Last month I wrote about tax returns giving examples of who might need to complete a tax return. This month I’m going to talk about when you might not need to complete a tax return.

HMRC have been trying to encourage small traders to register as businesses and have requested powers to help them enforce this. They have been particularly interested in people running businesses on web services such as Airbnb, Etsy and eBay.

My friend Amanda has a hobby of creating lino prints and has an enterprise called Pandablue Creations to sell them to the public.

She asked me whether she would need to complete a tax return for her business. She has only been doing it around a year or so and her turnover is currently a few hundred pounds.

In the 2016 trading and property allowances of £1,000 were introduced. If you earn less than £1,000 from either property rental or small trading, then you do not need to pay tax on that income. In fact, you don’t even need to declare it to HMRC and so if you have no other income that means you need to complete a tax return, you will not need to do so. Therefore Amanda does not need to complete a tax return for Pandablue Creations.

If an individual earns over £1,000 from a small trading businesses, then you can elect to only pay tax on the income over the allowance. For example, if you earned £1,100 in a year you could deduct the £1,000 allowance and only pay tax on the £100 that remained. One bonus to this is that you do not need to calculate your exact expenses which may potentially be a time consuming process.

There may be instances when you opt not to use this allowance. When she started out, my friend was creating her art primarily for her own enjoyment and she was charging people what she thought was a reasonable price and would not always cover her costs. She was therefore not making much of a profit.

Let’s assume that next year she will make £2,000 worth of sales. She could take the £1,000 allowance and pay tax on this £1,000. The alternative is that she could declare her actual costs. If she had spent £1,800 on materials as well as other allowable expenses such as travel to trade fairs and postage, she has only made £200 of profit.  She could therefore decide not to take the allowance but instead to declare £1,800 of costs and pay tax on the lower amount of £200 rather than on £1,000.

There may also be occasions for deciding to do a tax return even if your income is under £1,000. This is likely to be if you have just started out your business and you have actually made a loss.  In the first year, you may have incurred outlay for machinery, software, a franchise or something similar which has resulted in your costs being higher than the income you have made. You can declare this loss that you have made which will then offset against other tax liabilities, such as profit that you might make in your second year of trading.

If you have any questions at all, please do not hesitate to get in touch with Anderson Accounts as we will be happy to help.