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New £1,000 Allowance: Not all good news

by Lee Sharpe : Taxationweb

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The new Allowances that were announced in the former Chancellor’s March 2016 Budget were firmed up in the Finance Bill 2017.

These are ‘real’ allowances, (kind of), and not to be confused with the pseudo-allowances the former Chancellor inflicted on us the year before, which later turned out to be nil-rate bands in disguise. (Nope, "former Chancellor" simply does not get old).

At the moment, Schedule 5 of the 2017 Finance Bill holds the relevant legislation.

The key points are:

  • There is a “trading” allowance and a “property” allowance, each of £1,000
  • The trading allowance also covers miscellaneous income
  • Cannot apply to income from partnerships
  • Each is aimed at relieving the taxpayer of having to report nominal amounts of income (which HMRC would, in turn, find it very cost-ineffective to process and collect the tax thereon)
  • Very much hints of Rent-a-Room, in that:
    • Where gross income receipts are at or below the respective allowance, then both income and expenses are ignored; (so-called “full relief”)
    • Where gross income receipts exceed the respective allowance, then the taxpayer may elect to deduct the allowance from the gross income, but will then have to forego claiming any actual expenses
  • The allowances cannot be applied to income that has already ‘enjoyed’ Rent-a-Room

Here are the parts I really don’t like:

(ITTOIA 2005 s) 783G Full relief: trade profits

(1) This section applies if—

(a) an individual qualifies for full relief for a tax year, and

(b) the individual’s relevant income for the tax year consists of or includes receipts of one or more relevant trades.

(2) The profits or losses of each such trade for the tax year are treated as nil.

There are similar provisions for the property allowance at draft s 783X

Full relief applies if the taxpayer has some trading income in the tax year, but less than the allowance of £1,000. It applies automatically, under draft s 783G, unless there is an application to disapply the allowance in draft s 783M with similar provisions for the property allowance at draft sections 783W and 783Z2 respectively.

This means that, so long as I have a leeetle bit of income, then I automatically ignore any profits or losses that would otherwise arise.

or losses”.

So, if I am at the beginning of my new vocation as a CAD Technician, and I get a little bit of casual income from one or two small jobs in Year 1 but spend £10,000 on a workstation and software, then by default I can kiss goodbye to my losses, unless I remember to elect to disapply the new trading allowance. (I suppose as far as Capital Allowances are concerned, I could make a claim in a later year, but the basic logic holds good… or bad).

Or, if I get a really bad tenant in my single property, who gives me a month’s rent of (say) £800, ruins the property and I then spend £10,000 and the next (say) several months to get the property back into good order, I could again fall foul of the rules that say I should ignore both the income and the expenses when I get full relief, unless I remember to disapply the new property allowance.

Both provisions relating to the election to disapply the full relief must be made within 12 months of 31 January following the tax year in question. Which is not a very long time at all, particularly if I am

(a)    just staring out in business but think I have nothing to report because I haven’t made any profits yet, or

(b)    have been making a little bit of money but some bandit has just trashed my pension (property) and I have more important things to worry about right now, thanks very much - and anyway, I don't have any tax to pay, so what's the problem?

It is perhaps worth pointing out that claims to carry forwards trading loss relief may be made within four years of the end of the relevant tax year, under ITA 2007 s 83 (as an aside, it is astonishing how many sources say that trading losses are carried forwards automatically) subject to TMA 70 s 43(1), while ITA 2007 s 118 applies the carry forwards for property losses automatically.

A few things spring to mind:

  • Taxpayers should be able to claim genuine economic losses with minimal effort. Why it should be necessary to claim to carry forwards trading losses is beyond me. It should happen by default, in the absence of any other claim.
  • Taxpayers should be able to claim genuine economic losses with minimal effort, even when it may prove inconvenient to HMRC to have to process a tax return. There is no good reason that I can think of, as to why the new legislation for these modest allowances should seek also to block relief for losses of any substance. How hard would it be, for instance, to include provision that when expenses exceed receipts, the new allowance(s) will NOT apply automatically?
  • No doubt HMRC will say that they are giving reasonable time to taxpayers to get their affairs in order. If that is the case, then why does the older legislation give taxpayers up to 4 years to claim a trading loss – and give property losses automatically?
  • It's a little bit rich to call it "full relief" when it is in fact anything but. It's also a little bit rich that the Explanatory Notes to the Finance Bill fail to explain that "full relief", in both cases, means forfeiture of relief for any expenses. Funny, that.
  • Why are so many of these tax “simplifications” turning out to be anything but?