New trading allowances 'unfair to sole traders'
A discrepancy in the new £1,000 allowance for trading income puts existing sole traders at a disadvantage, a tax body is complaining.
The Association of Taxation Technicians points out that a key feature of the new allowance – effective since April – is that all the income from a person’s ‘relevant trades’ are combined.
“This can lead to difficulties where an established sole trader starts up a smaller second trade,” said the association, exampling a trades person who starts tutoring students in sport.
“‘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.”
The ATT’s Yvette Nunn said preventing the trading allowance from being abused by fragmenting the income of a single business in order to claim the £1,000 relief was important.
“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.”
She added that while sole traders who also have another micro-business on the side are penalised, someone with the same micro-business but whose main source of income is either from employment or a partnership is unaffected by the discrepancy.
Under the current framework, 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 (known 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 (known as ‘partial relief’).