The £1,000 allowances for property and trading income were introduced from 2017/18 onwards. The trading income allowance also covers miscellaneous income from the provision of assets or services. This guidance note considers the trading allowance, although commentary is included in relation to the property allowance, if relevant. For full details of the property allowance, see the Property allowance guidance note.
The trading allowance works in a similar way to rent-a-room relief, in that the first £1,000 of gross trading income is exempt from income tax. If the income exceeds £1,000, the taxpayer has a choice of:
- deducting the £1,000 trading allowance from his gross income and being taxable on the excess, or
- deducting allowable expenses from gross trading income in the normal way
The trading allowance and property allowance are mutually exclusive. Therefore, it is possible for the individual to have £1,000 of gross trading receipts (which must include miscellaneous receipts) and £1,000 of gross property receipts, and the entire £2,000 would be exempt from income tax.
The trading allowance is of most benefit to micro-entrepreneurs, such as those trading via e-marketplaces to provide a second income; however, remember that those selling their old possessions are unlikely to be trading, see the Application of the badges of trade guidance note.
Although not explicitly branded as a making tax digital measure, the trading allowance removes reporting obligations from those with low levels of second income, which is a welcome simplification. It also means that those who are accidentally non-compliant may no longer face penalties. It is possible that the outcome of the e-marketplaces campaign in 2012, which reportedly led to enquiries into traders who made as little as £100 in profit, played a part in the thinking behind these trading and property allowances.
The trading allowance is set at £1,000 and can only be amended by secondary legislation, meaning it is unlikely that the level of the allowance will be uprated annually. As such, the value of the allowance is likely to be eroded over time by inflation. ITTOIA 2005, s 783AD