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You are a Trainee Tax Manager with a firm of Chartered Accountants.
Your manager has given you the following tasks regarding Mr Desai to complete for the firm’s clients.
Write a report to Mr Desai addressing all the issues below.

A brief introduction no more than 200 words

Mr Desai has a vocation of collecting antiques and restoring, before selling on after a short while for a small profit. He does this on a regularly basis and sometimes buys in large quantities. Mr Desai’s neighbours Mr Freddy, a retired accountant has informed him that his vocation could be termed as trading by HMRC and advised him to seek financial advice from an accounting firm. Mr Desai does not think that he is trading; it is simply his hobby and a way of making a little profit. Mr Freddy has also informed him that if he does not declare his earnings it may be perceived as tax evasion.

Question 1
Advice Mr Desai’s whether his vocation can be termed as trading, using the six badges of trade and any case law to support answer.

Question 2
a) Explain the difference between Tax evasion and Tax avoidance to Mr Desai and their legal consequence’s- use Journal or recent article to support your work.

b) Discuss any measure HMRC can take if any, to counteract any abusive arrangement.

Question 3
Mr Desai has decided to setup a small antiques business as a sole trader. He started trading on the 1 January 2017, preparing accounts to 31 December yearly.
The business made a net profit of £12,100 for the year to December 2017
The following appears in the income and Expenditure statement for the year end 31 December 2017:
Expenditure

I. The sum of £1500 for obtaining a loan is included in the Income and expenditure statement

II. £4,200 was spent on installing new windows in a recently acquired factory, which had been badly damaged in a fire shortly before its acquisition by Mr Desai.

III. A sum of £250 fine paid in respect of Mr Desai’s son, who works part-time in the business.

IV. Depreciation charge of £3,500 is included in the income and expenditure. These relate to newly acquired cars.

V. A legal fees of £286 is included in the trading profit. This is in respect of renewal of a twenty –one year lease of the new office premises.

Income
VI. The old premises suffered damage as a result of flooding during its year ended 31 December 2016. The business paid the repair costs of £22,000 during that year, and these were allowed as a deduction in arriving at the trading profit figure for that year. In May 2017, the business received £18,000 from its insurers in final settlement. The sum received was credited to the Income and Expenditure account for the year ended 31 December 2017.

VII. Interest of £1,000 (gross) was received during the year in respect of a loan made to a supplier and included in the income and expenditure account.

Required:

a) Explain to Mr Desai the general rule that governs whether or not
Expenditure is allowed or disallowed when computing trading profits.
b) Discuss with explanation how each of the above items would be dealt with in arriving at the adjusted trading profit for the year, explaining clearly your reasons for your treatment of each item. You must state whether clearly the item would be allowed or disallowed. To be added or deducted from the reported profit figure. (No calculations required).

c) Calculate the adjusted trading profit for Mr Desai for the year ended 31 December 2017.

To get good marks, you must give detail explanation for your reason

I.
Question 4
Mr Desai also needs advice about his trading activities in relation to VAT. He currently is not registered for VAT. However, his business is growing and he has recently won a contract worth £90,000 on 1 November 2017
Desai sales from the last months of trading are:
August 2017 £20,000
September 2017 £40,000
November 2017 £105,000
December 2017 £70,000

All the above figures are stated exclusively of value added tax. Desai only supplies and all the businesses suppliers are standard rated.
Mr Desai allows his customers 45 days credit when paying for service and he is concerned that some of its customer will default on their payments.
Mr Desai pays its suppliers invoices as soon as they are received
Mr Desai is currently not registered for Value Added and his neighbour has mentioned Flat –rate scheme for small businesses to him and he will like to know more about it.
Required:
a) Explain giving reasons the date Desai is required to register for vat and by when it was required to notify HMRC.

b) State how and when Desai will have to submit its quarterly VAT liability.

 

c) Advice Mr Desai the benefit of the benefit of Flat – scheme for businesses.

d) Advice Mr Desai what he can do if his customers default in their payment?
5 marks

 
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