New trading allowance unfair on sole traders

The Association of Taxation Technicians (ATT) is highlighting a discrepancy in the new £1,000 allowance for trading income which puts existing sole traders at a disadvantage compared to the employed and those trading in partnership.

From 6 April 2017, a new £1,000 tax free allowance is available for individuals with trading income.¹ 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.² 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.

Yvette Nunn said:

“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 which prevents abuse while also eliminating the current discrimination against sole traders. Our recent evidence to the Finance Bill Committee included a suggested amendment.”³

Notes for editors

1. The legislation for the trading allowance is included at Clause 17 and Schedule 3 of Finance Bill 2017, which is currently passing through Parliament.
2. In the case of an employee or partner their ‘relevant income’ for the purposes of the trading allowance would be confined to that from the micro-business itself. Employment income is not trading income and income from a trade carried on in partnership is specifically excluded from being a relevant trade for the purposes of the trading allowance.
3. The ATT has submitted written evidence to the Finance Bill Committee setting out its proposed amendment and the reason it is needed.  The suggested amendment would, broadly, exclude the receipts of a main trade from the definition of ‘relevant income’ and prevent possible abuse by requiring the qualifying micro-business to be wholly distinct and unrelated to the main trade. All of the written evidence is at the bottom of this page: https://services.parliament.uk/bills/2017-19/finance/documents.html.
4. Trading income is broadly income received from commercial operations where customers are provided with goods or services. It includes the majority of self-employment income.
5. If you are a sole trader, you run your own business as an individual and are self-employed, you can keep all your business’s profits after you have paid tax on them. You are personally responsible for any losses your business makes. You must also follow certain rules on running and naming your business.