This is an extract of our Business Tax Problem Question document, which we sell as part of our Tax Law Notes collection written by the top tier of Oxford students.
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To calculate A's tax liability, we must determine what tax statutes apply to him: applying the "control" over the person test present in Ready Mixed Concrete v. MPNI and other indicators such as "who bears the risk of loss in a business" present in Addison v. London Philharmonic,
[NOT REALLY NECESSARY HERE, HE'S CLEARLY TRADING, RUNNING A RESTAURNT] John, as he is described as the "sole proprietor" is self-employed for the purposes of his tax assessment. This matters because the tests for deductions and income assessment will be governed by ITTOIA 2005. As a necessary preliminary, it is necessary to establish that John is engaged in a trade, profession or vocation. This is necessary for calculating whether J has income tax liability as ITTOIA 2005, Part 2, s.5 stipulates that "income tax is charged on the profits of a trade, profession or vocation". [THIS IS FINE, BUT NO NEED TO FURTHER DISCUSS]
The definition of "trade" is not precise: in the Tax Acts and the Taxes Management Act 1970 s118(1), 'trade' includes every trade, manufacture, adventure or concern in the nature of trade. This is definition contains the word it attempts to define: however, it is clear that while it is not essential that there should be a regular business of buying and selling (Barry v Cordy (Inspector of Taxes) ), if there is, a trade will be presumed, (as per Lord Wilberforce in Ransom v Higgs: "trade normally involves the exchange of goods or services for a reward"). In disputed cases, determining whether an activity is a trade is done on the basis of the "badges of trade"1: these provide guidance as to whether the activity is a trade, though no one test is decisive: they are: (1) the subject matter; (2) the length of the period of ownership; (3) the frequency of similar transactions by the same person; (4) supplementary work on the property realised; (5) the circumstances giving rise to the realisation; (6) motive. [THE BADGES ARE NOT RELEVANT IN RELATION TO HIS RESTAURANT, ONLY FOR THE LAND]
Applying this to J's activities, the operation of a restaurant will be considered trade: not only is having paying customers, and thus trading, the very purpose of a restaurant (confirming the motive of J's activity as sole proprietor of the restaurant), there is much evidence in the text of customers regularly engaging his services, "Cynthia, a regular customer" and "restaurant's long-standing contract to provide catering". The personal income J receives and the profits from the restaurant are taxable. J is not solely engaged in running the restaurant: he also purchased land. We must determine whether this is trade, and the profits are taxable. There is nothing to stop a company engaging, and therefore being taxable for, 2 different trades, as held in Scales (Inspector of Taxes) v George Thompson & Co Ltd . Here, the potential trades are property buying and running a restaurant. However, this presupposes J's property buying is a trade:. We must use the "badges of trade" to determine whether the property sale is trade.
1 the Royal Commission on the Taxation of Profits and Income
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