Income Tax (Trading and Other Income) Act 2005
What this means for your business
- Enforced by
- HMRC
- Applies to
- United Kingdom
- On this page
- 17 compliance obligations, 19 practical guides across 4 topics
What you must do
17 compliance obligations under this legislation.
Management duties 5
Allocate property allowance between multiple property businesses
If you receive property income from two separate property businesses, you must decide how to split your overall property allowance between them. The split must not cause either business to show a loss, and the allocation must be shown on your Self‑Assessment tax return.
Allocate your trading allowance between trades and other income
If you earn money from a trade and also receive income from another trade or from miscellaneous sources in the same tax year, you must split the £1,000 trading allowance between those streams. The split must not push a trade's profit into a negative amount or cause a loss on the miscellaneous income. This allocation is then used when you complete your Self Assessment tax return.
Limit lease‑payment tax deductions to finance charges
If your business rents plant or machinery under a long‑term finance lease, you can only claim tax relief for the lease payments up to the amount that would be recorded as interest or finance charges in your accounts. When you work out your taxable profit, any deduction claimed above that level is not allowed.
Limit total reductions and deductions for taxed receipts
When your business receives a taxed receipt (for example rent under a taxed lease) you may claim certain tax reductions and expense deductions. You must calculate the maximum amount you can claim – the limit set out in this section – and ensure the total of your claimed reductions and deductions does not exceed that limit. This calculation has to be done for every taxed receipt you use in your tax return.
Record and claim tax relief for unremittable amounts
If your business receives money that you cannot transfer out of the country, you can deduct that amount from your taxable profits. Any part that exceeds your profits can be carried forward to the next accounting period. You must keep records of these amounts and claim the relief in your tax return.
Payments and fees 8
Pay income tax on earnings each tax year
You must work out how much income your business earns in a tax year and pay income tax on that amount. Any reliefs that apply (e.g. foreign income rules, care provision reliefs, furnished accommodation reliefs) can be claimed to reduce the tax due.
Pay income tax on estate income (unless de minimis amount)
If you are responsible for administering a deceased person’s estate, you must treat any income the estate receives as taxable and pay the appropriate income tax, unless that income is a very small (de minimis) amount that is exempt under the rules.
Pay pool betting duty and keep supporting records
Unlimited fineIf your business runs a pool betting (e.g., football pools) you must pay the pool betting duty to HMRC when it is due and retain records of those payments. Failing to do so can lead to criminal prosecution and an unlimited fine.
Pay pool betting duty to HMRC
Unlimited fineIf your business runs a pool betting scheme you must calculate the pool betting duty due and pay it to HMRC. The duty is payable on the betting turnover and must be paid on the dates set out in the legislation. Failure to pay on time can lead to penalties and possible prosecution.
Pay tax due on trust income as settlor
If you have set up a trust, you (the settlor) are the person responsible for any tax charged under this part of the Income Tax Act. In some cases a close family member may be liable instead. You must make sure the tax is paid on time and keep evidence of the payment.
Pay tax on income you receive
If your business receives any income – or you have a right to it – you are the one who must pay the tax due on that income. In practice this means you need to work out the tax liability, include it in your tax return and make the payment by the required deadline.
Repay excess tax recovered from trustees if liability is reduced
If you have recovered tax from a trustee because a chargeable event increased your tax bill, and later HMRC recalculates your tax and reduces the amount you actually owe, you must pay back any part of the recovery that is now too much. The repayment amount is limited to what you originally received from the trustees.
Repay tax deducted from payments to non‑UK residents when required
If your business has deducted tax from a payment to a non‑UK resident under the Income Tax (Trading and Other Income) Act, you must adjust that deduction by repaying tax. The repayment is spread over six years (one‑sixth each year) and is only required if the final tax liability for a given year is lower than the amount already treated as paid.
Record keeping 1
Calculate and record the cost of any building used in your trade
When you buy or build a property that you use for your business, you must work out the building’s cost for tax purposes. Use the lower of market value or purchase price if you bought it, or the actual construction costs if you built it, and exclude the value of the land. Keep clear records of how you arrived at that figure and of any later construction work, but do not include maintenance expenses.
Reporting and filing 3
Make claim for spreading profits within deadline
If you want to spread your profits for tax relief, you must submit the claim under section 225ZB no later than one year after your normal self‑assessment filing date for the first year. You only receive any tax repayment if you actually make the claim, so be sure to lodge it on time.
Provide written estate‑income statement on request
If you are acting as the personal representative (executor or administrator) of a deceased person’s estate, you must, when asked in writing by anyone who has an interest in the estate, give them a written statement. The statement must show how much of the estate’s income is treated as taxable for them and the tax amount that would be treated as having been paid.
Value trading stock when you permanently stop a trade
If you decide to close your business for good, you must work out the value of any stock you still hold at the moment you stop trading. That value has to be calculated using the standard valuation rules (sections 175‑178) and added to your profit calculation for the year you ceased. If a non‑arm‑length provision under TIOPA applies and the market value is higher than the amount already accounted for, you must also add the excess amount.
Penalties for non-compliance
2 penalties under this legislation. 2 carry an unlimited fine.
Pay pool betting duty and keep supporting records
Unlimited fine
Pay pool betting duty to HMRC
Unlimited fine
Practical guidance
Our guides explain how to comply with the requirements above.
Tax & Finance 12
Pay National Insurance when self-employed
How to pay Class 2 and Class 4 National Insurance contributions when you're self-employed. Covers current rates, thresholds, …
Prepare for Making Tax Digital
How to get ready for Making Tax Digital for Income Tax, including when you must join, what software …
Register for Self Assessment
When and how to register for Self Assessment tax.
Filing your Self Assessment tax return
Who must file a Self Assessment return, how to complete and submit it, what expenses you can claim, …
Claim business expenses as a sole trader
How to claim allowable expenses to reduce your tax bill, including simplified expenses options for vehicles, working from …
File your Self Assessment tax return
Step-by-step guidance for sole traders on completing and submitting your Self Assessment tax return to HMRC, including key …
Get your Unique Taxpayer Reference (UTR)
How to get a UTR number for Self Assessment. Covers registration for sole traders and partnerships, delivery timelines, …
Use the trading allowance
When to use the £1,000 trading allowance versus claiming actual expenses. Includes eligibility rules, relief types, and the …
Keep business records as a sole trader
What records you must keep as a sole trader, how long to retain them, and how to prepare …
Go full-time with your business
Practical guidance for transitioning from employment to full-time self-employment. Covers financial preparation, legal obligations, tax registration, replacing employer …
File your final Self Assessment return
How to file your final Self Assessment tax return when you stop being self-employed. Covers deadlines, tax calculations, …
Report property income on your Self Assessment
How to report rental income on your Self Assessment using SA105 - allowable expenses, mortgage interest restriction, property …
Business Structure 5
Change from sole trader to limited company
How to incorporate your sole trader business as a limited company. Covers the incorporation process, transferring assets, tax …
Sole trader or limited company
Compare the two most common business structures and choose what's right for you.
How partners pay tax on profits
Understanding how partnership profits are taxed on individual partners, including profit allocation, National Insurance contributions, and Self Assessment …
File partnership tax returns (SA800)
How to file the SA800 partnership tax return and individual partner returns. Covers registration, deadlines, supplementary forms, and …
Stop being self-employed
How to close your sole trader business, notify HMRC, and complete your final Self Assessment tax return. Includes …
Sector-Specific 1
Digital & Technology 1
Sections and provisions
500 classified provisions from this legislation.
Duties 17
- s.148G Lessee under long funding finance lease: limit on deductions
- s.162 Payments by persons liable to pool betting duty
- s.172ZE Costs of the building
- s.173 Valuation of trading stock on cessation
- s.189 Relief for unremittable amounts
- s.225ZF Time limits etc for spreading claim
- s.295 Limit on reductions and deductions
- s.538 Recovery of tax from trustees The amount recovered
- s.596 Adjustments where tax has been deducted
- s.616 Person liable
- s.622 Person liable
- s.649 Charge to tax on estate income
- s.682A Statements relating to estate income
- s.688 Income charged
- s.748 Payments by persons liable to pool betting duty
- s.783AK Deductible amount: splitting of trading allowance
- s.783BI Deductible amount: splitting of property allowance
Powers 23
- s.14 Visiting performers: supplementary
- s.25C Election for profits to be calculated in accordance with GAAP
- s.154 Regulations for determining market value of securities or strips
- s.185 Election for valuation at cost
- s.225ZB Right to make claim
- s.257 Election to carry back
- s.314 Regulations
- s.450 Market value of strips etc.
- s.452 Power to modify this Chapter for strips
- s.526 Power to make regulations about personal portfolio bonds
- s.541A Effect of rebated or reinvested commission in certain cases
- s.591 Non-UK resident sellers: election for spreading
- s.647 Power to obtain information
- s.696 Plan managers
- s.706 Withdrawal and variation of certifications and connected requirements
- s.725 Annual payments under immediate needs annuities
- s.747 Power to amend sections 744 to 746
- s.767 Power to amend references to the Directive by order
- s.783BJ Election for full relief not to be given
- s.799 Election not to apply full relief
- ... and 3 more powers
Definitions 110
- s.1 Overview of Act
- Schedule 2 Transitionals and savings etc. relevant tax purposes superseded enactment the relevant period
- s.8 Person liable
- s.15 Divers and diving supervisors
- s.23C Meaning of “qualifying third party payment”
- s.23B Meaning of “relevant benefit” Relevant benefit
- s.49 Car ... hire: supplementary car ... a qualifying hire car ... new
- s.52 Exclusion of double relief for interest
- s.83 Meaning of “local enterprise organisation” local enterprise organisation Local enterprise agency Training and enterprise council
- s.86B Interpretation of section 86A English risk management authority
- s.94F The appropriate mileage amount Relevant business journey
- s.94G Definitions of types of vehicle Car Goods vehicle Motor cycle
- s.94E Excluded vehicles any relevant trade or business
- s.99 Reverse premiums
- s.104 Distribution of assets of mutual concerns
- s.120 Acquisition of new herd begun within 5 years of sale
- s.132 Meaning of “original master version” and “certified master version” original master version
- s.167 Site preparation expenditure: supplementary waste disposal licence waste disposal site
- s.169 Cemeteries and crematoria: interests in land Ancillary capital expenditure
- s.174 Meaning of “trading stock” trading stock
- ... and 90 more definitions
Exemptions 59
- Schedule 3 Repeals and revocations
- s.10 Commercial occupation of land other than woodlands
- s.13 Visiting performers
- s.47 Business gifts: exceptions
- s.55A Expenditure on integral features
- s.87 Expenses of research and development
- s.89 Expenses connected with patents
- s.90 Expenses connected with designs or trade marks
- s.94A Costs of setting up SAYE option scheme or CSOP scheme
- s.97A Cash basis: value of trading stock on cessation of trade
- s.97B Cash basis: value of work in progress on cessation of profession or vocation
- s.100 Excluded cases
- s.112 Meaning of “animal”, “herd”, “production herd” etc.
- s.148B Lessor under long funding finance lease: exceptional items
- s.148DA “Starting value”: general
- s.150 Conversion etc. of securities held as circulating capital
- s.172E Acquisitions not made in the course of trade
- s.182 Valuation of work in progress on cessation
- s.240C Unrelieved qualifying expenditure: Parts 2, 7 and 8 of CAA 2001
- s.240CA Unrelieved qualifying expenditure: Part 5 of CAA 2001
- ... and 39 more exemptions
Official guidance
Authoritative sources from regulators explaining this legislation.
- Stop being self-employed Detailed Guidance
- Scottish income tax rates (gov.scot) Detailed Guidance