The New Trading And Property Allowances: Be Careful!

The new £1,000 trading and property allowances are potentially useful to casual traders/landlords – but care is needed, warns Lee Sharpe.

The new trading and property allowances were announced in Budget 2016; the legislation itself has only recently been drafted. There is a £1,000 trading allowance essentially to cover casual trading income, and a separate £1,000 property allowance to cover casual income from property. 

The specific provisions have been cut from the slimmed-down Finance Act that was rushed through Parliament ahead of the 2017 general election but, seeing as it has been promised by two Chancellors, the regime does seem likely to proceed as planned – most likely by being re-introduced in a Budget to follow the general election. So, what is on offer?

The real point behind these new allowances is to save the government (and particularly HMRC) having to administer people’s tax records where there is very little tax at stake. In essence, the government has decided it is cheaper to let people off paying a little bit of tax if it will save the administration cost of setting up tax records and processing tax returns. 

The allowances are highly unlikely to be useful to ‘serious’ traders or landlords with significant operating costs. We shall see why when we look at how the allowances operate.

Let us assume that Patricia, who is full-time employed, decides to sell cards, which she makes herself in her spare time. Totting up the casual sales through craft fairs and similar, her total receipts (ignoring any expenses that might be deductible) in the tax year come to £800. 

Her trading income is entirely covered by the new allowance, so she ignores her actual income and actual expenditure, and pays no tax. 

Let us say that Patricia decides to open an online store for her cards, and sales increase significantly in the second tax year, to £1,600.

The new trading allowance does not completely cover her gross receipts, so she effectively has a choice: 

Where actual allowable business expenses exceed £1,000, making a ‘normal’ claim to offset those deductible expenses is likely to be beneficial:

(a) If Patricia’s actual card-making expenses (including travelling, use of the home, etc.) came to £1,200, her ‘normal’ profit would be just £400, rather than the net £600 left after claiming the new allowance.

(b) If Patricia’s allowable expenses were only £750, her ‘normal’ profits would be £850, so she would prefer to use the new trading allowance instead.

Example 2 highlights why the allowances are of little use to ‘larger’ businesses with significant expenses. Since one can claim either the allowance or actual expenses, larger businesses with more substantial costs will lose out by claiming the allowance.

Phyllis also makes cards in her spare time (with all of her tax-free personal allowance, etc., allocated to her main employment), but she has a well-established business with £10,000 annual turnover and £4,000 annual deductible expenses. 

If she were to use the new trading allowance, she could deduct £1,000 from her gross annual income, leaving her taxable on £9,000, rather than the £6,000 net income that would arise using the normal route. Unsurprisingly, she is less than impressed with the new allowance.

The new allowances work in a very similar fashion to rent-a-room relief, which has been around for many years. Where available, rent-a-room relief arguably has greater appeal, because it has a much more generous £7,500 per year allowance. 

However, it is aimed at people renting rooms in their own homes (basically while they remain in occupation), and there may well be circumstances where the new property allowance might be ideal but where rent-a-room relief cannot apply – an example being where someone rents out his or her drive during the day while away at work, so that someone else can work locally without parking on the road. 

Rent-a-room relief may also be relevant to someone operating a modest bed-and-breakfast (B&B) business from their home, which would generally be considered a trading activity. 

The new allowances are available to non-rent-a-room income sources, but will be excluded where an income source could have been eligible for rent-a-room relief but the taxpayer does not make use of the rent-a-room regime. Where a trading income source (such as a B&B in one’s own home) is eligible for rent-a-room relief but it is not used, then the trading allowance for the year is not available at all to the taxpayer; likewise, where rent-a-room relief would be applicable to a property income source but is not used, the new property allowance is not available to the taxpayer for that tax year. 

Trap for losses

One thing to bear in mind with the new allowances is that they will apply automatically, where a taxpayer’s circumstances fit the relevant criteria. So, if a person’s gross casual letting or trading income respectively falls below the corresponding allowance, then it will be ignored – as will any relevant expenses. This means that expenses will be ignored, even if the taxpayer has actually made a substantial loss. It is possible to elect to disapply the new allowances, but only within the usual tax return amendment window – which is not much help if you didn’t know how much you had to lose.

Dean decides to set up an event promotion business. He spends many thousands of pounds on advertising and web promotion, but by the end of the tax year has had only a few hundred pounds of income from subscriptions. As his gross receipts for the tax year were below £1,000, the trading allowance applies automatically, unbeknownst to Dean. Dean knows he has made a substantial loss, so doesn’t think a tax return is actually necessary (this is, of course, incorrect, but an understandable assumption). Income levels rise in the second year, so Dean files a tax return, posting a profit but expecting to benefit from the losses he made in the first year. 

Sometime later, HMRC reviews Dan’s Year 2 tax return, and then treats the losses made in Year 1 as nil, thanks to the new trading allowance, so he has no losses to bring forwards to set off against the profits he made in Year 2 – meaning a significant increase in his Year 2 tax bill. By this time, Dean is outside the usual ‘repair’ period for his Year 1 tax return (i.e. the second 31 January following the tax year in question), so he cannot now elect to disapply the trading allowance, and his Year 1 losses are forfeit.

 

Since Dean would have to elect to disapply the new trading allowance, he might even have filed a tax return for his first year in the above hypothetical scenario, but still forfeited his losses if he didn’t realise that he had to make an election in the return. 

The key criterion is that Dean had some income, but less than £1,000, so the trading allowance automatically applied. A similar issue might arise where a landlord spends substantial sums making his or her first property available for let, but takes only one or two months’ rent (totalling less than £1,000) before the end of the tax year.

The new allowances are intended to make HMRC’s (and perhaps taxpayers’) lives easier. They are unlikely to be of much use to sizable businesses, but may have merit for ‘casual’ sources. Although the potential forfeiture of losses may apply only in relatively unusual circumstances, it is surprising that the government has put such a short time limit on the election to circumvent the problem, and it may not be too long before novice traders and landlords get an unwelcome surprise.