Clarification on tax allowance for ‘sharing’ economy income

HMRC has issued a policy paper outlining a tax allowance for individuals with small amounts of income from providing goods, services, property or other assets, which was originally set out in Budget 2016 as a way of facilitating the ‘sharing’ economy

Around 700,000 individuals are estimated to be likely to take up the allowance. Originally the scope was narrower, and focused on property or trading income, but in Autumn Statement 2016 the Chancellor announced that the trading allowance will also apply to certain miscellaneous income from providing assets or services, so that individuals will no longer have to decide if the activity amounts to a trade or not.

This measure introduces two new annual tax allowances for individuals of £1,000 each, one for trading and one for property income. The trading allowance will also apply to certain miscellaneous income from providing assets or services. These new allowances will take effect from the tax year 2017 to 2018.

The aim is to provide simplicity and certainty regarding income tax obligations on small amounts of income from activities such as room rentals or online selling.

Where the allowances cover all of an individual’s relevant income (before expenses) then they will no longer have to declare or pay tax on this income.

Those with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. The trading allowance will also apply for Class 4 National Insurance contribution (NIC) purposes.

The new allowances will not apply to partnership income from carrying on a trade, profession or property business in partnership, and cannot be claimed in addition to relief given under the rent-a-room relief legislation.

For those individuals who choose to report their income and expenses of a trade according to the tax year, the trading allowance will take effect for trading income in the period 6 April 2017 to 5 April 2018. Otherwise, it will take effect for periods ending on either, an accounting date or on such other date, on or after 6 April 2017 that forms the basis period for the 2017 to 2018 tax year.

This will take effect for property income and certain miscellaneous income arising from 6 April 2017.

The new measure is expected to result in £15m of tax lost to the Exchequer in 2017-18, rising to £235m in 2018-19 and then totalling around £200m lost for each of the next two tax years.

The Association of Taxation Technicians (ATT) said the clarification over the types of business which would qualify for the allowances was welcome, but warned there was still a risk that taxpayers may be confused and unintentionally fail to declare income if the level increased.

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. 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: ‘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.’

Policy paper Income Tax: new tax allowance for property and trading income is here.

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