Income Tax: deductions at a fixed rate
Published 9 December 2015
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Who is likely to be affected
Partners in partnerships which have adopted simplified expenses for income tax purposes.
General description of the measure
This measure is introduced to clarify how the simplified expenses regime should be applied by partnerships in respect of the business use of a home and where premises are used both for business and as a home.
Policy objective
The measure will ensure that the legislation for simplified expenses will be applied as intended for partnerships to ensure that partnerships and individuals are treated in the same way. This is in line with the policy for simpler taxation for business which led to the introduction of the simplified expenses regime.
Background to the measure
This measure was first announced at Autumn Statement 2014 and is introduced as part of the review of the legislation. It is consistent with the original policy and consultation on Simpler Income Tax for the Simplest Small Businesses.
Detailed proposal
Operative date
The measure will have effect on and after 6 April 2016.
Current law
Under Section 94H of the Income Tax (Trading and Other Income) Act 2005 a person can make a claim to use a fixed rate deduction in respect of the business use of their home by reference to the number of hours of work undertaken at the home. This fixed rate deduction replaces any other deduction for expenses for the use of the home and therefore simplifies the records that would otherwise be needed to justify any expense claimed under the normal rules.
Section 94I of the Income Tax (Trading and Other Income) Act 2005 makes provision for a fixed rate adjustment where premises are used mainly by a person for business but are also used as their home. The section allows the full expenses in relation to premises to be allowed as a deduction with an adjustment measured by reference to the number of occupants residing in the premises as their home. This again simplifies the record keeping and apportionment calculations that would otherwise be necessary to calculate the correct amount of taxable profit under the normal rules.
Proposed revisions
Legislation will be introduced in Finance Bill 2016 to amend the simplified expenses legislation in the Income Tax (Trading and Other Income) Act 2005 to clarify how the business use of home and premises used both for business and as a home provisions apply to partnerships.
The amended provisions will make it clear that the fixed rate deduction for use of home for business can be claimed by individual partners where appropriate and also that partnerships can use the fixed rate non-business use adjustment where premises are used mainly for business but are also used as a home by a partner or partners.
It was considered that the original legislation did not make it clear how the rules could be applied to partnerships.
Summary of impacts
Exchequer impact (£m)
| 2015 to 2016 | 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 |
|---|---|---|---|---|---|
This measure clarifies the application of the simplified expenses legislation for partnerships. The Exchequer impact of ‘Cash basis and simplified expenses’ for small businesses is set out in Table 2.2 of Budget 2013 and was certified by the Office for Budget Responsibility.
Economic impact
This measure is not expected to have any significant macroeconomic impacts.
Impact on individuals, households and families
The measure is a clarification and is designed to bring most partnerships in line with individuals in respect of their calculation of business profits where simplified expenses applies.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
This measure should have no adverse impact on the equality of protected groups.
Impact on business including civil society organisations
This measure will ensure an even playing field between individual traders and those in partnership so that partners too can benefit from the simplified expenses and thus reduce their compliance burden and the record-keeping needed to compute their business profits for tax purposes. Details of the administrative costs and benefits of simplified expenses are set out in the ‘Simplified income tax for the simplest small businesses’ tax information and impact note published as part of the Overview of Tax Legislation and Rates on 20 March 2013.
Small and micro business assessment: the measure confirms the original intention of Parliament in making tax easier, simpler and quicker for small businesses.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
There will be no significant operational impact. No amendments are needed to self-assessment returns and the only impact for HMRC is to ensure that guidance is updated to make it clear how the provisions work in practice.
Other impacts
Other impacts have been considered and none have been identified.
Monitoring and evaluation
This measure will be monitored alongside the routine review of the operation of the cash basis and simplified expenses which were introduced in Finance Act 2013 and have had effect from 6 April 2013. The first returns where this new measure can apply will be for the 2016 to 2017 tax year which are due to be filed by 31 January 2018.
Further advice
If you have any questions about this change, please contact Steven Phillips on Telephone: 03000 575485 or email: steven.phillips@hmrc.gsi.gov.uk