Tax professionals concerned about mechanism for new allowance for small businesses

The Budget announcement in March 2016 had linked the new allowance to the ‘sharing economy’, creating uncertainty as to which types of business would qualify. Today’s publications make it is clear that the new allowances will apply to all types of property and trading income of an individual but not to partnership income.

The new allowance will mean that an individual who has income from one or more trading businesses which does not in aggregate exceed £1,000 for a tax year, will have no tax liability on the profits from that business.

Where such annual income does exceed £1,000, the individual will have the option in calculating their taxable profits of either deducting all their actual business expenses (in the usual way) or of deducting the fixed allowance of £1,000 (regardless of their level of actual business expenditure). A separate £1,000 allowance will work in the same way for an individual’s property business income.

Where an individual’s trading (or property) income for the tax year before expenses does not exceed the £1,000 allowance, the draft legislation does not currently require them to notify HMRC that they are making use of the allowance.

The ATT is concerned that this could mean that if the individual’s annual income subsequently exceeds the allowance, they might unintentionally fail to notify HMRC. The ATT suggests that there could possibly be a simple notification process in order for an individual to qualify for the allowance.

Michael Steed, Co-chair of ATT’s Technical Steering Group, said: “We are very pleased that the allowance will be available in relation to all types of trading or property income that an individual may have. This will make it very useful for taxpayers who have a small level of income from a business – such as one which they operate on a part-time basis or as a new start-up. And for those with annual income in excess of the allowance, the option to deduct the fixed amount of £1,000 in calculating their taxable profits could save both time and money.

“We think that it would be sensible to consider making entitlement to the allowance conditional on notification to HMRC that an individual wishes to use it. In that way, the individual would be far less likely to receive an enquiry from HMRC about their income from an apparently undeclared source of income and HMRC could safely disregard information about low levels of income received by someone who had notified their use of the allowance.

“HMRC is properly concerned about closing the tax gap. What we are suggesting is a simple and practical way of helping to reduce the hidden economy. Without it, we think that taxpayers might be confused by the allowance and subsequently (and unintentionally) fail to report taxable income to HMRC. If that happened, this welcome allowance might be abolished or become subject to restrictions. So we see our suggested notification procedure as a way of both ensuring that the allowance is maintained and encouraging compliance.”