Establishment Ali’s activities as a trade and
tax purposes
Written by: Anna Janicka
To: John Ogden
Date of report: 18th December 2017
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Table of contents:
Title page………………………………………………………………………………..1
Table of contents……………………………………………………………………….2
The context of report………………………………………………………….3.1
Introduction…………………………………………………………….3.2
Badges of Trade………………………………………………………3.3
Taxable person………………………………………………………..4.1
Registration……………………………………………………………4.2
Deregistration…………………………………………………………5.1
Import/Export………………………………………………………….5.2
Standard Rate…………………………………………………………5.3
Zero Rate………………………………………………………………5.4
Exempt Rate…………………………………………………………..6.1
Cash accounting………………………………………………………6.2
Accounting schemes for VAT……………………………………….,6.3
Accruals accounting…………………………………………………..7.1
Quarterly accounting………………………………………………….7.2
Annual accounting…………………………………………………….7.3
Tax invoices……………………………………………………………7.4
Tax point……………………………………………………………….7.5
Record keeping………………………………………………………..7.6
Assessments…………………………………………………………..8.1
Appeals…………………………………………………………………8.2
Penalties……………………………………………………………….8.3
Interest………………………………………………………………….8.4
Surcharges…………………………………………………………….8.5
Conclusion……………………………………………………………..8.6
I. Introduction:
This report was requested by John Ogden and must be submitted by 22nd December 2017.
The purpose of the report was to establish whether or not Ali is trading and his Tax status and give him advice on that.
II. The badges of trade:
1. Profit seeking motive.
Profit must be done for a trade supports’ not for itself.
It might be a purpose for Ali to make a profit. It need to be stated, that Ali made purchases of boats to make a profit not as an investment.
Purchasing of boats to sale them to make a profit.
2. The number of transactions
Every single transaction amounts to support a trading activity. Those transactions must be repeated and systematic.
In this case, transactions are constantly repeated by many times with a number of boats, so every single transaction is a trading activity.
Every sold boat is counted as for trade activities.
3. The nature of the asset.
It depends on the intention of purchasing assets, whether they were bought for own use, as an investment or for sale.
It has to be looked at Ali’s assets, whether they were bought to generate profit or to be used as a plant and machinery.
An asset has been bought to be sold but not only, it could be bought as a plant and machinery too.
4. Existence of similar trading transactions or interests.
“Transactions that are similar to those of an existing trade may themselves be trading” .
At this stage, Ali’s activities are: buying, repairing, refurbishing and selling boats only, so no existence of similar trading transactions or interests.
As stated above, there are no existence of similar trading transactions or interests.
5. Changes to the asset.
Improvements of assets by repairing, modifying to receive grater profit.
It might be noted that, Ali did some improvements to the assets and perhaps modifications, to make them more saleable.
Changes to the assets were done to receive higher profit and make them easy for sale.
6. The way the sale was carried out.
Selling assets in a trading way or the sale was for raising money in an emergency.
It can be stated here, that Ali’s transactions were carried out in the same way.
All transactions were carried out in the same way to generate income and raise a profit.
7. The source of finance.
The source of finance of the first asset it is important for a trade to be moved on.
To find out Ali’s source of finance to purchase his first asset, to repay any his debts he had to sale the asset once.
In the first place, a purchased asset must be sold to repay debts and for a trade to be moved on.
8. Interval of time between purchase and sale.
For a trade, an asset is usually for a resale purpose, but sometimes is held longer, then it can be not necessarily “a subject of trade” .
The longer Ali would have owned an asset the greater the possibility he had made an investment instead of trading.
Time has the important impact, but is known that all the assets have been sold, rather than were kept as an investment purpose.
9. Method of acquisition.
The assets might be either inherited or gifted, if so, then is “less likely to be a subject of trade” , but an asset purchased at a market could be for a sale or an investment.
Ali acquired his first asset at a market, so it could be either bought for a trade or as an investment, but it is known that, Ali purchased that asset for sale.
Method of acquisition has a matter for a trade, looking at the assets how they were acquired.
III. Taxable person:
Every person that, lives and works in the UK for a tax year, has a liability to pay income tax for that year, this includes income generating in the UK and income from an overseas.
IV. VAT Registration:
Compulsory registration:
If Ali has generated taxable turnover no more than “£85,000 from 1st April 2017” , he must register this fact with HM Revenue and Customs. He will receive a number which has to be written on his invoices.
Historical turnover:
“1st April 2016 (£83,000)”
Future turnover:
No future changes for VAT, it will remain the same threshold at £85,000.
Voluntary registration:
Ali not might go over the registration threshold with making taxable stock, but he can be registered for VAT voluntarily. This means Ali is enabled to get back input tax but that output tax has to be paid when taxable stock is bought for sale.
V. Deregistration:
Deregistration may be either voluntary or compulsory.
• A registered person may deregister voluntarily, if her/ his turnover’s registration threshold will be no more than “£83,000 from 1st April 2017” in the next 12 months.
• Compulsory deregistration can be brought when a registered person stops to buy taxable stock. There are “30 days to inform HMRC” about this and deregistration process will start from the date on which taxable stock stoped.
• Deregistration might be compulsory when a business changes a legal status (i.e. when partnership is bought by a company).
VI. Imports and exports:
When goods are supplied between EU countries, then customers’ VAT registration number is remained and shown on the sales invoice:
• “The goods are zero – rated in the country of origin.
• VAT has to be accounted on the ‘acquisition’ at rate that is applicable to those goods in the destination country.
• The customer’s VAT may be treated as input tax” .
VII. VAT standard rate:
Taxable supply – any supply of goods or services in the UK, VAT is charged at the standard rate of 20%.
Supply of goods – when goods pass on from one owner to another. A supply of goods will fall within the range of this VAT only it is made in return for money or payment in kind.
Supply of services – any made supply but not a supply of goods is a supply of services. The hiring of goods to a customer is a supply of services, not a supply of goods, when the owner of the goods does not pass to the customer.
VIII. Zero rated supplies:
A supply of goods or services is charged to VAT at the zero rate 0% and this falls within one of sixteen zero-rate groups. “Below are eight of them as follows:
1. Food
2. Water and sewerage services unless supplied for industry use.
3. Books, newspapers and journals
4. Talking books and wireless sets for the blind and handicapped.
5. The sale of new buildings for residential or charitable use.
6. The sale of protected buildings for residential or charitable use.
7. Certain categories of international services.
8. Passenger transport” .
Zero-rated tax implications of a supply of goods or services are as follows:
? A taxable supply the VAT rate is at 0%.
? If Ali wants to make zero-rated supplies then it is still making taxable supplies and he must be registered as a taxable person, if its turnover is higher than the certain threshold.
IX. Exempt supplies:
“An exempt supply is a supply of goods or services, if it occurs within one of fifteen groups. Below are eight of them as follows:
1. The sale or lease of land and buildings.
2. Insurance.
3. Postal services provided by the Post Office.
4. Betting, gaming and lotteries.
5. Financial services.
6. Education provided by schools or universities.
7. Health and welfare services.
8. Burial and cremation services” .
Exempt tax implications of a supply of goods or services are as follows:
? An exempt supply VAT cannot be charged.
? When Ali buys or sells only exempt supplies for VAT purposes cannot register and is not a taxable person and cannot recover his input tax.
? In fact, a person making only exempt supplies is as same considered with regards to VAT as a usual costumer who buys goods in a shop.
X. Cash Accounting:
If Ali’s taxable turnover is less than “£1,350,000 in the rolling 12 months” he may join to the cash accounting scheme. This scheme regards for output tax in the tax period in which payment is received from the customer and to recover of input tax in the period in which payment was made to the supplier. When a person leaves the scheme, threshold is “£1,600,000” .
XI. Accounting schemes for VAT:
The different accounting schemes for VAT, they are for small businesses to simplify of the VAT. “They are as follows:
• The cash accounting.
• The flat rate for small business.
• The margin for second hand goods” .
XII. Accruals accounting:
Accruals increase an expense in the Income Statement and is shown as a creditor due within 12 months on The Statement of Financial Position. Using matching concept, expenses incurred but not invoiced are brought forward into the correct time period.
XIII. Quarterly accounting:
A quarter is a three months period. In one fiscal year are four quarters, as same as four quarters in each calendar year. Some companies can operate on their own calendar basis. For companies which operate on a calendar year basis the quarters are as follows:
Q1 2017 – 1st January to 31st March 2017, Q2 2017 – 1st April to 30th June 2017,
Q3 2017 – 1st July to 30th September 2017, Q4 2017 – 1st October to 31st December 2017
XIV. Annual accounting:
It is an accounting process that records, measures, classifies, verifies, summarizes and communicates financial information of a company. It shows Income Statement for a certain period and the value of a company’s Statement of Financial Position.
XV. Tax invoices:
An invoice is a document of a transaction, the person that, receives the supply can recover the input tax with regards to that supply:
• “The name, address and VAT registration number.
• A description of the goods or services.
• The gross amount payable including VAT and the rate of tax” .
XVI. Tax point:
The basic tax point it is a date for removing of goods or, if they are not removed, it is the date when they can be sent to the customer.
XVII. Record keeping:
Every taxable person is obligated to keep all records for 12 months that are required by HMRC. “The records are as follows:
• Business and accounting records
• A VAT account.
• A copy of tax invoices issued.
• All tax invoices received
• Documentation relating to import and export” .
XVIII. Assessments:
If no any return is submitted, then HMRC will send a “VAT notice of assessment of tax” with the information included how much VAT they think a person owes.
XIX. Appeals:
A taxable person can raise an appeal against the Self-Assessment within “30 days” and can use an appeal form attached to decision letter or write to HMRC.
XX. Penalties/Interest/Surcharges:
a) Late registration – a penalty is calculated as a percentage of the amount of tax due is 5% for a delay of up to nine months, 10% for a delay of 9 and 18 months and 15% for a longer delay. The minimum penalty is £50.
b) Late returns – a penalty of £100 can incur if a tax return is up to 3 months late and it has to be calculated if the return is made more than 3 months late and for another late payment.
c) Incorrect returns – an error is a factor to be charged for. Every error needs to be checked to be identified. The penalty will occur, if loss of revenue will be based on an error and can be up to 100% of the amount of tax underpaid.
XXI. Conclusion:
In conclusion, Ali buys, repairs, refurbishes and sales boats to generate a profit rather than as an investment. It is understood that his mainly activities are only boats, the transactions are repeated, and he made some improvements to the assets to make them more marketable. It can be established that, the trade has taken the place, so Ali will have to register his activities as trading activities and for income taxes purposes and perhaps VAT as well.
References:
Taxation-Finance Act 2006, author Alan Melville
www.gov.scot.uk
www.hrmc.gov.uk
Business Taxation – Study notes
