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In the 2016 budget, George Osborne announced the introduction of two valuable new tax allowances, ushering in financial breaks for small time property and trading businesses, with the intent to drastically minimize the tax obligations on small incomes and to lessen the burden of administrative and reporting requirements, by negating the obligation to declare them to the HMRC.
Yet, despite becoming operational on April 6th, there’s been a noticeable absence of clear direction and guidance regarding exactly how to utilise them, meaning that only a small percentage of the 700,000 taxpayers eligible are actually aware of the potential savings per annum. The scarcity of information surrounding exactly what are, and how to participate in, the new Trading and Property Allowances has led, I’ve noticed in my own accounting practice, to an extremely low level of perception in regards to how the allowances will affect incomes.
Aimed at micro-entrepreneurs and small business owners with small levels of trading and property income, the allowances will reduce the amount of time, effort and expenditure taxpayers spend on calculating expenses and filling out self-assessment trading and property returns.
The key figure to remember is £1000. The new legislation introduced in the Finance Bill 2017 introduces a new Part of ITTOIA 2005 offering relief for two new annual trading and property tax allowances of £1,000 respectively. Where the allowances cover all of your income under trading or property, before expenses, you will no longer have to declare or pay tax on this income. However, if you generate higher amounts of income you have the option to choose to, after calculating your taxable profits, deducting the allowance from your receipts, instead of deducting the actual allowable expenses.
The allowance also counts for Class 4 National Insurance Contribution.
The allowances came into operation on 6 April 2017, continuing over the tax year to 5 April 2018, however if you’ve missed the original date of introduction, the allowance can take effect for periods ending on an accounting date after April 6th, forming the basis period for the 2017 to 2018 tax year. Property incomes will be on a tax year basis only.
The operation of the allowances depend upon whether the income for either the trading or property allowance exceeds the £1,000 allowance.
If your trading or property income is less than the allowance, then full relief will be given so the income is not charged to tax. Currently, the allowance is opt out, so full relief is automatically given unless you elect otherwise, on, or before, the anniversary of your usual self-assessment filing date for the tax year for which the election is made.
The allowance is essentially all, or nothing, it cannot be used to preserve entitlement to the allowance against miscellaneous income whilst simultaneously getting normal relief for expenses from one or more trades.
On the other hand, if your income does exceed the trading allowance, you can elect (within the same timeframe) to pursue an alternative method of calculating the income, disregarding the usual rules that would otherwise apply in calculating the profit, and opting for ‘partial relief’. Partial relief refers to receiving a flat deduction of £1,000, without needing to keep or provide any records of the expenditure.
It is important to keep abreast of the yearly provisions of the allowances, as these regulations are singular to this tax year, 2017 to 2018, and in subsequent years the allowances will be reviewed and may be revised.
There are, however, some universal exclusions. The allowances can not be utilised in conjunction with income benefitting from “rent a room” relief, nor will it apply to any partnership income from a trade or property business.
The trading allowance is available is applicable under the following two terms, with the exclusions detailed above still in effect:
Again, if your relevant income does not exceed your trading allowance for the tax year, and you remained opted into full relief, then the profit of your relevant business, and net amount of relevant business, is nil and need not be reported to HMRC.
The property income allowance works similarly to the trading allowance, with a few exclusions to bear in mind.
The allowance will not be available under the following circumstances;
Due to the recent calling of the General Election, the passing into law of the allowances has been deferred until after the election, and although is expected to become law without any amendments, may be subject to change.