Business Taxation: Income, Employment vs. Self-Employment, VAT Schemes

This document provides information on taxable income, employment vs. self-employment, six badges of trade, and different VAT schemes in business taxation. It covers topics such as determining taxable income, the differences between employed and self-employed individuals, the advantages of self-employment, and various VAT schemes. This study material is suitable for students studying business taxation or anyone interested in understanding these concepts.

Business Taxation

Table of Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................5
a) Employment vs. self-employment...........................................................................................5
b) Preference for self-employment..............................................................................................7
Question 3........................................................................................................................................9
a) Six badges of trade..................................................................................................................9
b) Different VAT schemes.........................................................................................................11
Question 4......................................................................................................................................12
a) Inheritance tax.......................................................................................................................12
b) John’s capital gains tax liability............................................................................................12

Question 1
Taxable income:
Taxable income refers to the compensation for each legal person or entity used to determine tax
liabilities. Total income or gross income is used as the basis for calculating the amount owed to
the state by a natural or legal person for a specific tax period.
£ £
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
Employees are involved in a wide range of industries. At each end of this spectrum, the
characteristics of employed and self-employed employees can be clearly identified. Self-
employed as well as running the company at their own expense, at risk of loss, capital investment
and independence from customers. In a fiscal context, it would be impossible, if not impossible,
to levy the withholding tax on someone's total income.
Anyone who is securely employed in long-term employment will receive a salary or salary. You
may be directly supervised in any form and integrated into the industry providing the service. It
would be practical and convenient to ask employers to withhold taxes on these employees, and
the PAYE cumulative system would work well. It does not fit these descriptions, but there are
personalities between the two ends of the spectrum. It can be said that they live in a "gray zone"
at the edge of the distribution gap. These employees can be classified in different ways according
to the legal purpose.
Even if employees are clearly and correctly categorized by both sides of the charge, some
differences in the rules can be unfair. For example, some employees have unparalleled real costs
that cannot be taken under current rules. However, for gray groups, wage inequality and the
plight of the self-employed are high.
For lawyers, the difference between an employee and a self-employed person can have serious
legal consequences. To assess an employee's rights and responsibilities, you need to know
clearly which side you are on. Subject to certain legal provisions, this is guaranteed by the
contractual rights and obligations between the employee and the person or organization
providing the service. This is not just about the label or the terms agreed by the parties. Under
UK law, the court will assess the situation on the basis of all the facts, but this is the true nature
of the report under the law.

b) Preference for self-employment
In 1999, the British Domestic Finance Service introduced a new tax settlement measure that
limits the ability of entrepreneurs and small businesses to limit income tax and social security
through intermediaries or "personal services" company. Prior to the introduction of these
measures, the IR35 regulations, known as their own limited liability companies, often acted as
intermediaries for the taxes they levied on them. It really works.
Previously, one can limit your tax requirements in several ways by making use of intermediaries.
For example, by sharing small business ownership with a family member, to enter a low income
tax area or person’s salary comes in the form of: Benefits not eligible for benefits in Northern
Ireland. Another common way to reduce your tax debt is to work with a contract from Monday to
Friday, then work with a new contract but almost the same a week later, adding directly to your
Northern Ireland monthly limit. Replacing the monthly contribution is dependent on full time. A
secret employee is anyone who works the same way as a full-time company employee, but is
paid through a separate bankruptcy company, is governed by the IR35 rules, and is not self-
employed.
IR35 changed the previous stance of private data companies and entrepreneurs by introducing
rules requiring undercover employees to cover the same taxes and duties in Northern Ireland as
employees. This means that if you are found "in" and hidden in the IR35 rules, you can increase
the Irish rate and income tax to increase the tax credits you normally pay with direct employees
of the company. HMRC requires an investment to allow you to invest in "risk criteria" for a
person who can potentially connect.
Previously, it was up to the broker or sole proprietor of the contractor to assess whether the
broker was subject to the IR35 rule. In 2017, HMRC updated its approach to implementing IR35
in authorities in response to perceived increases in tax cuts.
Under the new rules, authorities such as the NHS or local authorities have a responsibility to
ensure that contractors or intermediaries are self-employed. These decisions for intermediaries
should be made individually rather than at a wider level for specific areas of staff. HMRC will
extend these rule changes to the private sector.

From 2020, private companies have a responsibility to assess the condition of those who work
for them through intermediaries. Responsibility for non-compliance with IR35 regulation has
also passed to these private companies. These changes have had a significant impact on the work
of the NHS as organizations rely on professionals to work through intermediaries. A quarter of
NHS representatives responded to a survey by the contract calculator and decided to leave the
NHS altogether after an IR35 survey, with 60% of new samples saying they were "internally
recognized" with the IR35. "." After the NHS used general estimates illegal to limit increases in
administration costs. Small businesses should be exempt from these changes, and for IR35
purposes, small businesses are defined by at least two of the following three actions:
 Less than 12 million pounds in sales
 Less than £5.1 million on the balance sheet,
 There are no more than 50 employees.
The new IR35 rule introduces the concept of state decision reporting (SDS). It is a complete
statement that the client must make after evaluating the IR35. It sets out the contractor's intended
employment status and the reasons for this decision. On April 6, 2020, a safety data sheet must
be completed for all new Personal Service Company (PSC) contracts and all existing PSC
contracts payable after that date.
Another change in the law is the introduction of a customer-driven legal process that allows
contractors to ask MSDS questions if they feel their decisions are wrong. Customers must
respond to the appeal within 45 days of receipt and keep the current status definition. When the
state of the art changes, the customer must withdraw the previous request and give the employee
a new safety data sheet containing the updated solution.
Another change to note is that IR35 entrepreneurs are now entitled to a 5% price to cover
running costs. As the responsibility for determining employment status for IR35 purposes is
transferred to the employer, this benefit is only available to intermediaries with small group
relationships.
The impact of these changes is huge for both companies that employ intermediaries and for
intermediaries themselves. 4.8 million Self-employed people, entrepreneurs and brokers cannot
be listed outside the IR35 rules, many of which could be interpreted as rules after a decision. .

Question 3
a) Six badges of trade
Moving to seek profit
When someone makes a contract, we have to decide if that person has a profit margin. What
matters is not the earning opportunity, but the motivation to get it. However, the revenue and
responsibilities to Her Majesty (Revenue Services) would be of great interest in this matter if the
profits were made. Taxpayers can claim that they are working to use the loss to reduce their
taxes. Taxpayers must show, not profit, to see if there is an exchange.
Frequency and number of such transactions
To recognize a transaction as a trade, it is necessary to repeat that transaction at repeated period
of time. On the other hand, doing a regular trade also indicates an action taken by a person. For
example, suppose a man sold a car he owned for 4 years. He bought another car for himself and
sold it two years later. HM Treasury & Customs is unlikely to accept a particular car dealer. But
if he buys and sells cars every month, they're more likely to try to tax the profits as trading
income. The most impressive example in this area is Pickford v. Quirk, where the taxpayer has
acquired a commercial structure. However, it was clear that the factory was in much worse shape
than expected, and the best thing a taxpayer could do was take everything out and sell it one by
one. In doing so, he made a huge profit and did it over and over again. A number of transactions
involved the taxation of profits from trading income.
Modification of the asset in order to make it more saleable
If someone buys something and sells it without doing anything, he is very likely to buy it. But if
someone buys a car, install a new engine, repair the body, and make it more attractive to buy, he
can be seen as seller.
The nature of the assets
The business label can be linked to one-time trading as it cannot be used as an excuse to
purchase a particular asset for any purpose other than resale. The most impressive example in
this area is Rutledge v. CIR. In this case, the taxpayer bought 1 million toilet papers in a single
transaction. They then sold it for profit in other stores. It was considered a career ("adventure" of

course) because there was no other reason to buy too much toilet paper. It could not be argued
that it was overcrowded.
Link to an existing trade
For example, an accountant sold a car. Because car sales are not linked to tax accountants, it is
unlikely that anyone will trade in cars. However, if someone has worked as a car sales mechanic,
HMRC is much more likely to successfully tax car income under the current contract, as car
repairs are directly linked to the cars they sell. Other signals should also be used, but HMRC
takes these references with caution.
Reasons to build / sell
The final signal is to explain the answer to how the fund was acquired. In other words, if
received by gift or bequest, and why did you sell the real estate? Consider an example of a mod
who received a coat from a deceased mother. He doesn't want them, so he posts ads in local
newspapers. This advertisement is displayed by HM Treasury and Customs and is intended to tax
Maud's income. Since Maud acquired the fur, the brand is unlikely to be associated with these
arrangements. However, if the mod bought a full-length wardrobe, advertised it, and then sold it
for a profit; it is far more likely to be seen as a trader. This is not just the beginning of selling
donations.
b) Different VAT schemes
Some of the different types of VAT schemes have been discussed below:
Flat rate VAT accounting scheme
The standard VAT accounting system simplifies VAT refunds. In this VAT reporting system,
only VAT due to HM Revenue and Customs (HMRC) is calculated as a percentage of sales. This
is in lieu of paying the difference between the VAT paid on the sale and the VAT paid on the
purchase. The only upstream VAT you can claim is to invest over £ 2000 including VAT. This
VAT is entered separately in the VAT return in box 4.
VAT cash accounting scheme

VAT refunds are usually based on the tax date (usually the same as the invoice date) for the sale
and purchase. This could mean that the buyer will have to pay HM Revenue & Customs VAT on
sales that have not yet been paid. Instead, the VAT accounting system is based on the date of
sale. You need to make sure that your VAT return shows the actual payment date.
Annual accounting scheme
The annual accounting system allows you to pay VAT within nine months or three quarters.
Then complete the annual VAT refund used to work out your balance or income and HM levels.
Again, this simplifies VAT practices. You can only qualify for the program if you can stay in
this system as long as your estimated tax version does not exceed £ 1.35 million and you live
below £ 1.6 million.
Retail and VAT margin schemes
There are several sales systems in place to enable VAT. The plan that's right for you depends on
whether your retail sales (excluding VAT) are under £ 1 million and from £ 1 million to over £
130 million. Small businesses can use sales planning with cash accounting and annual reports.
The sales system cannot be combined with the VAT model, but sellers can use standard amounts
instead. In addition, there is a VAT system for companies dealing in second-hand goods, art, etc.
and a special system for traveling group presentation.
Question 4
a) Inheritance tax
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