Tax and Old Cars Essay
It is a great pleasure to get the opportunity to contact with you. As you requested me to give you an advice, I would like to explain you some points that will help you while you do your activity. You mentioned that your hobby is restoring old cars. Buying them from auctions, repair them and then you sell them back to auctions with good profits. Your friend was right when he told you to register as self employed. Your hobby activity can be considered as a type of badges of trade called “the nature of asset”.
The cars are assets that can be turned to advantage by a sale. Also there is a badge of trade called “Frequency Transaction” which means profit from a onetime sale is normally considered as capital gain. However, if there is repeated buying and selling of Cars, this indicates the existence of trade activity dealing in investible cars. Another reason which is “profit seeking motive”, you have the intention to re-sell the old cars to gain income. The cars which are your assets are likely held as investments so you trade them by buying and selling them.
It is important to note that old cars you bought are soon sold afterwards. This called the “Length of Ownership”. Even the way in which your assets (Old cars) sold acquired can be considered as a trade badge which means if cars are acquired deliberately; it may be a sign of trading. From the reasons above we can say that you are trading and running your own business reselling old cars after repairing them and you should register as self employed for tax purposes. For income tax purposes I will explain to you principles of VAT. VAT, Value Added Tax, is generally consumption tax.
It is a type of a tax that is placed on the product from the stage of production to final sale. We can define VAT in your case as repairing old cars and add value to them to get good profit on selling them. For VAT purposes, a taxable person is any individual, partnership, company or whatever which supplies taxable goods and services in the course of business. The taxable person in your case is you. In this case you should apply to register as VAT registered trader in Customs and Excise department in Ministry of Commerce. However, not all goods and services you do during epairing old cars are subject of VAT. Some of them are zero rated which means that VAT is charged at the rate of 0%. In your case the zero rated services can be: * Human food. * Cleaning cars charges. * Transportation of cars. Some of services are exempt from VAT which means VAT cannot be charged. In your situation, the exempt supplies can be: * Insurance. * Financial services. * Health services. In your business you can use the Cash Accounting Scheme to help you in the cash flow, because you do not have to pay VAT until your customers buy your cars.
The cash accounting scheme allows you to make accounting for VAT on your cars sales on basis of payments you receive. Also you can use method of Accrual Accounting if you want your cash inflow or outflow to be combined future expected cash inflow or outflow to know more about your financial status in your business. By using VAT accounting standards, you must complete four VAT Returns each year. This called quarterly accounting. Also you can use annual accounting method; you only need to complete one return at the end of each year.
If you outstanding amount, you must pay them but if you have overpaid, you will receive a refund. If you have been registered for VAT for less than 12 months, your interim payments are based on an estimate of the VAT you expect to owe for the coming year. If you have been registered for VAT for 12 or more months, your interim payments are based on your previous year’s actual VAT payments. During paying VAT you will receive VAT invoices to confirm the payments and you should keep these invoices as records for at least six years.
VAT is usually administrated by HMRC which is local officers who their responsibilities are to administrate VAT and to provide advice to you as a registered person to VAT. HMRC will issue you an “assessment” if they discovered errors in your VAT records. Before making any assessments the HMRC will notice you and explain to you what they will do to help resolve any disagreement and give you legal time to apply assessments. Sometimes you may disagree with a decision made by HMRC.
You may be able to appeal to challenge the decision. May be able to resolve the issue by sending more information to the VAT officer who sent you the ecision you disagree with. You must submit your VAT return and ensure that payment of the VAT due has cleared to HMRC account by the due date. If you don’t, you may have to pay what’s known as a ‘surcharge’, which is a percentage of your unpaid VAT. If you continue to submit or pay late, you will be charged a higher percentage of your unpaid VAT. If you submit an incorrect VAT Return, HMRC may also charge you an inaccuracy penalty. These are advices which I can provide you for your business. I wish you all the best in your business.