Law of Business Taxation Essay Example | Topics and Well Written Essays - 1250 words

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 â€Å"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 w hether a particular activity constitutes trading. Under ITTOIA, trading was defined as â€Å"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 â€Å"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 ca se 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 â€Å"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 ga ined 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).

FINANCIAL REPORTING & MANAGEMENT ACCOUNTING Case Study

FINANCIAL REPORTING & MANAGEMENT ACCOUNTING - Case Study Example From there, they gained a contract from IBM and in 1985, they both partnered in the development of the OS/2 operating system. That same year, her first retail version of Microsoft Windows came out and in 1986 they went public with an initial price of $21 per share, closing the day in $28. Today, Microsoft Corporation stands as the worldwide leader in software, services and varied ideas and solutions that helps not only businesses but broadens and makes knowledge easier. They have as their registered trademarks today, MS-DOS, .NET, office XP, 2007 office system, windows server, and windows versions like, 3.0, 95, 98, 2000, XP and Vista. As of August 2007, the corporation had a total real estate portfolio of 24,166,129square feet (in 565 sites) of which 13,918,070 were leased (in 482 sites) and 10,248,059 were owned (in 83 sites). Microsoft had a higher profit margin in 2003 which witnessed a sharp drop in 2004. This went up again in 2005 but after that period, it has been dropping yearly. However her return on assets which also dropped in 2004 is increasing from 2005 on a yearly basis. But, the increase on Microsoft's return on equity after her drop from 2003/2004 is very great. Her basic earning power too has improved greatly. The receivable turnover of Microsoft has been somewhat reducing which denotes the fact that she gives out more free ride to its customers. This turnover should increase and thus an increase in physical cash. This poor receivable turnover is also realized when we take a proper look into the day's sales outstanding. It's on the increase which is not good for the corporation. Inventory turnover too is dropping which is bad whereas both fixed asset turnover and total asset turnover are slightly increasing. In all, Microsoft is not managing her assets properly and greater care must be placed on this issue. Exhibit A-2: Asset Utilization Ratios Asset Management 2003 2004 2005 2006 2007 Receivable Turnover 6.19 6.25 5.54 4.75 4.51 DSO 58.92 58.36 65.87 76.79 80.95 Inventory Turnover 50.29 87.49 81.03 29.96 45.36 FA Turnover 1.56 1.69 1.80 2.15 2.22 TFA Turnover 0.40 0.40 0.56 0.64 0.81 Liquidity Any company's liquidity position is determined by comparing assets to liabilities; current liquidity considers current assets and current liabilities only. The Quick Ratio is similar to Current except that it carves out inventories. Microsoft has a very bad liquidity situation when we look on the two tests and this denotes the fact that, they have a weaker position to handle short-term obligations. Exhibit A-3: Liquidity Ratios Liquidity 2003 2004 2005 2006 2007 Current Ratio 4.22 4.71 2.89 2.18 1.69 Acid Test/ Quick ratio 4.17 4.69 2.86 2.12 1.64 Debt Utilization Having her debt ratio together with her times interest earned going up denotes the fact that this corporation is very risky as the years go by. But, as they carry more debt, they have a better coverage of debt as their EBITDA coverage reduces, thus their interest payments are well