Trading and Property Allowances (TAPAs) - Part 1

The Finance Act (No2) 2017 introduced two new exemptions from 6 April 2017 - a £1,000 trading allowance and a £1,000 property income allowance.

This blog talks about the Trading Allowance, with the Property Income Allowance being discussed next week.

These exemptions seem to have slipped under the radar slightly, with a lot of people I talk to not really knowing much about them. This might have something to do with them being introduced in the Budget 2016 and then being excluded from the original Finance Act 2017 as they didn’t have enough time to debate them!

Even some software providers are not quite ready for them yet, with our 2018 tax returns being completed by entering £1,000 in the other expenses box, with a note being put on the return to explain what it is for..

What is the Trading allowance?

The aim of the trading allowance is to provide simplicity and certainty regarding?income tax obligations?on small amounts of trading and miscellaneous income from providing goods, services or other assets.

Sounds simple enough right? As always, there are several confusing elements to the exemption, which we’ll talk about later

At its simplest form, the trading allowance provides for a complete exemption from?income tax?if total trading and miscellaneous income in the year is less than £1,000.

There is no need to register with?HMRC?or file tax returns provided trading income is below this level. (Unless you need to register for another reason)

Individuals who qualify for full exemption will need to monitor their income levels year-on-year: if their income goes above £1,000 they will be subject to Self-Assessment.

Where trading income exceeds £1,000, the legislation allows for partial relief, with individuals choosing to either:

• Deduct their actual business expenses from trading income in the usual way, or
• Elect instead for the £1,000 trading allowance as a deduction from income, without any relief for other expenses

The good thing is that Individuals can decide on a year-by-year basis which approach to take. This will depend on the type of business and the level of expenses incurred that year. As a guide:

• Businesses with a high level of expenses are likely to be better off claiming actual expenses.
• Small services businesses with minimal overheads and costs are likely to find the trading allowance more beneficial unless they have a one-off large revenue expense in any year.

The trading allowance applies equally to both cash basis and GAAP accounting scenarios – the £1,000 threshold is simply applied to whichever measure of income/profits you adopt, with just one exception:

For the purposes of full relief (only), the cash basis is assumed to be used rather than GAAP if:

• your GAAP income would be more than £1,000,
• but your cash basis income would be less than £1,000,

In effect, this allows full relief without requiring a cash basis election to be made. If the taxpayer really wishes GAAP to apply, they can elect out of full relief.

Here are the Exclusions...

It just wouldn’t be a HMRC tax allowance without a few complications to keep us on our toes!

• The trading allowance cannot be claimed for partnership trades, or for income which attracts rent a room relief.
• No relief is available if an individual’s trading income includes any amounts received from:
• an employer, or a spouse / civil partner’s 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 participator.

The first of these exclusions is pretty self explanatory, but the second is particularly restrictive?– any amount of such income will completely deny relief for the year. For example, if you are employed and have a sideline in selling photographs of old buildings, the sale of one photograph to your employer (or your spouse’s employer) will prevent you from claiming the trading allowance, even if you sell hundreds of photos to other unconnected parties.

For the purposes of the trading allowance, the income and profits of all an individual’s trades are combined. This can lead to difficulties if an individual with an existing sole-trade business starts a smaller second trade.

For example, if a self-employed taxi driver starts up a?small business?of teaching Welsh in the evenings:

• Full relief will not be available for the new trade (assuming their combined income from both trades exceeds £1,000).
• Partial relief is likely to be economically unattractive, as they would not be able to claim for the expenses incurred in their taxi driving trade.

This results in a slightly unfair situation whereby an individual can receive unlimited income from employment or a partnership and still claim the trading allowance, but an existing sole-trader is unlikely to benefit from the allowance.

We can help you with TAPAs!

If bdhc complete your tax returns then you can be sure that we will advise you about claiming the Trading Allowance if it is the most tax efficient choice for you.

If you’re unsure of whether the allowance will apply to you, then please just give us a call or drop us an email and we can help you with your options.