Whilst the idea of a £1000 tax free allowance sounds simple as always there are a number of areas which the tax payer needs to be aware of.
There were two new allowances, Trading Allowance and Property Allowance, which were originally introduced in the 2016 budget but was many of the items dropped due to insufficient time for debate prior to the general election. They have now been reintroduced as part of the Finance (No. 2) Bill 2017 which was published in September.
The Trading Allowance was introduced to provide simplicity and certainty for income tax obligations of individuals on small amounts of trading and sundry income from providing goods, services and other assets through, for example, selling on ebay. In its simplest form it provides for a complete exemption from income tax if total trading and sundry income in the tax year is less than £1000. Not only is there no income tax to pay but there is also no requirement to register with HMRC or file tax returns. The threshold applies to INCOME not profits and there are exceptions and nuances which are set out below.
Should trading income exceed £1000 there is partial relief in which individuals can choose either to :
- Deduct their actual business expenses from trading income in the normal way or
- Elect to use the £1000 trading allowance as a deduction from income (Note if an individual claims partial relief they cannot deduct other expenses)
Do you use Cash basis or GAAP?
The trading allowance applies to both methods of accounting and is applied to whichever method is adopted however, for the purpose of full relief only, if
- GAAP income is more than £1000 but
- Cash basis is less than £1000
the cash basis is assumed to be used which allows full relief without needing to elect for the cash basis.
There are Exclusions!
- The trading allowamce is not available for partnerships or against income which attracts rent a room relief
- No relief is available if trading income includes any amounts received from :
- An employer, or a spouse/civil partners employer
- A partnership in which they, or a connected party, are a partner or
- a close company in which they, or an associate, are a particpator
This second exclusion could be very restrictive as any amount of income from that source will completely deny relief for that tax year.
As an example, if an individual is employed but has a hobby taking photographs and the employer purchases one or a few of the photographs for their website, that will be sufficient to deny relief via the Trading Allowance.
Where an individual has more than one trade or hobby which generates income the total of all activities are used to determine whether the allowance can be claimed which can lead to difficulties if an existing sole trader starts a second small trade.
This means that an individual can claim the allowance despite having a large income from employment or a partnership but an existing sole trader is unlikely to benefit.