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

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