Her
Majesty could be due to tax avoidance or tax evasion. There is thin line between the two. A brief
description about the two and the differences between the two would be helpful in understanding
that whether there has been tax avoidance or tax evasion on the part of Mr Desai (Devereux, Liu
and Loretz, 2014).

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As per the provisions of Income Tax Act 2005 tax evasion is the illegal practice by the tax payers
to not pay or pay less amount of tax than they are liable to pay for the income earned by them.
Thus, it is an offence on the part of the tax payers to use illegal means to not pay or pay reduced
amount of taxes than the actual liabilities in respect of taxes. The consequences of tax evasion
include fine, penalty and even imprisonment in some case as it is illegal (Fung, 2016).
On the other hand tax avoidance is the effective use of tax rules to reduce the liability of tax of a
tax payer in the country. These are completely legal practice where tax consultants bend tax rules
to reduce the tax liabilities of tax payers in the country. Tax avoidance on the other hand if used
as per the tax provisions of Income Tax Act 2005 then there will be no consequences (Fung,
2016).
Part b:
HMRC has the right to take necessary steps to counter tax evasion practices in the
country. From imposing penalties on tax evasion practices to canceling business licenses of
organization using tax evasion measures and even imprisoning individuals involved in tax
evasion practices (Wahab and Holland, 2015).
Answer 3:
Part a:
As per Income Tax Act 2005 the revenue expenditures incurred in carrying out business
operations is to be deducted in computing taxable profit from business. Capital expenses and
other expenditures shall not be allowed as deduction for computing taxable profit of business.
Part b:
Explanations:
Expenditures:

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As per Income Tax Act 2005 interest on loan as well as incidental expenses to raise a loan used
for business is allowed as deduction. Hence, the sum of ₤1500 paid for obtaining loan is allowed.
Installing new window is capital expenditure as the condition was persistent even prior to
acquisition of the business by Mr Desai. Hence, ₤4200 is not allowed as expenditure in
computing taxable profit (Ma, 2015).
Fine paid in respect of an employee or anyone related to the business is not allowed as deduction
as it is due to the contravention of law. Thus, ₤250 is not allowed as deduction.
Depreciation charges on fixed assets used in business operations to generate revenue is allowable
expenditure. Since the amount of ₤3500 is depreciation on newly acquired car which is not
related to business (Assumed as the business is of antique) hence, it is not allowed as deduction.
Legal fees is allowed as deduction in computing taxable income of business hence, ₤286 is
allowed as deduction (Guceri, 2015).
Income:
Section 5 of Income Tax Act (ITA) 2005 provides that the income or profit from trade,
profession and vocation shall be subjected to the charge of income tax as per ITA. Taking into
consideration the provision of section 5 of ITA let’s discuss about the taxability or otherwise of
the incomes of Mr Desai.
Insurance claim received is subjected to income tax however, in case the insurance claim
is received in a year for losses suffered in another year the amount of insurance claim shall be
shown separately in the income statement. Thus, ₤18000 received from insurance company is
liable to income tax however should be shown separately (Schenk, Thuronyi and Cui, 2015).

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Interest received from a loan is not revenue of business hence, should not be considered
in calculating taxable profit of business. Thus, ₤1000 is not to be considered for computing
taxable profit of Mr Desai’s business.
Part c:
Calculation of adjusted trading profit of Mr Desai after considering the above explanations is
provided in the table below:
Particulars Amount (₤) Amount
(₤)
Net profit as per books of accounts 12,100.
00
Add: Expenses disallowed and taxable income not considered
Installation charge of windows 4,200.00
Fine paid for Mr Desai's son 250.00
Depreciation on newly acquired cars 3,500.00
7,950.
00
20,050.
00
Less: Income not to be considered for calculating taxable profit 1,000.

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00
Adjusted trading profit 19,050.
00
Adjusted trading profit of Mr Desai is ₤19,050 as can be seen in the calculation provided above.
Answer 4:
Part a:
Her Majesty’s Revenue and Customs require a person to register for VAT immediately
subsequent to reaching a VAT taxable turnover of ₤85000. Thus, in rolling period of 12 months
if the VAT taxable threshold is excessed then the business must register for VAT.
On November 1, 2017 Mr Desai received a contract of ₤90000 hence, the threshold limit of
₤85000 has been exceeded on that day hence, Mr Desai must register for VAT on or after
November 01, 2017 (Pomeranz, 2015).
Part b:
The VAT payments must be made on the 7th of the month following the period ends. Hence, for
the quarter ending on December 31, 2017 Mr Desai must paid liability in respect of VAT on or
before 7th January 2018.
Part c:
In order to simplify VAT return process VAT flat rate scheme has been designed. The small
businesses by using the Flat rate Vat scheme can pay the same amount of VAT without
undertaking extensive paper work. A flat rate of 10% is applicable on all turnover thus, the
small businesses can easily administer VAT tax (Wawire, 2017).

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Par d:
In case customers defaults in paying the amount due in business Mr Desai can file rectified VAT
returns to recover excess amount of VAT paid on the revenue which has not been received by
him. IT is also possible to adjust the VAT liability of a particular quarter or year by adjusting the
excess amount of VAT paid in case the customers default in making payment on which VAT has
already been paid by Mr Desai.

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References:
Burkhauser, R.V., Hérault, N., Jenkins, S.P. and Wilkins, R., 2016. What has been happening to
UK income inequality since the mid-1990s? Answers from reconciled and combined household
survey and tax return data (No. w21991). National Bureau of Economic Research.
Devereux, M.P., Liu, L. and Loretz, S., 2014. The elasticity of corporate taxable income: New
evidence from UK tax records. American Economic Journal: Economic Policy, 6(2), pp.19-53.
Available at: https://www.aeaweb.org/articles?id=10.1257/pol.6.2.19 [Accessed on 16 November
2018]
Fung, L., 2016. Corporate Tax Inversions: The New Business Strategy.
Guceri, I., 2015. Tax incentives and R&D: an evaluation of the 2002 UK reform using micro
data.
James, S., 2016. The complexity of tax simplification: the UK experience. In The Complexity of
Tax Simplification (pp. 229-246). Palgrave Macmillan, London.
Ma, D., 2015. Small business tax compliance burden: what can be done to level the playing field.
Miller, A. and Oats, L., 2016. Principles of international taxation. Bloomsbury Publishing.
Pomeranz, D., 2015. No taxation without information: Deterrence and self-enforcement in the
value added tax. American Economic Review, 105(8), pp.2539-69.
Schenk, A., Thuronyi, V. and Cui, W., 2015. Value added tax. Cambridge University Press.
Wahab, N.S.A. and Holland, K., 2015. The persistence of book-tax differences. The British
Accounting Review, 47(4), pp.339-350. Available at:

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https://www.sciencedirect.com/science/article/abs/pii/S0890838914000456 [Accessed on 16
November 2018]
Wawire, N., 2017. Determinants of value added tax revenue in Kenya. Journal of Economics
Library, 4(3), pp.322-344.