£1000 trading allowance & self employed partnership confusion

itsmeagain

I'm posting this on behalf of a family member who has written it for me!

Hello, I am confused about the trading allowance rules and would like to know where I’m going wrong with my understanding please?

I have a simple business partnership with a family member. This is my main source of income. 

I’m considering some casual self-employed work ( GCSE tutoring) where I expect to earn around £1500. (completely unrelated to the partnership)

I am confused as to whether I can use the £1000 trading allowance on my casual work due to the rules on the HMRC website.

https://www.gov.uk/guidance/tax-free-allowances-on-property-and-trading-income

On the above link, when you click: 'When you cannot use the allowances' it says:

You cannot use the allowances in a tax year, if you have any trade or property income from:

 “a partnership where you or someone connected to you are partners”

I don’t understand how it’s even possible to be in a partnership and not be connected to the partner?

The fact it says ‘any income from’ makes me think I’m not allowed to use this. Do does this mean I’m not able to use the allowance even though my casual income is absolutely nothing to do with my partnership?

Googling away I’ve found this implying that the trading allowance is allowed with partnership.

https://www.att.org.uk/technical/news/new-trading-allowance-unfair-sole-traders

 “As the rules currently stand, an individual with both a sole-trade and a micro-business is unable to benefit from the trading allowance. By contrast, an individual with an identical micro-business but whose main source of income is either from employment or income from a partnership is entitled to relief on their micro-business income.2 This is the case regardless of the amount of money an employee or partner derives from their main source of income.”

Anyone know where i'm going wrong and why things appear to contradict please?

uknick

The rules say, if you trade with your partnership you can't claim the allowance.

In their case, assuming the tutoring is an arm's length arrangement, I can't see why they couldn't claim the allowance.  I assume, again, they'll be showing the income as a separate business in their self assessment return. 

itsmeagain

uknick said:

The rules say, if you trade with your partnership you can't claim the allowance.

In their case, assuming the tutoring is an arm's length arrangement, I can't see why they couldn't claim the allowance.  I assume, again, they'll be showing the income as a separate business in their self assessment return. 

Thanks. Can you point out where you found the words "trade with your partnership" please?
Are you thinking that it means that you can't use the small trade £1000 allowance if that small trade is trading with the main trade and that main trade is in a partnership? 

uknick

They're my words paraphrasing HMRC, but here's the full link (which I think you've already seen);

Tax-free allowances on property and trading income - GOV.UK (www.gov.uk)

When you cannot use the allowances

You cannot use the allowances in a tax year, if you have any trade or property income from:

• a company you or someone connected to you owns or controls
• a partnership where you or someone connected to you are partners
• your employer or the employer of your spouse or civil partner

You cannot use the property allowance if you:

• claim the tax reducer for finance costs such as mortgage interest for a residential property
• deduct expenses from income from letting a room in your own home instead of using the Rent a Room Scheme

I think it's pretty clear regarding partnerships.  It makes sense to me because without that clause, one could manipulate the use of the allowance to save £200, £400 or £450 in tax (depending on your marginal tax rate).  I suppose it's an extension of the rules which cover non-arms length deals for tax purposes.

itsmeagain

uknick said:

They're my words paraphrasing HMRC, but here's the full link (which I think you've already seen);

Tax-free allowances on property and trading income - GOV.UK (www.gov.uk)

When you cannot use the allowances

You cannot use the allowances in a tax year, if you have any trade or property income from:

• a company you or someone connected to you owns or controls
• a partnership where you or someone connected to you are partners
• your employer or the employer of your spouse or civil partner

You cannot use the property allowance if you:

• claim the tax reducer for finance costs such as mortgage interest for a residential property
• deduct expenses from income from letting a room in your own home instead of using the Rent a Room Scheme

I think it's pretty clear regarding partnerships.  It makes sense to me because without that clause, one could manipulate the use of the allowance to save £200, £400 or £450 in tax (depending on your marginal tax rate).  I suppose it's an extension of the rules which cover non-arms length deals for tax purposes.

I've seen the rules thanks. That's the same link as my OP.

I'm not following your logic on the ability to manipulate with a partnership though. Surely whether you are 'sole trader self employed' or 'partnership self employed', the ability to manipulate and effectively trade with oneself is still possible? So any allowance by trading with oneself and getting the £1k allowance shouldn't be permitted (partnership or not)?

uknick

I'm not sure why you're still pursuing this.  Your friend can use the allowance in the circumstances you originally quoted, an arm's length business contract.

With regard to my example, I was trying to make sense of the HMRC rules without any knowledge of the background to the reasoning for the rules.  In hindsight something I shouldn't have done. 

   

itsmeagain

uknick said:

I'm not sure why you're still pursuing this.  Your friend can use the allowance in the circumstances you originally quoted, an arm's length business contract.
  

The reason she's pursuing this is optimise her finances, inc payback of student loan (or not)!

There appears to be online contradiction as to whether the trading allowance is allowed if you have a partnership.

Then there's the question of whether you would be able to claim business expenses on you main business if you choose to use £1000 trading allowance instead?

However, the partnership already has the expenses applied prior to filling in the self employed tax return, so no expenses show on the self employed return when in a partnership.

uknick

I meant, why is she pursuing whether, as a sole trader in her position, she can claim it.  I think she can as she's trading as herself and not with, or for, the partnership.  I see no contradiction in the rules.

In addition, I setup a dummy situation in Taxfiler for a person sole trading and in a partnership and it permits the trading allowance against the sole trader business.  If you're still unsure I suggest you call HMRC.  If they do give a different answer to mine let us know.

Taxfiler treats the two sources of income as separate, just asking for the share of the partnership profit due to the person completing their personal tax return.

With regard to your second question about the main business it is either/or for the allowance/actual expenses.  If that's what you're asking.  Again, this is pretty clear.

Your final point I think I covered above, you only enter the profit element for the partnership on your personal tax return.  I assume they've been doing this since the partnership started trading.