A discrepancy in the new £1,000 allowance for trading income puts existing sole traders at a disadvantage compared with the employed and those trading in partnership, The Association of Taxation Technicians (ATT) is claiming.
From 6 April 2017, a new £1,000 tax free allowance became available for individuals with trading income. Under this trading allowance, individuals receiving less than £1,000 a year of gross trading income are completely exempt from income tax, with no requirement to report their trading income to HMRC or file tax returns (referred to as full relief). If annual trading income exceeds £1,000 a year, individuals can choose to either deduct their actual business expenses for income tax purposes in the usual way or claim the £1,000 allowance as a deduction from income (referred to as partial relief).
A key feature of the trading allowance is that all of the income from an individual’s ‘relevant trades’ are combined. This can lead to difficulties where an established sole trader starts up a smaller second trade; full relief will not be available as their combined income from both trades is likely to exceed £1,000 and partial relief will not be attractive as the individual will be prevented from deducting the expenses incurred in their main trade.
Yvette Nunn, Co-chair of ATT’s Technical Steering Group, said: “We welcome the aim of the trading allowance to simplify the tax affairs of those with small amounts of trading and miscellaneous income. However, the approach taken in respect of second trades is inconsistent with this aim and discriminates against sole traders.
“As the rules currently stand, an individual with both a sole-trade and a micro-business is unable to benefit from the trading allowance. By contrast, an individual with an identical micro-business but whose main source of income is either from employment or income from a partnership is entitled to relief on their micro-business income. This is the case regardless of the amount of money an employee or partner derives from their main source of income.”
For example, a self-employed electrician who gives occasional tennis lessons on the side will not benefit from the trading allowance, but would if they instead earned their main income as an employed electrician or as a partner.
She added: “We recognise the importance of preventing the trading allowance being abused by fragmenting the income of a single business in order to claim the £1,000 relief. However, we believe that the trading allowance legislation can be amended in a relatively simple way that prevents abuse while also eliminating the current discrimination against sole traders. Our recent evidence to the Finance Bill Committee included a suggested amendment.
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