SUBJECT: Business Tax, Outcome 1, Ali Case study.

Income Tax Legislation.

Income tax legislation can be found in the Income Tax (Earnings and Pensions) Act 2003, the Income Tax (Trading and Other Income) Act 2005 and the Income Tax Act 2007.

Taxable supplies.

A good understanding of the principles of VAT is very important in advising business.
The third largest source of government revenues is value added tax (VAT), charged at 20% on supplies of goods and services. It is therefore a tax on consumer expenditure.
Certain goods and services are exempt from VAT, and others are subject to VAT at a lower rate of 5% (the reduced rate, such as domestic gas supplies) or 0% ("zero-rated", such as most food and children's clothing). Exemptions are intended to relieve the tax burden on essentials while placing the full tax on luxuries, but disputes based on fine distinctions arise, such as the notorious "Jaffa Cake Case" which hinged on whether Jaffa Cakes were classed as (zero-rated) cakes—as was eventually decided—or (fully taxed) chocolate-covered biscuits.

Five things to remember about exempt supplies:
• You don’t include VAT in the price of exempt goods or services;
• You are not eligible to claim input tax credits in acquiring exempt supplies;
• You don’t include the value of the exempt supplies in your taxable turnover when establishing your VAT registration threshold;
• If you only supply exempt goods or services, you cannot register for VAT purposes;
• You must make the relevant VAT adjustments if your business is engaged in both taxable and exempt supplies.

Zero rating is a rate of VAT, (0%), i.e. it constitutes a taxable supply. This in turn renders any supplier of zero-rated goods, services liable to register for VAT. The advantage of VAT registration is that VAT can be reclaimed on costs. If taxable turnover exceeds the VAT threshold they