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Trading income priority rules

There is specific tax legislation that seeks to determine which charge takes priority where two different charges could potentially apply to the same income. These rules are known as the 'priority rules'.

HMRC manuals state that for Income Tax purposes, savings and investment income, and income otherwise within one of the charges on miscellaneous income, which also falls to be treated as a trade receipt is dealt with under the trading income rules. For Corporation Tax purposes, distributions from unauthorised unit trusts and income from the sale of foreign dividend coupons, which are also trade receipts, are dealt with under the trading income rules.

There are a number of exceptions to these rules. For example, a receipt or other credit item which would otherwise be treated both as a trade receipt and as a receipt of a UK property business is dealt with under the property income provisions.

The Income Tax priority rules must be considered together with other rules of law about the scope of particular provisions or the order of priority to be given to them. For example, there are particular rules which expressly require certain activities to be treated as a trade.

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A reminder of the ‘badges of trade’

The 'badges of trade' tests, whilst not conclusive, are used by HMRC to help determine whether an activity is a proper economic / business activity or merely a money-making side-line to a hobby. Careful consideration needs to be given to deciding whether a hobby has become a taxable activity.

Both HMRC and the courts are clear that it is important to look at the whole picture rather than looking at each 'badge' in isolation when deciding.

HMRC will consider the following nine badges of trade as part of their overall investigation as to whether a hobby is actually a trade:

  • Profit-seeking motive
  • The number of transactions
  • The nature of the asset
  • Existence of similar trading transactions or interests
  • Changes to the asset
  • The way the sale was carried out
  • The source of finance
  • Interval of time between purchase and sale
  • Method of acquisition

The introduction of the trading allowance in April 2017 allows taxpayers to make small amounts of money from their hobby. Even if HMRC consider that the activities in question are a trade, taxpayers can make up to £1,000 per year from their hobby using the trading allowance.

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When are scholarships taxable as benefits?

The holder of a scholarship is exempt from a charge to Income Tax on income from a scholarship when receiving full-time education at a university, college, school or other educational establishment.

Please note, that the provision of a scholarship to a member of the family or household (usually a son or daughter) of a director or employee by reason of the employment of that director or employee, will give rise to a taxable benefit. Fortuitous awards of scholarships are the only exception to this rule.

We have noted below the principal conditions and one exclusion, which together explain the basic position when a scholarship can be exempt from Income Tax.

Conditions

  1. The employer must require that the employee be enrolled at the educational establishment for at least one academic year and must attend the course for at least twenty weeks in that academic year. Or if the course is longer, the employee must attend for at least twenty weeks on average, in an academic year over the period of the course.
  2. The educational establishment must be a recognised university, technical college, or similar educational establishment and which is open to members of the public generally and offers more than one course of practical or academic instruction. For example, an employer’s internal training school or one run by an employer’s trade organisation will not satisfy the educational establishment condition for this relief.
  3. The payments, including lodging, subsistence and travelling allowances but excluding any tuition fees payable by the employee to the university etc, should not exceed £15,480.

Exclusion

  • This exemption does not apply to payments of earnings made for any periods spent working for the employer during vacations or otherwise. These payments would be taxable as earnings in the normal way.
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Taxation of miscellaneous income

There are special rules, known as the miscellaneous income sweep-up provisions, that seek to charge tax on certain income. This unusual provision, which is broad in scope, catches certain income that would not otherwise be charged under specific provisions to Income Tax or Corporation Tax.

Amongst the types of income covered are:

  • payment for a service where it was agreed that the service would be provided for reward;
  • income received under an agreement or arrangement and which is not otherwise taxable;
  • payment for the use of money that is not interest or does not fall within the loan relationships legislation.

HMRC is keen to stress that although the provisions are sweep-up provisions, this does not make all miscellaneous income taxable.

Specifically, the provisions do not tax:

  • capital accretions on isolated transactions in assets;
  • voluntary receipts such as gifts and gratuities;
  • gambling winnings from wagers and bets;
  • certain post-cessation receipts.
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Keeping records if self-employed

If you are self-employed as a sole trader or as a partner in a business partnership, then you must keep suitable business records as well as separate personal records of your income.

For tax purposes, the business records must be held for at least 5 years from the 31 January submission deadline for the relevant tax year. For example, for the 2017-18 tax year where online filing was due by 31 January 2019 you must keep your records until at least the end of January 2024. In certain situations, such as when a return is submitted late, the records must be held for longer.

If you are self-employed you should also keep a record of:

  • all sales and income
  • all business expenses
  • VAT records if you’re registered for VAT
  • PAYE records if you employ people
  • records about your personal income

You don't need to keep the vast majority of your records in their original form. If you prefer, you can keep a copy of most of them in an alternative format, as long as they can be recovered in a readable and uncorrupted format. For example, a scanned PDF document.

If your records are no longer available for any reason, you must try and recreate them letting HMRC know if the figures are estimated or provisional. There are penalties for failing to keep proper records or for keeping inaccurate records.

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Applying to register a trade mark

The process of registering a trade mark can be very complex, and careful due diligence must be undertaken to decide what exactly is being trade marked and in which jurisdictions. It is possible to make a UK only trade mark application or a European Union wide application. The process for applying in other jurisdictions is based on local rules and would need to be considered on a case by case basis.

We consider the steps mentioned below to be taken in making an application solely in the UK. An application can be made online with the Intellectual Property Office (IPO), the official UK government body responsible for Intellectual Property (IP) rights including patents, designs, trade marks and copyright.

In order to apply you need:

  • details of what you want to register, for example a word, illustration or slogan
  • the trade mark classes you want to register in

There is a special service available, known as 'Right Start' service that will check your application meets the rules for registration. If you use this service, you pay £100 initially plus another £100 if you complete the application, plus £50 for each additional class applied for. You will then get a report telling you if your application meets the rules. To proceed, you must then pay the full fee within 14 days of getting your report. You can choose to continue your application even if it does not meet the rules for registration. There is also a standard online and paper application process available at slightly different fee rates.

The trade mark registration process takes about four months and includes approximately 20 working days for the IPO to consider whether your trade mark is suitable for registration, as well as the publication of the proposed trade mark in the IPO’s Trade Mark Journal – so that third parties have an opportunity to oppose your application. If there is no opposition, the trade mark will be registered.

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Who is eligible to use the cash basis?

The cash basis scheme helps many sole traders and other unincorporated businesses benefit from a simpler way of managing their financial affairs. The scheme is not open to limited companies and limited liability partnerships. The scheme allows qualifying businesses to use the cash basis when recording income and expenditure. However, some smaller businesses are more suited to using the case basis than others.

The scheme is most suitable for straight forward businesses especially those that provide services. Firms must have a turnover of £150,000 or less to join the scheme and they can continue using the scheme until their turnover reaches £300,000.

If clients wish to use the cash basis, they must also meet the following conditions:

  1. The total cash basis receipts for all trades carried on in a tax year must not exceed the amounts stated above.
  2. Where a business is either an individual who controls a partnership or a member of a partnership controlled by an individual, the total cash basis receipts for all trades carried on in a tax year must not exceed the amounts stated above where the individual or partnership uses the cash basis for all those trades.
  3. Clients are not specifically excluded from using the cash basis. Excluded categories include Lloyd’s underwriters, partnerships with one or more corporate partners and businesses that have claimed a research and development allowance.

Clients considering the use of the cash scheme, and who elect to use the cash basis for a tax year, must use the cash basis for each trade they carry on during that tax year.

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Tax-Free childcare in the school holidays

As the school holidays fast approach, many parents face having to organise extra school holiday childcare over the summer months.

HMRC is reminding parents that the Tax-Free Childcare (TFC) scheme can help if you have children aged 0-11 years old. The TFC scheme helps support working families with their childcare costs and can be used to pay for regulated holiday clubs during the school holidays. More than 68,000 registered childcare providers including school, football, art and tennis clubs have signed up across the UK. Parents can pay into their account regularly and save up their TFC allowance to use during school holidays.

The TFC scheme provides for a government top-up on parental contributions. For every £8 contributed by parents an additional £2 top up payment will be funded by the Government up to a maximum total of £10,000 per child per year. This will give parents an annual savings of up to £2,000 per child (and up to £4,000 for disabled children until the age of 17) in childcare costs.

The TFC scheme is open to all qualifying parents including the self-employed and those on a minimum wage. The scheme is also available to parents on paid sick leave as well as those on paid and unpaid statutory maternity, paternity and adoption leave. In order to be eligible to use the scheme, parents will have to be in work at least 16 hours per week and earn at least the National Minimum Wage or Living Wage. If either parent earns more than £100,000, both parents are unable to use the scheme.

Chief Secretary to the Treasury, Liz Truss, said:

'We understand making arrangements for summer childcare at this time of year is important and can be a stressful time for parents. Tax-Free Childcare makes things easier, putting more money in the pockets of parents and supporting as many families as possible to secure high-quality, affordable childcare.'

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How ISAs work

An ISA is a tax exempt savings account available to UK residents. Whilst the amount invested in an ISA does not benefit from tax relief the income and gains are free from most taxes including Income Tax and Capital Gains Tax. Eligible holdings include cash ISAs, stocks and shares ISAs and innovative finance (including peer-to-peer loans) ISAs.

There is no minimum period for which an ISA must be held, and you can make withdrawals at any time without the loss of tax relief. The maximum amount that can be invested in an ISA in the current tax year is £20,000. The £20,000 limit can be used in one account or multiple accounts.

It is also possible for qualifying taxpayers to invest up to £4,000 of the £20,000 ISA limit in a Lifetime ISA. The Lifetime ISA is available to those aged between 18 and 40 to save for a new home or for their retirement. Under the scheme, the government provides a 25% bonus on yearly savings of up to £4,000 and once you start saving before you are 40, you can continue using the scheme until you turn 50. If you are approaching the age limit cut-off it is well worth opening a Lifetime ISA as you can continue saving until the day before you turn 50. The money invested in a Lifetime ISA can be used for purposes other than saving for a new home or retirement, but will be subject to a 25% withdrawal charge.

There are also Junior ISAs available for under 18’s which were introduced to encourage children to save money. The returns from Junior ISAs are also tax-free and are usually locked until the child reaches 18. The annual subscription limit for Junior ISAs is currently £4,368.

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Cashback schemes and tax

Statement of Practice 4/97 sets out HMRC’s views on the correct treatment for tax purposes of commission, cashbacks and discounts. Cashbacks are taken to mean lump sums received by a customer as an inducement for entering into a transaction for the purchase of goods, investments or services and received as a direct consequence of having entered into that transaction.

In general, an ordinary retail customer purchasing goods, investments or services at arm’s length will not be liable to Income or Capital Gains Tax in respect of any commission, discounts or cashbacks received by them. This applies even if the commission or cash-back is paid under an enforceable contract separate from the contract for the supply of the goods or services itself.

However, if someone is paid for introducing some other customer to the supplier of goods or services, then they are taxable under the miscellaneous income sweep-up provisions if:

  • they are not otherwise chargeable; and
  • the payment is not gratuitous.

Note that a cash-back received in the course of trading is a receipt of the trade to be included in taxable trade profits.