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Trading and property allowance side effects

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10th Feb 2017
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Two new tax allowances making their debut from 6 April are designed to make life easier for Theresa May’s micro-entrepreneurs - the people inhabiting the world of the sharing economy - but they may have unexpected side effects if draft clause 19 with draft schedule 5 to the Finance Bill 2017 go through without further modification.

Sarah McNeill takes a closer look at the trading allowance and property allowance, and their unexpected side effects.

Rationale

The two allowances are meant as simplification measures. The property allowance is there “to support the sharing economy” according to GOV.UK, while the aim of the trading allowance is to “reduce the complexity for some individuals who will no longer have to decide if the activity amounts to a trade or not.”

Airbnb and eBay

BDO’s take on the allowances highlights the benefit to those “earning minimal amounts from auction sites such as eBay.”

“The property allowance will no doubt benefit individuals renting their own homes on short term lets, via such platforms as Airbnb, and also those letting out garages, parking spaces and small plots of land.”

“Welcome certainty to individuals in receipt of small amounts that will not need to be declared to HMRC” is something else BDO applauds.

How they work

The way that the allowances are meant to work is like this.

Each allowance is designed to exempt £1,000 of potentially taxable income. So people with small amounts of income from goods, property, services or the sharing of assets, are not required to declare the income or pay tax on it, if it stays below the magic £1,000 threshold.

If the £1,000 limit is exceeded, they can elect to deduct the allowance from receipts, or failing this, deduct actual expenses.

Side effects

And here the fun starts. Many of the professional bodies have expressed misgivings about how the allowances will work in practice.

Unanswered questions

The ATT has a long list of unanswered questions, touching on the interaction between deemed ‘nil’ income with entrepreneurs’ relief on subsequent disposal of capital assets used in the relevant trade, the question of operating on a commercial basis in relation to possible future loss relief claims and practical difficulties in relation to the required elections.

Signals

When the allowances were first mooted, PwC tax partner, John Steveni, was one of the first to foresee unintended side effects. And his was a positive:

“I think it… sends a message if you have been earning more than £1,000 from these sorts of activities, but it hadn’t occurred to you that you might be taxable on it,” he commented.

“It is a useful flag to such people that maybe they ought to think about declaring it. Although I don’t think it’s been stated that that is intentional, it is a useful side-effect.”

Cliff edge

But wave Steveni’s flag – and then what?

The question of when to notify – “the cliff-edge impact of relevant income exceeding the allowance” is something the ATT has picked up on.

Clear guidance

‘Clear guidance’ from HMRC, around when business records need to be kept, elections for partial relief, and when HMRC needs to be informed about a trading or property business , is needed, according to LITRG.

Muddy waters

The view from ICAS is that the allowances were likely to muddy the water. “Without a record- keeping requirement, who is going to know now when to notify taxable income?” asked Philip McNeill, head of tax (Tax Practice and Small Business Taxes) at ICAS.

“For many low-income traders survival is the name of the game. Others think of their activity as a non-taxable hobby.

“What happens when you’re looking at £1,200 worth of income? If, through uncertainty, you fail to notify and miss the election deadline for the partial relief allowance, the full £1,200 can become taxable,” he said.

Give-away

Ironically, the way the allowances work means that taxpayers with trading, property or miscellaneous income of more than £1,000, may be on to a good thing, too.

“There look like all sorts of accidental side effects,” commented McNeill. “It’s like handing sole traders a £1,000 minimum deduction, regardless of what they actually spend. With partnerships, there is the possibility of £1,000 tax-free income by partners billing some work in their own name. Is that really what was intended?”

Company concerns

And ICAEW’s comments on the draft legislation highlight a further unexpected side effect.

This is the fact that either allowance could potentially be used where a shareholder provides goods, services, property or assets to a company in which they hold an interest.

This opens the door to the possibility of the company claiming a deduction for an expense, if incurred wholly and exclusively for the purposes of the trade, and the income being exempt as regards the individual.

Casual mischief

“The draft clause should be amended to provide an exclusion similar to that introduced by new sections 783P and 783Z6,” the ICAEW recommended.

“For simplicity we would suggest that the exclusion is drafted to deny the use of either allowance where an individual is a participator (or an associate of a participator) in a close company, as defined in part 10, Corporation Tax Act 2010. Although this will not close the door completely it will prevent the bulk of casual mischief.”

Replies (10)

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the sea otter
By memyself-eye
13th Feb 2017 10:14

So; the temptation for businesses that have seasonal trades such as providers of refreshments at festivals and therefore need 'staff' only for short periods will now be emboldened now take on the 'services' of individuals up to £1,000 a year with no tax consequences to either party?
Oh, but I hear you say, aren't those individuals employees?
Maybe, ask the man from Pimlico plumbers...

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Replying to memyself-eye:
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By rememberscarborough
13th Feb 2017 10:24

Having spend a lifetime as an accountant in the construction industry all I can say is - welcome to HMRC's weird and wonderful world of selective taxation....

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By Mitch
13th Feb 2017 12:20

I suspect that many individuals will use this as an excuse to "go off the radar" and never return!

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By ireallyshouldknowthisbut
13th Feb 2017 14:36

It is a very nice toy for Gideon to give us accountants.

The number of ways in which this will be used is going to be extraordinary, very few of which have been originally intended in the legislation.

I sincerely hope however this rather silly allowance is quickly closed as it means a lot of messing about for small sums, but our clients will expect it to be used and adds yet another absurd complexity to the tax system in the name of "simplification"

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By BryanS1958
13th Feb 2017 16:07

Great that the ICAEW is telling HMRC what tax planning possibilities there are (albeit miniscule). I thought that was HMRC's job!

Why doesn't the ICAEW concentrate on convincing HMRC that MTD (Making Tax Daft) is a terrible idea, no businesses have been asking for it and HMRC shouldn't even be contemplating introducing it.

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By bendybod
14th Feb 2017 09:36

I can't see that the average client of a professional accountant's would have less than £1,000 expenses and so would not be in a position to take advantage of this allowance. Furthermore, how many of those who don't engage an accountant are going to understand how this works? So how much is it actually going to save businesses?
This will come at a cost of £260,000 to enable HMRC's computers to process the allowances. Could that not have been better spent on, I don't know, ensuring that MTD isn't a complete shambles, or something?

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By AndrewV12
14th Feb 2017 09:52

Close to me is a lady who sells flowers, Lillys mainly,good value, I always wondered is she even aware of her Taxation requirements, never mind even declare them, though I doubt she makes most of a profit. Not a bad rule, why bother even looking into her affairs, there so cheap its almost a hobby. Mind you I could be wrong.

Extract above

'Each allowance is designed to exempt £1,000 of potentially taxable income. So people with small amounts of income from goods, property, services or the sharing of assets, are not required to declare the income or pay tax on it, if it stays below the magic £1,000 threshold'.

Not a bad idea, I suppose someone has done the maths costs of providing HMRC services to administer such small amounts, versus tax lost, most people with income under £1,000 wont bother to inform HMRC.

Small amounts from property ????? really

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By Pavilionaire
14th Feb 2017 10:55

I totally get the spirit in which this legislation was drafted but I agree that it muddies the waters.

Will savvy clients now be expecting me to be making a provision for, say, £1,000 'storage rent' for use of private garage / shed. Such an expense could save a director £450 in CT/IT. Will they be upset with me if I DON'T claim this and - 5 years down the line - they discover they could have saved £2,250??

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Replying to Pavilionaire:
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By bendybod
15th Feb 2017 13:12

It's only an either / or, isn't it? So your income is either under £1,000 to start with: no issue, or your income is over £1,000 but your expenditure is less than £1,000 so you claim the £1,000 allowance instead. You can't claim it as well as other expenses.
That's my reading of it, anyway. The issue I see is, who is going to do the work to determine whether the small trader has £900 of expenses, in which case claim the £1,000 or has £1,100 of expenses, in which case claim the actual expenditure.

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By Red1960
03rd Mar 2017 09:32

I have to agree with BryanS1958 isn't it about time that the ICAEW started taking HMRC to task and acting on behalf of it's members, the profession genraly and in the best interests of the public?

Why isn't the ICAEW taking HMRC on in respect of the absurdities of RTI, auto enrolment and the looming national catastrophe which is MTD than trying to do HMRC's job for them?

Why isn't the ICAEW campaigning against the proposterous burden of administrative red tape which HMRC is using to strangle small businesses or the fact that HMRC appears intent on driving smaller accountancy practices out of business?

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