TAXA6065 Spring 2019: Taxation Report on Key Tax Concepts

This report delves into the intricacies of the UK tax system, focusing on key concepts relevant to individuals and businesses. It begins by differentiating between employment and self-employment, outlining the distinct tax structures, including PAYE and self-assessment, and highlighting the implications for national insurance contributions and tax liabilities. The report then explores the critical distinction between tax avoidance and tax evasion, examining their legal and ethical implications, and providing real-life examples. It discusses the Ramsay Principle and other legal precedents. Finally, the report analyzes the 'badges of trade' and their role in differentiating between investment and trading activities, providing insights into how these factors influence tax assessments. The report concludes with a summary of the key findings and a list of references in Harvard style, demonstrating a comprehensive understanding of the subject matter. The report aims to provide insights on how to minimize taxes.

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

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Table of Contents
Introduction................................................................................................................................2
Employment versus Self-Employment......................................................................................3
Tax Avoidance versus Tax Evasion...........................................................................................5
Badges of Trade.........................................................................................................................7
Conclusion................................................................................................................................10
Reference..................................................................................................................................11

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Introduction
In the United Kingdom, the responsibility of the collection of taxes, forms of state support
payments and administration of regulatory regimes lies with the Her Majesty's Revenue and
Customs (HMRC), which is not a ministerial department. Robert is considering whether to
operate as self-employed or to work for another company. This report will aims to suggest
him how to minimise his taxes and would therefore like to know more about tax avoidance
and tax evasion. This report will discuss the difference between the employment and self-
employment. It will strive to draw a distinction between tax avoidance and tax evasion. The
report will also analyse the badges of trade in the context of a differentiation between an
investment and a trade.

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Employment versus Self-Employment
Employment implies a situation where the employee is required to perform the work that
has been assigned to him under the direct control of the employer and the employee is
required to carry out the work under the control and instructions of the employer. Self-
employment indicates a situation where an individual works independently and can hire other
individuals to perform the work on their behalf. The structure for the payment of taxes are
different for the employees and the self-employed individuals (Haines 2018).
In case of employment, the employees are paid via the PAYE system of income tax by a
business, which usually involves a monthly or weekly basis of payment. In this system, a
deduction of the income tax and class 1 national insurance contributions must be effected by
the employer before making the payment of wages to the employees. The employer pays the
net amount arrived at after the deductions to the employees. Class 1 national insurance
contributions entitles the person paying the tax to various benefits relating to social security
and it includes the State Pension. The employer is also required to make contribution with
respect to a portion of the National Insurance on the account of the employees (Adams,
Freedman and Prassl 2018).
A personal annual allowance is also provided to the employees and the same will be
applied prior to the calculations with respect to the liability of income tax. The annual tax
return needs to be completed by an employee only if he falls within the purview of higher
income bracket. The completion of the annual tax return is not mandatory by an employee
generally. Again, in case the employee has income from sources other than employment,
including interest accrued from investments, rent received from property or another
employment, he is also liable to complete the annual tax return.

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However, in case of self-employment, the individual, whether a small business or a sole
trader, has the responsibility of paying the national insurance contributions and the income
tax wholly by himself. No contribution of the employer is required in such a case. A self-
employed individual is required to submit a self-assessment tax return annually to the
HMRC. The self-employed individual will also be entitled to the personal annual allowance.
However, the self-employed person has the option of reducing his overall tax liability by
making deductions of the business costs and expenses that have been incurred by the
business. These costs and expenses includes business rates, property rent and staff wages.
The self-employed individuals are required to make payment of the Class 2 National
Insurance Contributions. This contribution will cover maternity leave, Bereavement Benefit
and basic state pension. The contribution to National Insurance under class 2 does not cover
Statutory Sick Pay, Jobseeker's Allowance or additional State Pension. In certain cases, a
self-employed individual may also opt for the class 4 National Insurance. This will be
imposed on annual profits at the rate of 8% ranging from GBP5,715 to GBP43,875 (2010-11)
and on the profits over that threshold will be subjected to a rate of 1%. However, all of these
will be dependent upon the turnover (Cabral and Gemmell 2018).
The taxes that the self-employed individuals are required to pay are generally lesser than
the payments with respect to taxes made by the employees. In case of employees, the taxes
are deducted through PAYE and there is not requirement for the completion of annual self-
assessment tax return. However, the self-employed individuals has the option to complete an
annual self-assessment tax return, and this enables them to make deductions with respect to
the expenses and costs that the business has incurred. This option of deductions with respect
to the costs and expenses are not available to an employee although the earnings of both the
employee and the self-employed individuals are the same. The tax structure applicable to the
self-employed, is called the SECA tax. Whereas, the taxes applicable to employees are the

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FICA taxes (Medicare Security and Social taxes), Federal income taxes, and Federal
Unemployment (FUTA) tax.
The case of Christa Ackroyd Media v HMRC [2018] UKFTT 69 has highlighted several
risks that necessitates the differentiation of the employment and the self-employment. The
main concern in this regard can be attributed to the difference in the rates and complexities of
taxes that needs to be paid by the them, as the taxes paid by the self-employed is much less
than by the employed.
Tax Avoidance versus Tax Evasion
Tax Avoidance indicates a method provided under the tax regime in the single jurisdiction,
which enables a tax payer to reduce his tax liability and the usage of this is covered by the
law. Tax avoidance has several forms that employs the tax laws in order to make reduction in
the tax liability of an individual and the same is considered to be legal. However, the legality
of the same has always been a subject of criticism in the public opinion court and journalism
on the grounds of morality. However, the aggressive tax avoidance is generally an area of tax
avoidance, which is considered to be highly unethical. This often involves schemes enabling
the shifting of profits to the territories having low tax rates from the ones with high tax rates
to reduce the tax payable on a certain amount of profit.
There are several judicial principles that has evolved with time, which strives to prevent
tax avoidance. These principles indicate preventive measures and does not have the effect of
rendering tax avoidance to be illegal. In the United Kingdom, the principles relating to the
prevention of tax avoidance has been initiated with the case of W. T. Ramsay Ltd. v. Inland
Revenue Commissioners, Eilbeck (Inspector of Taxes) v. Rawling [1982] A.C. 300,
popularly known as the Ramsay Principle. This principle says that the situations where
transactions are designed and arranged with the chief objective of saving tax and the such a

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transaction does not have any commercial purpose to serve other than the reduction of tax,
such a transaction will be subjected to tax nullifying the effect of the tax reduction. This
principle has been applied in the case of Furniss v. Dawson [1984] 1 All ER 530. However,
in subsequent cases, this approaches has been rejected by the courts. There were considerable
number of decisions that has contradicted this principle. Later on, the Labour Government of
the United Kingdom has formulated several scheme preventing the tax avoidance. One of
such schemes includes Budget Note 66 (BN66) with the help of which, the clause 55 of the
Finance Bill 2008 has been introduced by the Government of the United Kingdom. The
initiative introduced by the Organisation for Economic Co-operation and Development
(OECD) has been backed by the Government of UK, which emphasises on the shifting of
profit and base erosion. A tax on the diverted profit has also been announced by the
Chancellor George Osborne, in the year 2015. This has been named as Google Tax. However,
the Ramsay Principle has been extended in deciding the case of Morrison 2002 Maintenance
Trust, The Trustees of and Others v Revenue and Customs [2016] UKFTT 250 (TC).
On the other hand, tax evasion implies the intentional misstatement of the state of affairs
in relation to the business in the tax return that are submitted to the tax authorities to shrink
the tax liability. Such a misrepresentation can be effected by misleading tax reporting,
declaration of less income, gains or profits and overstatement of deductions. Tax evasions are
considered to be illegal evasions with respect to taxes that are performed by the individuals,
trusts and corporations. Tax evasion is mainly evident in the informal economy, where tax
discrepancies are not monitored by the government adequately. The tax evasion can be
measured in terms of the amount of the taxable income that has been unreported. The amount
of tax evasion can be calculated by measuring the difference between the actual taxable
income and the reported taxable income.

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In the year 2016-17, a cost of £5.3 billion has been incurred by the government purely in
the form of tax evasion as estimated by the HMRC, the chief agency for the collection of tax
in the United Kingdom. However, this estimation did not include the Criminal activities and
the hidden economy while making such an estimation. This has represented a higher tax gap
of £33 billion that presents a liability of 5.7%. However, during this period, the tax avoidance
has been estimated to be £1.7 billion, excluding the arrangements of international tax that
cannot be dealt under the tax laws prevailing in UK and the profit-shifting and base erosion.
In the year 2013, an enforcement on the economic crime has been declared by the Coalition
government, which has rendered the aiding of the evasion of tax to be a criminal offence.
Chancellor George Osborne, in the year 2015 has targeted the individuals having an offshore
bank account by the HMRC, which has doubled the number of prosecution relating to tax
evasion. In this furtherance, the HMRC has opened 27 cases relating to serious tax evasion,
which includes the top businesses in the United Kingdom (Schneider, Raczkowski and Mróz
2015).
Badges of Trade
The Badges of Trade are an important aspect in the computation of tax as it provides for a
differentiation with respect to the income from trading transactions and non-trading
transactions. Such a differentiation is significant as the taxability of the income from the
trading transactions and the non-trading transactions are different. These badges of trade has
been listed on the basis of several cases that has evolved with time.
Initially, the Royal Commission on the Taxation of Profits and Income has reviewed
several case laws and recognised six badges of trade in the year 1955. This has made way to
the nine badges of trade that has been listed by the HM Revenue & Customs (HMRC),
existing at present. These nine badges can be enumerated as profit seeking motive, the

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number of transactions, the nature of the asset, existence of similar trading transactions or
interests, changes to the asset, the way the sale was carried out, the source of finance, interval
of time between purchase and sale, method of acquisition.
The motive relating to profit making in a transaction in general implies a trading activity.
However, it cannot be regarded as a conclusive proof of the same. This can further be
illustrated with the case of Salt v Chamberlain – Ch D 1979, 53 TC 143; [1979] STC 750. In
this case it was held that although share trading is carried on by the traders in order to make
financial gains but the same cannot be regarded as a trade for the purpose of the tax
assessment. It can be more appropriately classified as an income from investment transaction
and is best assessed under the head income from capital gains. Again, in the case of Rutledge
v CIR – CS 1929, 14 TC 490, it has been decided that an income from the resale of a
commodity for profit to an individual can be regarded as an income from a trading
transaction although the sale has been made with respect to a sole consignment. This can be
regarded as the income from trading transaction.
In the case of Pickford v Quirke – CA 1927, 13 TC 251, it has been held that although
single transactions may also be regarded as trading transaction, but to be considered as a
trading transaction the repeated nature of a transaction needs to be provided with a more
enhanced chances.
The differentiation between a trading activity and an investment transaction can also be
assessed with respect to the nature of the assets. In case, the asset has been used to generate
an income readily, it can be treated as a trading transaction. The same can be illustrated with
the case of Marson v Morton – Ch D 1986, 59 TC 381; [1986] STC 463; [1986] 1 WLR
1343. However, an investment transaction is attracted when the probability of the asset in
generating income is remote. It has been contended in the case of Wisdom v Chamberlain –

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CA 1968, 45 TC 92; [1969] 1 WLR 275; [1969] 1 All ER 332 that where the asset has been
purchased for a short term with a view to make a resale of the same, the transaction can be
viewed as a trading transaction.
In the case of CIR v Fraser [1942] 24TC498, it has been held that where a commodity has
been purchased in excess of the amount that can be used by the individual and has been sold
subsequently, the same can be attributed to trading transaction. In the case of Cape Brandy
Syndicate v CIR – CA 1921, 12 TC 358; [1921] 2 KB 403, it has been held that in case an
alteration has been made in an asset in order to make it marketable and the subsequent sale of
the same will amount to trading transactions.
The mode of effecting the sale is also an important factor in deciding whether a transaction
is trading or investment. This can be illustrated with the case of CIR v Livingston and Others
11TC538. In the case of Wisdom v Chamberlain – CA 1968, 45 TC 92; [1969] 1 WLR 275;
[1969] 1 All ER 332, it has been held that the source that has been used to finance a
transaction is an important point of distinction between trading and an investment transaction.
In the case of Taylor v Good – CA 1974, 49 TC 277; [1974] STC 148; [1974] 1 WLR 556;
[1974] 1 All ER 1137, it has been held that the purpose for which the item has been bought is
irrelevant. The time for which the subject matter has been held the seller is required to be
taken as a consideration.

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Conclusion
Hence, it can be concluded that the taxes paid by the self-employed is much less than by
the employed. Tax avoidance has several forms that employs the tax laws in order to make
reduction in the tax liability of an individual and the same is considered to be legal. Tax
evasions are considered to be illegal evasions with respect to taxes that are performed by the
individuals, trusts and corporations. The Badges of Trade are an important aspect in the
computation of tax as it provides for a differentiation with respect to the income from trading
transactions and non-trading transactions. Such a differentiation is significant as the taxability
of the income from the trading transactions and the non-trading transactions are different.

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Reference
Adams, A., Freedman, J. and Prassl, J., 2018. Rethinking Legal Taxonomies for the Gig
Economy: Tax Law, Employment Law, and Economic Incentives.
Cabral, A.C.G. and Gemmell, N., 2018. Estimating Self-Employment Income-Gaps from
Register and Survey Data: Evidence for New Zealand.
Cape Brandy Syndicate v CIR – CA 1921, 12 TC 358; [1921] 2 KB 403.
Christa Ackroyd Media v HMRC [2018] UKFTT 69.
CIR v Fraser [1942] 24TC498.
CIR v Livingston and Others 11TC538.
Furniss v. Dawson [1984] 1 All ER 530.
Haines, A., 2018. UK considers closer links between employment and tax rules. International
Tax Review.
Marson v Morton – Ch D 1986, 59 TC 381; [1986] STC 463; [1986] 1 WLR 1343.
Morrison 2002 Maintenance Trust, The Trustees of and Others v Revenue and Customs
[2016] UKFTT 250 (TC).
Pickford v Quirke – CA 1927, 13 TC 251.
Rutledge v CIR – CS 1929, 14 TC 490.
Salt v Chamberlain – Ch D 1979, 53 TC 143; [1979] STC 750.
Schneider, F., Raczkowski, K. and Mróz, B., 2015. Shadow economy and tax evasion in the
EU. Journal of Money Laundering Control, 18(1), pp.34-51.

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Taylor v Good – CA 1974, 49 TC 277; [1974] STC 148; [1974] 1 WLR 556; [1974] 1 All ER
1137.
The Finance Bill 2008.
W. T. Ramsay Ltd. v. Inland Revenue Commissioners, Eilbeck (Inspector of Taxes) v.
Rawling [1982] A.C. 300.
Wisdom v Chamberlain – CA 1968, 45 TC 92; [1969] 1 WLR 275; [1969] 1 All ER 332.
Wisdom v Chamberlain – CA 1968, 45 TC 92; [1969] 1 WLR 275; [1969] 1 All ER 332.