2017 sees the introduction of two new tax allowances that have so far gone ‘under the radar’.
From April 2017 the government is introducing two new annual tax allowances for individuals of £1,000 each, one for trading and one for property income. These were announced in the 2016 Budget but have largely gone ‘under the radar’.
Overview The allowances cover individuals with small amounts of income from providing goods, services, property or other assets. The government sees this as ‘providing simplicity and certainty regarding income tax obligations on small amounts of income’.
When it was announced commentators initially assumed this was largely aimed at regularising the taxation of small income where the recipients habitually did not declare it. It was also dubbed ‘the eBay allowance’ as it was designed to ‘reduce the complexity for some individuals who will no longer have to decide if the activity amounts to a trade or not.’
However, the measures also introduce a new way of taxing income which is over the £1,000 limit.
The trading allowance – how does it work? The basics are that if the allowance covers all of an individual’s relevant income (note this is before any relevant expenses) then they will no longer have to declare or pay tax on this income. Therefore this provides for full relief where the receipts that would otherwise have been brought into account in calculating the profits of the trade for the tax year are up to £1,000. The effect of the relief will be that the profits from the trade will be nil.
There will be an equivalent rule for certain miscellaneous income, chargeable under Chapter 8 of Part 5, of the Act. This will apply to the extent that the £1,000 trading allowance is not otherwise used against trading income.
Receipts of over £1,000 potentially have a new profits calculation basis Those with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. The trading allowance will also apply for Class 4 National Insurance contribution purposes.
Note that this is instead of the usual rules that would otherwise apply in calculating the profit of a trade or of a property business or miscellaneous income. The election for the trading allowance is made independently and applies for each particular tax year.
The election will apply to the calculation of the profits of all trades for a particular tax year. For trading income, the effect of the alternative method will be to calculate the profits on the receipts that would otherwise have been brought into account in calculating the profits of the trade for the tax year less the deduction of the £1,000 trading allowance. In calculating the profits, no deduction will be allowed for expenses generally or any other matter. There will be a rule to ensure that the total amount of the trading allowance cannot exceed £1,000, where the individual has both sources of income.
Does the trading allowance apply to all businesses? The quick answer is no! The new allowances will apply to all types of trading income of an individual but not to partnership income from carrying on a trade or profession where special rules in Part 9 of ITTOIA 2005 apply.
How does the property allowance work? This operates in a very similar manner to the trading allowance. This will provide for full relief where the income arising in the tax year is up to £1,000. The effect of the relief will be that the income and expenses will not be brought into account when calculating profits of a property business.
There will be also be an optional alternative method for calculating profits where the deductible receipts of a property business are more than £1,000. This will take the form of an election which will apply to the calculation of the profits from property businesses for a particular tax year. The effect of the alternative method will be that the income receipts are brought into account only in calculating the profits for the tax year. Any expenses associated with the income receipts will not be brought into account. In calculating the profit a deduction is allowed for the £1,000 property allowance.
Does the property allowance apply to all income? As above, the new allowance does not apply to partnership income. In addition, it does not apply to relief given under the Rent-a-Room Relief legislation.