Law of Business Taxation - Essay Example

It was suggested that about 25% of the deduction for such expenditure is increased. Specifically, it provides that contract work outside of “any person otherwise than in the course of a trade, profession or vocation the profits of which are chargeable to tax under Case I or II of Schedule D,” (paragraph 4(6)(b) of Schedule 12. It disallows deduction for activity of trade, profession or vocation undertaken in any part of the United Kingdom. The Income Tax (Trading and Other Income) Act 2005 or ITTOIA 2005 imposes charges to income tax under trading income, property income, savings and investment income, and certain miscellaneous income.

It also dealt with exemptions from the charges, provisions about rent-a-room relief and foster-care-relief, special rules for foreign income, special rules for partnership, and certain calculation rules and general provisions. The limited guidance provided by the previous legislation makes interpretation problematic such as in determining whether a particular activity constitutes trading. Under ITTOIA, trading was defined as “any venture in the nature of a trade” (ITA 2007 s. 989) that leans on the substance of what is being carried on and how it is being carried on.

The understanding of the activity by the individual conducting it may be derailed. James (2011) suggested that it “does not necessarily need to have all the attributes associated with a trade I order to be chargeable,” (16). Previously, under the ITEPA 2003, Schedule D Case 1 provides that profits derived from trade were taxable. Profits from a vocation or profession were taxable under Schedule D Case II. ITTOIA 2005 removed this distinction and trading income has encompassed incomes from vocation, trade, or profession under ITTOIA 2005 section 5 (James, 2011).

Other contentions are statutory trades such as farming, market gardening, and occupation of land managed on a commercial basis for the purpose of gaining profits. For the case of woodlands, occupation may not be taxable but once an actual trade, an example of which is the selling of timber, occurred, then, a taxable activity is committed (James, 2011). Numerous tests called the “badges of trade” also help determine trading activities, but already, confusion have proven costly through litigations.

One specific example is the American Leaf Blending Co. SDN BHD v Director-General of Inland Revenue (1979) (AC676). Lord Diplock opined that: …in the case of a company incorporated for the purpose of making profits for its shareholders any gainful use of which it puts any of its assets prima facie amounts to the carrying on of a business… Assets held as investment due to their nature as income-producing, or have the potential for capital appreciation, or possible profit for its sale cannot be considered a trading profit.

An asset acquired by loan with the potential to bear an income but only as a motive to offset interest from income gained is also considered of irrelevance. An investment of a property later appropriated as trading stock will have the sale as trading. Such was the case of Wisdom v Chamberlain (1969) 45 (TC 103). In this case, actor Norman Wisdom bought silver bullion as a hedge against devaluation. He then sold it at lower cost but bought more bullion which when sold gave Wisdom a profit. The second transaction was considered a trading because it was bought for short-term profit (James, 2011).