Thousands of pop-up businesses have appeared during the pandemic, but budding entrepreneurs need to make sure they don’t fall foul of HMRC, said leading tax and advisory firm Blick Rothenberg.
Stefanie Tremain, a director at the firm, said: ‘There were few high points in 2020, but as many lost their jobs, they started to think creatively about how they could turn what might have been a hobby or interest into a job. This has ranged from people offering takeaway and deliveries from their own home, selling homemade cakes, offering to tutor, and even pet portraits.’
‘Now that the tax year has ended, this may be the time these Covid-entrepreneurs need to start thinking about the taxman, many may go back to their original jobs, some may combine the two, others may carry on with their new plans, but there are implications.’
She added: ‘For anyone who started trading the last year 2020–2021 may be the first year for which they have to file a self-assessment tax return, and for anyone who has previously only paid tax through PAYE, this can be a confusing business, with different filing requirements and deadlines to meet.’
‘The first £1,000 of trading income earned in a tax year is exempt under the trading allowance, and if the gross trading income (before deducting any expenses) is below £1,000, it may not be necessary to register for Self-Assessment and file a tax return. If gross income from the trade is more than £1,000, the individual must tell HMRC and register for Self-Assessment. Those taxpayers who have started trading in the year ending 5th April 2021 should tell HMRC by 5th October 2021. Their first tax return (and any tax) will be due by 31st January 2022.’
Stefanie said: ‘When calculating trading profits or losses, taxpayers can either deduct their trading expenses from their gross income or the £1,000 trading allowance if this is more than allowable expenses. Allowable expenses would include stock and materials used in the business; venue hire; advertising costs; postage/stationery/printing costs; staff costs; phone bills. For those trading from home, it is also possible to include deductions for home use. It’s important that complete records of expenses are kept in case HMRC query any deductions claimed.’
‘After deducting any allowable expenses (or the £1,000 trading allowance if this is higher), this will leave a net profit or a trading loss. If an individual’s total taxable income (including the net profit) is below the personal allowance (£12,500 for 2020/21), no income tax should be due. If their taxable income (including the net profit) is more than £12,500, income tax may be due at either 20%, 40%, 45% depending on the level of their income.
‘If the net trading profit for 2020–2021 is above £9,500 class four national insurance may also be due, which is 9% on profits from £9,500 to £50,000, and 2% on profits above that amount. Class two national insurance may also be due at £3.05 a week.’
Stefanie concluded: ‘A key point to remember is that your tax return includes all your income received in the year, so even if your trading profit is relatively small, if you have also had employment income, there may be some tax to pay. On the other hand, if a trading loss is realised, the loss can be offset against other income received in the year. For a taxpayer who was also employed during 2020–2021, this may mean that they are entitled to a refund of PAYE. If there is no other income to offset the loss against, the loss will be carried forward to offset against trading profits in future years.’
‘It could be good news or bad news for these budding entrepreneurs. The crucial point is that they declare what they have earned to the taxman, or they could face fines and penalties.’