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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.