HMRC notices

Interestingly, there is no statutory definition of ‘trade’. The only statutory reference to the term states that ‘trade’ includes a ‘venture in the nature of trade’. This absence of statutory clarity has left definition – is a certain activity a trade or not – to the courts, and they have set some established guidance. 

This effectively suggests that the term ‘trade’ can be taken to refer to operations of a commercial kind, by which the trader provides to customers for reward with some kind of goods or services. 

The courts have also found the so-called ‘badges of trade’ tests to be helpful indicators of trading in some cases. The tests, whilst not conclusive, are used to help determine whether an activity is an economic / business activity or merely a money-making side line to a hobby. 

It is clear from the significant amount of case law on this subject that a decision on whether there is indeed a trade is often not black and white. Even if HMRC consider that the activities in question are a trade, taxpayers can make up to £1,000 per year from their ‘trade’ using the trading allowance that was introduced in April 2017. 

Most of our readers will be aware of the £1,000 property income allowance that came into effect on 6 April 2017. This allowance applies to income from property (including foreign property). If your annual gross property income is £1,000 or less, the amount is exempt from tax and doesn’t need to be reported on your tax return. In practice, the use of this allowance is limited, but could work, for example, if you rented your parking space for a small amount of extra income.

HMRC also publishes a list of income streams that are excluded from a UK property business. The list includes fishing concerns, hotels and guest houses, tied premises, caravan sites, lodgers and tenants in your own home, extra services to tenants and letting surplus trade accommodation. In most cases the income from these activities will be taxed as income of a trade and not as property income.

There are also certain receipts which can arise out of the use of land and which are specifically excluded by statute from a rental business. These include yearly interest, income from the occupation of woodlands managed on a commercial basis, income from mines and quarries and income from farming and market gardening.

There are special rules for the taxation of post-cessation receipts, those received after a trade has ceased. The legislation clearly states that the person who receives or is entitled to the post-cessation receipt is the person who is subject to Income Tax or Corporation Tax on the income. This does not have to be the same person who carried on the original trade.

The only test to consider when deciding whether these rules apply is if the income is a post-cessation receipt. If it is, then unless the territorial exclusion applies, the income is taxable on the recipient.

HMRC manuals explain how case law has determined when and if there is another person with a claim to the income. Effectively, the conclusions drawn mean that it is the person who receives the money who is taxable even if others can also lay claim to the funds involved.

Consideration must be given to the specific facts of each case to decide who is liable to tax on the post-cessation receipt.

If you are self-employed as a sole trader or as a partner in a business partnership, then you must keep suitable business records as well as separate personal records of your income.

For tax purposes, the business records must be held for at least 5 years after the 31 January submission deadline for the relevant tax year. For example, for the 2017-18 tax year, when online filing was due by 31 January 2019, you must keep your records until at least the end of January 2024. In certain situations, such as when a return is submitted late, the records must be held for longer.

If you are self-employed you should keep a record of:

• all sales and income
• all business expenses
• VAT records if you’re registered for VAT
• PAYE records if you employ people
• records about your personal income

You don't need to keep the vast majority of your records in their original form. If you prefer, you can keep a copy of most of them in an alternative format, as long as they can be recovered in a readable and uncorrupted format. For example, a scanned PDF document.

If records are no longer available for any reason you must try and recreate them letting HMRC know if the figures are estimated or provisional. There are penalties for failing to keep proper records or for keeping inaccurate records.

The cash basis scheme helps many sole traders and other unincorporated businesses benefit from a simpler way of managing their financial affairs. The scheme is not open to limited companies and limited liability partnerships. The scheme allows qualifying businesses to use the cash basis when recording income and expenditure.

You must have a turnover of £150,000 or less to join the scheme and you can continue using the scheme until your turnover reaches £300,000. However, some small businesses are more suited to using the case basis than others.

If you are using the cash basis scheme, then capital expenditure is usually treated as an allowable business expense with the following exceptions:

• The acquisition or disposal of a business or part of a business
• Education or training
• The provision, alteration or disposal of certain non-depreciating assets, assets not acquired or created for continuing use in the trade, land, non-qualifying intangible assets and certain financial assets.

In addition, if you buy a car you can claim the purchase as a Capital Allowance (but only if you’re not using simplified expenses to work out your business expenses for that vehicle).

A capital sum received by an individual in respect of the sale or relinquishment of income to be derived from his or her personal activities, can sometimes be treated as earned income and chargeable to Income Tax. If this is the case, the amount charged to Income Tax is not also charged to Capital Gains Tax.

The following conditions must all be present before the sale of income legislation can operate:

1. The individual must be carrying on an occupation wholly or partly in the UK.


2. Transactions or arrangements must have been affected putting some other person in a position to exploit the earnings capacity of that individual.


3. A ‘capital amount’ must have been obtained by the individual or for some other person, as part of, or in connection with, or in consequence of the transactions or arrangements.


4. The main object, or one of the main objects, of the transactions or arrangements must be the avoidance or reduction of liability to Income Tax.
   

The ‘badges of trade’ tests, whilst not conclusive, are used by HMRC to help determine whether an activity is a proper economic / business activity or merely a money-making side line to a hobby. Careful consideration needs to be given when deciding if a hobby has become a taxable activity.

It is clear from the significant amount of case law on this subject that a decision on whether there is a business activity is often not clear. In fact, both HMRC and the courts are of the opinion that it is important to look at the whole picture rather than looking at each ‘badge’ in isolation or even relying too heavily on the badges of trade at all. In some cases, taxpayers will seek to argue that their hobby is actually a trade in order to benefit from certain tax reliefs, usually related to utilising a trading loss.

HMRC will consider the following nine badges of trade as part of their overall investigation as to whether a hobby is actually a trade:

• Profit-seeking motive


• The number of transactions


• The nature of the asset


• Existence of similar trading transactions or interests


• Changes to the asset


• The way the sale was carried out


• The source of finance


• Interval of time between purchase and sale


• Method of acquisition

The introduction of the trading allowance in April 2017 allows taxpayers to make small amounts of money from their hobby. Even if HMRC consider that the activities in question are a trade, taxpayers can make up to £1,000 per year from their hobby tax-free.

According to HMRC’s published guidance there are special rules for the taxation of post-cessation receipts and expenses. These provisions apply to professions, vocations and trades.

Tax relief may be available for post-cessation expenses of a trade, although such expenses still have to satisfy the wholly and exclusively test and be revenue in nature to qualify for relief. In order to be an allowable post-cessation expense, the trade must have ceased, and the expense would, in the normal course of events, have been deductible in calculating trading profits. Post-cessation expenses must be set against post-cessation receipts arising in the same period, before any other method of relief can be considered.

There are a number of different ways in which post-cessation expenses can be relieved. Relief will depend on the person incurring the expenditure and the type of expenditure incurred.

An expense specifically relating to the cessation itself is not an allowable expense.

The Help to Save scheme for people on low incomes was officially launched in September 2018 and since then over 80,000 people have signed up. The scheme allows those in work entitled to Working Tax Credit and in receipt of Working Tax Credits or Child Tax Credits to save up to £50 a month for two years and receive a 50% government bonus.

The scheme is also open to UK residents who are claiming Universal Credit and have a household or individual income of at least £542.88 for their last monthly assessment period. Payments from Universal Credit are not considered to be part of household income.

Payments under the scheme can be made by standing order on a weekly, fortnightly, or monthly basis and one-off payments by debit card are also possible. Account holders will then be able to continue saving under the scheme for a further 2 years and receive another bonus. This could see those on low incomes receive a bonus of up to £1,200 on maximum savings of £2,400 for 4 years from the date the account is opened. After the 4 years the Help to Save account will be closed and savers will not be able to reopen it or open another Help to Save account. The account balances are expected to be rolled over into successor accounts.

There are no limits on how the savings can be spent but it is advised that the money will be saved for urgent costs. Money paid into the account can be withdrawn at any time, but this could affect the size of the bonus payment. HMRC has also launched a new tool in the HMRC app that lets savers set their own savings goals and personal reminders, to keep on track and maximise bonuses using the scheme.