Her Majesty's Revenue and Customs Framework - Essay Example

Business Tax Part (a) HMRC Framework Generally, Great Britain and Hodge explains that the HMRC considers an organization or acompany ‘active’ for purposes of Corporation Taxes when it starts carrying on a business activity, receives income or is trading. On the other hand, the HMRC may consider an organization ‘dormant’ especially when it is not trading or active and in that case it may not apply the Corporation Taxes. Moreover, HMRC may also deem an unincorporated organisation as trading or active in which case it is supposed to comply with some corporation taxes. In addition, whether an activity is considered as trading or non-trading depends on the specific facts of different cases as provided in the badges of trade (Hmrc.gov.uk, 2015). In this regard, this paper states the general rules relating to how HMRC determines trading and applies them to interpreted different transactions in different scenarios. The badges of trade aid in deciding whether a transaction after review, is a trade or non-trade for the application of corporation taxes. The first of the badges of trade is the profit-seeking motive which states that with evidence that the sole intention of purchasing an asset is to re-sell at a profit and not holding it as an investment leads to the conclusion that trading has occurred or is being carried on (Great Britain & Hodge, 2013). The implication of the profit-seeking principle is not that a profit-seeking objective should definitely mean a trade is being carried on but that this motive should be weighed with the other factors provided in the badges of trade. For an example of a case law, Salt v Chamberlain (1979) case concerned losses that had been made by an individual in the transaction of buying and selling quoted securities with a motive of making profits. In that case, the prosecution asserted that the evidence that an individual is engaged in transactions involving speculative dealings in the stock market is considered as carrying on a trade (Great Britain & Hodge, 2013). In this case, the claim was that all the other badges of trade were present but the General Commissioners and the court declined to disturb the findings indicating that they were not trade transactions (Hmrc.gov.uk, 2015). This case implied that the motive of seeking profit is a question of fact that and is not determined by the professed intentions of the person and in most cases it is inferred from the surrounding situations. The second badge is emphasized on the number of the transactions and states that repeated and systematic transactions are evidence that one is carrying on a trade. In application, it seeks to examine whether the specific operations associated with a transaction are of the same character and kind, or, in other words, whether they are carried out in the same way as those carried ordinarily in the related line of business. For instance, in a case of CIR v Fraser, a woodcutter had brought a consignment of whisky and then sold it at a profit through an agent. Even though all the other badges of trade favoured the taxpayer, he was found guilty because the court asserted that the woodcutter had purchased such a large quantity of whisky that was by far in excess of what he could consume with his family and even friends and also the actual dealings of the transactions were exactly like those ordinarily involved in the trade (Hmrc.gov.uk, 2015). The third badge considers the nature of the asset and observes that some assets are often realized by way of trade, for example, chemicals, and if a transaction involves them then there cannot be doubt that trade has occurred. The other badge of trade considers the existence of similar trading interests and transactions in which case transactions similar to those of an existing trade may in them be trading. The fifth badge is concerned with making changes to an asset after purchasing it hence making it more profitable upon selling is considered trading (Carter, Danford, Howcroft, Richardson, Smith & Taylor, 2011). The sixth badge of trade is concerned with the way a transaction is carried out or is organized and is based on the fact that transactions carried in a similar manner to those of undisputed trader mean a trading activity has occurred. The seventh badge examines the means for financing the purchase of an asset and asserts that a purchase made from a loan implies that the purchaser expects proceeds from the sale of the asset from which they will repay the loan hence there is a clear intention of trading. The eighth badge provides that assets bought for trade though this not always, are normally sold quickly after purchase. In this regard, a motive to resell an asset shortly after purchase implies or supports trading. The last badge of trade considers the method with which the asset was acquired and states that an asset that is obtained through inheritance is less likely to be a subject of trade (Sanders, 1995). The above general rules may be applied in the case of James Ventures transactions as follows: Rolex- this may be considered a trading activity because upon the provision of a good and service to customers initiates a trading activity. Even though he inherited the watch from his uncle, the sale of the watch was not occasioned by any emergency and was done in the ordinary way of trade. Fishing Equipments- the purchase of new fishing equipment for him was an investment and there are no grounds that the transaction constituted a trade. Conversely, the sale of the old fishing equipment may not be interpreted by HMRC as a trade. This is because despite not being sold to raise cash for any emergency, there was a lapse of time between the times he bought the equipment from his father and when he sold it (Lindop & Holland, 2013). Moreover, it may be argued that he sold it to finance the purchase of new equipment and hence it was an investment. Bikes- the sale of the bike given by an admirer may not be considered as a trading activity because the badges of trade do not support that. Given that he had a new job, it made sense that he might have wanted to dispose of it since it had no use for him. However, selling the bike he made from purchasing and assembling parts may have been considered as a trade. This is because, as Sanders (1995) interprets a similar case, by fact that he already had a bike and that he was not involved in racing the only motive he might have had in making and improving the second and third bikes was to resell of which he did making a profit. Car boot sale purchases- the purchase and resell of the items from his old cycling acquaintance may be interpreted as a trading activity. Regardless of that he did it out of sympathy, there are no grounds for which he would by them only to resell after three months except that he considered the profits that will accrue from the transactions as Grainger (2013) interprets a similar case. The profiteering objective is apparent, the time interval support that this was a trading activity. Men’s cycle shorts -may also be considered by the HMRC as a trading activity. The reasoning is that despite the price being low, just like the case of CIR and Fraser, the quantity was so large to be considered for personal use. Later, he sold them after a short period of time confirming that indeed this was a trading activity aimed at making a profit and hence a corporation tax was applicable. Table tennis robot machine- under the HMRC this transaction may not have been considered a trade because James disposed of an item that was not useful to him. There is a great interval of time between the purchase and the sale. The purchase was initially for personal use and, therefore, there is no link with making a profit for the sale even though he realizes a profit from selling it. Antique bicycle- the Antique bicycle may not be considered as a trading activity because, it is an investment and the badges support him. Just like the case of Salt and Chamberlain, despite the profits realized in the transaction, the activity is non-trading especially because of the elapse of time and hence may be considered as a capital gain transaction. Grandparent’s antiques-this transaction cannot be considered as a trading activity since James has no intention of selling the antiques on behalf of his parents to make a profit. The commission may be considered like a tip for the help which he renders. Moreover, Sims (2011) presents a similar case and suggests that he does it upon the request of his parents and therefore he had not initiated the service. This transaction is also linked to the charitable actions as he contributes towards animal protection which is subject to value added tax. Speaking engagements- the first speaking engagement is not a trading activity as per the badges of trade because James does not offer any service for sale but is requested to offer a speech. Also, the second speech for which he is offered money for by a company may not be considered as a trading transaction as James does not intend to trade at all (Rowes, 2005). Designer Brand Clothing-the designer brand clothing sale may also not be considered a trading activity. This is because he does it so as dispose of surplus wear and the revenue may be considered a capital gain. Agency sales –the agency sales constitutes a trading activity because it aims at generating income for James. In conclusion, James should have registered as a sales agent because based on eBay considering the many sales he makes there. As such, in overall all the transactions done on eBay are trading activities as per the badges of trade. Some transactions can only be excluded by special considerations. Part (b) Capital Allowance James can claim various deductions from his gross profits before paying the income tax on his company. First, the plant and machinery allowances allow him to deduct the expenditures on the two before taxation. Machinery is defined to include machines such as electronic devices and any other device or an assembly of parts that are moving to do productive work. On the other hand, a plant definition is not straight but is got from reference to case laws (Gov.uk, 2015). For instance, the case of Yarmouth v France offers guidance in deciding whether a plant is an apparatus performing a function in a business and whether of the assets can be held as plant even if they are also setting. Another factor to consider is the wholly and exclusively for trade purposes as it is applied to a business tax. In this regard, an expense of trade is deductible for tax purposes if it has been incurred wholly and exclusively for the particular trade. Therefore, for an expense that serves several purposes, a partial deduction can be applied by relating the portion to a part of the expense that meets the wholly and exclusivity provision (Gov.uk, 2015). For instance, in the case of Drummond v Mallalieu, the costs were found to be not deductible because the purchased clothes for purposes of complying with the rules of the bar council also provided decency and warmth. Notably, James should also differentiate between a capital expenditure that is deductible and a business expense that may not be deductible. In this case, expenditure is attributed to capital if that expenditure was made once and for all to buy an asset that brings a lasting advantage to the trade or brings an asset into existence. For instance, in Danskin the law was applied to categorize legal fees as a capital expenditure since it served to protect property. In specific, deductible expenses are those that can be deducted before subjecting a business income to tax because they are thought as reasonable expenses that must be incurred by the business to earn. The deductible expenses include the general administrative expenses, deductions for home office, depreciation, benefits for employee, pension plans and health insurance. Entertainment may be deductible only if it is associated with a business or is related to business directly. Conversely, disallowable capital expenditure refers to specific expenses prohibited from being deductible by the law. This are illustrated by the case of Law Shipping Co Ltd v IRC that tests whether revenue is capital or not. In this case, the company continued to operate repairs on the cinemas in terms of decorating for a period of more than five years. This expenditure was deductible for tax purposes because the repairs were done as the cinema continued operation hence were revenue expenses. According to Grant and McLarty (2014), the duality test is used to differentiate personal expenses from business expenses allowed for deduction. As illustrated in the case of Caillebotte v Quinn, a carpenter who was self-employed claimed his launches as a business expense. The court argued that the taxpayer ate to live but not to work hence the deduction was not allowed. In addition, the remoteness test that links the causation to the loss to be compensated for is another important test (Johnson, 2014). The application of this test is in a case by Smiths Potato Estates Ltd v Bolland, the company claimed payments had had made to an employee. In this case, the court disallowed the deduction on the grounds that such a cost did not contest profits. In summary, there are some important concepts for James as it regards tax deductions. One, he should note the disallowable expenses that even though subtracted in the accounts of a business are not tax deductible and hence should be added to taxable profits. Contrary, allowable expenses are incurred to earn profits and are deductible. Secondly, the pre-trading expenses incurred seven years before commencing business may also be deducted before taxation and are treated as if they were incurred on the first day of training. Thirdly, posts-cessation receipts arising from UK property is not chargeable to tax if it’s considered in the calculation of profits during the period of trade (Grant & McLarty, 2014) References Cited Carter, B., Danford, A., Howcroft, D., Richardson, H., Smith, A., & Taylor, P. (2011). Lean and mean in the civil service: the case of processing in HMRC. Public Money & Management, 31(2), 115-122. http://www.tandfonline.com/doi/full/10.1080/09540962.2011.560708 Gov.uk, (2015). Claim capital allowances - GOV.UK. 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