Don't miss out on trading allowances

Brought to you by ACCA

For the tax year 2017/18 we saw the introduction of two new £1,000 tax-free allowances. Both are available from 6 April 2017 and are the property allowance and the trading allowance.

Allowances
The trading and property allowance provides for a complete exemption from income tax if the total trading or property income in the year is less than £1,000. 

If a person has both types of income, they will receive a £1,000 allowance for each.

Each is aimed at relieving the taxpayer of having to report nominal amounts of income which HMRC would, in turn, find very cost-ineffective to process and collect the tax due.

Full exemption is only available if the total income, not profit, is below the limit. So individuals are required to record their income level and if their trading income goes above £1,000 they will need to inform HMRC and be subject to self-assessment.

The trading allowance is applicable to trading income from either self-employment, or casual services (eg babysitting, private tuition, gardening) but for the purposes of the trading allowance, the income and profits of all an individual’s trades are combined.

Where income exceeds £1,000, the legislation allows for so-called partial relief. Effectively, individuals can choose to either:

  • deduct their actual business expenses from trading income in the usual way, or
  • elect instead to deduct up to £1,000, but not more than the amount from trading income.
     

It should be noted that if the expenses are more than the income it may be beneficial to claim expenses instead of the allowances.

Also, if you own a property jointly with others, each individual is eligible for the £1,000 allowance against your share of the gross rental income. Individuals can decide on an annual basis which approach to take. The trading allowance applies equally to both cash basis and accrual accounting however, it is expected that most small businesses would adopt the cash basis.

When you can’t claim the allowance
The allowances can’t be claimed when you have any trade or property income from connected or controlling parties. 

In addition the property allowance cannot be claimed if:

  • The person claims the tax reducer for non-deductible costs of a dwelling loan.
  • The Rent-a-Room Scheme is available but they choose to disapply it. However, as the Rent-a-Room relief limit of £7,500 is higher than the property allowance of £1,000 this is unlikely to be a concern.
  • The income is from partnership property income.
     

Like the trading allowance, the property allowance cannot be claimed in respect of partnership property income. However, if the property is owned jointly with one or more other persons it does not mean that, of itself, the activity is a partnership.

HMRC PIM 1030  states:

‘Whether or not a customer is a member of a partnership depends on the facts. A partnership is unlikely to exist where the customer is one of a group of joint owners who merely let a property that they jointly own. On the other hand, there could be a partnership where the customer is one of a group of joint owners who: let the jointly owned property, and provide significant additional services in return for payment.’

In conclusion if there is no partnership agreement and no partnership return has ever been filed, it is likely that the share of the income from property is reported in property pages of the tax return and it qualifies for relief.

It should be noted that, unlike Rent-a-Room relief, if property is jointly held then each person is entitled to the full £1,000 property allowance.

In conclusion, in order to qualify for allowance:

  • Do not involve your spouse or your friend (in order to avoid trading as a partnership).
  • Do not sell anything to your own employer or your own limited company; selling one item to your company would mean you could not claim the tax-free trading allowance at all.
  • Do not think of setting up a new trade for each of your businesses to get around the £1,000 limit as the allowance applies to all self-employed trades carried on by you.