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August 2018 – Trading or property income

Not everyone has to complete a Self-Assessment tax return as most taxpayers find their income disclosures and tax payments are dealt with adequately via the automated PAYE system.  However, over 10 million people have typically had some circumstance or income type requiring assessment of tax via the Self-Assessment system.

We’re now at the point where anyone needing to submit a Self-Assessment tax return for 2017/18 should be making plans for doing so. The deadline for submitting a paper Self-Assessment tax return is 31st October 2018, but there’s a later deadline of 31st January 2019 if doing it on-line.  Given that, this article looks at two allowances which were new for 2017/18 – the Trading Allowance and the Property Allowance.  These new allowances won’t be relevant to everyone, not even to all those with trading or property incomes, but where they apply they will be quite useful.

HMRC has said that the introduction of these allowances is intended to provide greater certainty around income tax obligations in particular circumstances. This is easiest to understand in the context of the Trading Allowance.  For some years there has been debate about what might constitute “trading” (or self-employment) to the extent that the activity needs reporting to HMRC.  It had been something of an urban myth that low levels of trading (or “hobbying” as some people might call an activity producing a small income) need not be disclosed to HMRC.  As more and more people indulge in on-line trading via internet sites like e-bay, or sell at car boot sales, HMRC has felt that clarity around modest activity would be useful so that people wouldn’t have to decide for themselves.

The Trading Allowance establishes that trading activity in the year up to a turnover value of £1000 is now tax exempt and not reportable via Self-Assessment (but records should still be kept). This is referred to as “full relief”.  Where turnover exceeds £1000, a Self-Assessment tax return will be needed and the taxpayer has the option to deduct actual allowable expenses to arrive at the profit figure for tax purposes, or deduct a flat £1000 via the Trading Allowance. In essence, therefore, anyone trading where allowable expenses are under £1000 would now sensibly deduct £1000 via the Trading Allowance to arrive at the taxable profit figure - a process referred to as “partial relief”.

The Trading Allowance clearly means that anyone trading with turnover above £1000 (remember– this is a turnover threshold, not a profit threshold) should be informing HMRC of their activity via the Self- Assessment process.  This applies even if total income across all sources is low enough to mean that no tax would actually be due.

The Property Allowance follows the same basic principles but is a separate allowance for rental income.  If you have rental income in the year above £1000 you must inform HMRC (usually via Self-Assessment) and you have the choice of deducting either actual allowable expenses or a flat £1000, whichever would produce the lower rental profit figure.

There are a few things to bear in mind –

  • These allowances are per person, not per trade/property.
  • The Trading Allowance cannot be used for partnerships, or if any of the income is derived from an employer, spouse or civil partner.
  • The Property Allowance cannot be used for partnerships, but where a property is simply jointly owned (e.g. husband and wife) each owner should qualify for it.
  • The Property Allowance doesn’t apply where relief is being claimed under the Rent-a-Room scheme.
  • Some individuals who are exempted from Self-Assessment may anyway elect to submit tax returns to, for example, pay voluntary National Insurance Contributions (to obtain State Pension credits) or to preserve a self-employment record to support other relevant future benefit claims.

Posted in: Tax Tips