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Introduction

• This session covers property and trading income assessment for tax purposes.
• The session highlights distinctions and similarities between property and trading income.

Basis of Assessment

• Overview:
  • The assessment of tax is crucial in both areas.
  • Focuses on cash basis versus accrual basis accounting.
• Cash Basis:
  • Revenue is accounted for when cash is received, not when sales are made.
  • Expenses are accounted for when they are paid, not when invoiced.
• Accrual Basis:
  • Adjustment of revenue and expenses based on when they are incurred, as studied in previous classes (e.g., IFA).
• Cash Basis Eligibility for Property Income:
  • Available for unincorporated property businesses with gross receipts <= £150,000 a year.
  • Assessment period is from April 6, 2024, to April 5, 2025.
  • Refer to page 27 in the textbook for detailed examples.
• Trading Income Treatment:
  • Default method switched to cash basis for unincorporated businesses.
  • Previously, a choice could be made if income was less than £150,000, now electing out is required if not using cash basis.
  • Companies are not affected; this pertains only to unincorporated entities.
  • Trading income is also subject to end-of-year assessments, discussed further in class (Example 6.1 on page 38 of the textbook).

Trading and Property Allowances

• General Understanding:
  • HMRC recognizes small sales (e.g., eBay) may not need to be reported.
• Trading Allowance:
  • If gross receipts from trading are £1,000 or less, exempt from reporting.
• Property Income Allowance:
  • If gross receipts from property are £1,000 or less, exempt from reporting.
• Choosing the Reporting Method:
  • Gross receipts over £1,000 allow for two approaches:
  1. Tax the excess above £1,000 (i.e., income - £1,000).
  2. Report all allowable expenses for accurate net income.
• Example Scenario:
  • Selling a parking space for £1,200 - choose the method yielding less taxable income.

Worked Example: Rachel's Trading Income

• Rachel's Situation:
  • Gross trading income from eBay: £1,399, with costs of £399.
• Application of Reporting Methods:
  • Excess Method:
  • £1,399 - £1,000 = £399 taxable.
  • Normal Method:
  • £1,399 - £399 = £1,000 taxable.
  • Opt for the method resulting in £399 taxable income.
• General Rule of Thumb for Reporting:
  • If gross receipts exceed £1,000 - use:
  1. Normal method if allowable expenses > £1,000.
  2. Excess option if allowable expenses < £1,000.

Badges of Trade

• Purpose:
  • To determine whether one is trading and to distinguish between trading and non-trading income.
• Legal Framework:
  • Defined by court interpretations rather than strict rules.
• Six Badges to Consider:
  1. Subject Matter of Transaction:
  • Nature of what is sold can indicate trading (e.g., Rutledge vs. Inland Revenue with toilet rolls).
  1. Ownership and Length of Time Held:
  • Longer ownership often suggests non-trading intentions.
  1. Frequency of Transactions:
  • More frequent activities suggest trading (e.g., Pickford case).
  1. Supplementary Work:
  • Engaging in additional work to enhance items indicates trading intent (e.g., car manufacturers).
  1. Reason for Sale:
  • If sale serves an urgent need, it's possibly not trading compared to routine selling for profit.
  1. Motive:
  • The ultimate aim of profit generation is key for determining trading status (e.g., Wisdom v. Chamberlain).

Conclusion

• Review badges of trade in detail on page 36 of the textbook.
• Anticipate more discussion in class regarding technical applications.