Small businesses that have less than 10 employees are often described as ‘micro-businesses’, and in 2017 they represented 19 of every 20 businesses in the UK.
By their nature, micro-businesses include start-ups and part-time enterprises, such as Airbnb letting, E-bay trading, tutoring, equipment hire or gardening, and from April 2017 the government has given a little boost to those micro-entrepreneurs by providing two new £1,000 tax free allowances for trading and property businesses. If you have both qualifying trading and property businesses then separate £1,000 trading and property allowances can be claimed.
The measures have been introduced as part of HMRC’s tax simplification project, and for those with gross relevant income of £1,000 or less, there may be (with some exceptions) no tax to pay and no requirement to file a tax return.
In each tax year you have a choice whether to use the allowance and claim ‘full relief’ automatically where gross business receipts are up to and not exceeding £1,000, or to make an election and disclaim the relief. With the latter, the normal business income principles would be used to calculate the profit or loss. The election could be beneficial where the business is in a loss position and tax relief can be claimed on the loss.
‘Partial relief’ can be claimed where gross receipts are greater than £1,000. In these circumstances, you again have a choice. You can elect to use the tax free allowances instead of deducting expenses, or, calculate the profit or loss for the year under normal business principles. If you claim partial relief then no other expenses can be deducted. Therefore, in scenarios where business expenses are less than £1,000, the partial relief option would result in lower taxable profits.
In both cases of full and partial relief, the £1,000 allowances cannot create a loss.
The ‘trading income allowance’ also covers miscellaneous income from the provision of assets or services. For example, a higher rate tax payer works full time and also receives annual fees of £1,000 for exam marking for one sitting per year. Previously, this amount should have been reported on a tax return and income tax of £400 paid. Now, under the new allowance you no longer need to report this income on a tax return and the amount is free from income tax.
You can’t use the allowances if you have any trade or property income from connected companies or connected partnerships. In addition, residential property businesses with deductions for loan finance are excluded from the relief.
Furthermore, income from lodgers who do not use the ‘rent a room relief’ scheme (though this is a generous relief, currently at £7,500) is also excluded from the relief. Following the call for evidence on ‘rent a room relief’ by the government in December 2017 there is speculation that withdrawal of this generous relief is being considered in response to increasing popularity of letting rooms through websites such as Airbnb. It is possible that the ‘property income allowance’ may become the replacement relief for income from lodgings in due course.