From April 2017 taxpayers will be able to take advantage of two new allowances, aimed at reducing the burden (of both tax and administration) for those making small amounts of money. HM Revenue & Customs (HMRC) refer to this group of taxpayers as ‘micro-entrepreneurs’.
The allowances will allow an individual to receive income of up to £1,000 from trade plus a further £1,000 from property without having to declare this income to HMRC. Those with income over these amounts will be able to elect either to deduct the £1,000 allowance or the actual costs they have incurred.
The Government hopes that by creating these new allowances they will be removing as many as 700,000 people from the Self Assessment system and thereby make savings of their own in dealing with the tax returns of a large number of people, who would account for a very small amount of the tax HMRC collects.
The danger is that this could lead to a casual approach to record keeping among low volume traders. If a trader whose income starts out below the reporting threshold no longer has to keep records of their income how are they to know when it reaches £1,000 and has to be reported?
There is also potential for those targeted by the measures to be confused by how they will interact with other income, for example the trading allowance cannot be applied to partnership income, but what if a partner bills some of their work in their own name?
Certain Capital Gains Tax reliefs (such as rollover, holdover and Entrepreneurs’ Relief) can rely on an asset having been used for trading, but how to demonstrate this if you have never reached a level of income that required reporting to HMRC?
As is often the case new measures aimed at simplification leave us with a number of unanswered questions and potential pitfalls. If you would like to speak to one of our specialist personal tax team regarding how the changes may affect you please call me on 01603 624181 or email firstname.lastname@example.org