In a campaign to make more people register their small businesses as sole traders, HMRC have been trying to clamp down on people running small online businesses in their spare time. They have launched a number of initiatives to make people trading online register as businesses even if they are only trading on a small scale.
HMRC have also been asking for more and more powers to track small online businesses. They have been asking for direct access to data from sites like Etsy, eBay, AirBnB and Amazon in order to work out who is trading online and whether they are registered as a business. Most people running an online business in their spare time are happy to pay tax on their profits. But some have felt it is unfair that they are treated in the same way, and expected to follow the same rules, as larger full-time business operations.
Now the government has announced a new ‘trading allowance’ for individuals so that people can operate small online businesses without needing to pay tax or register. They have said that:
The rapid growth of the digital and sharing economy means it is becoming easier for more and more people to become ‘micro-entrepreneurs’. However, for those making only small amounts of income from trading or property, the current tax rules can seem daunting or complex.
Starting from April 2017 individuals running small online businesses will have a £1,000 trading allowance. The government have said that:
Individuals with property income or trading income below the level of allowance will no longer need to declare or pay tax on that income. Those with relevant incomes above £1,000 can benefit by simply deducting the allowance instead of calculating their exact expenses.
This initiative, alongside simpler expenses for sole traders, could be a real boost to small online businesses such as AirBnB hosts and crafters. It could also be a real help for entrepreneurs looking to start a full-time business. Many entrepreneurs choose to test their startup idea out by doing a small amount of trading alongside their full-time job. This can be a great way to test ideas about how much you will be able to charge, how easy it is to attract customers and how big your profit margin is likely to be. The new allowance will let budding entrepreneurs do these initial test trades without the need to register their business or worry about paying the tax on them.
Whilst a £1,000 allowance will not go far for many businesses it will reduce overheads for occasional traders and make it easier for people to get started with their online business. Once people get over the £1,000 allowance (and until it is introduced in April 2017) people will still need to register their business. For most small online traders this will mean registering as a sole trader.
For businesses with larger turnovers, or where multiple people are involved, setting up setting up a limited company can be a better choice.