How are taxable trading profits calculated under section 796 of ITTOIA 2005?

Under section 796, taxable trading profits are calculated by taking the rent-a-room receipts from the trade for the tax year, adding any relevant balancing charge, and subtracting a deductible amount. This simplified formula replaces the normal method of deducting actual expenses, and no further expense deductions are permitted against the trade receipts.

How is the deductible amount worked out under the rent-a-room alternative method for trading income?

If all rent-a-room receipts arise from the trade, the deductible amount equals the individual's rent-a-room limit (L). If only some receipts arise from the trade, the deductible amount is proportionally reduced using the formula L × T / R, where T is trade receipts and R is total rent-a-room receipts. The deductible amount cannot exceed T.

Can the section 796 calculation produce a trading loss?

No, the section 796 calculation cannot produce a trading loss. The deductible amount is capped at the amount of the trade receipts themselves (T). This means the taxable trading profit can be reduced to zero at most, but never below zero, preventing any artificial loss from arising under the rent-a-room alternative method.

Are actual expenses deductible when using the alternative calculation under section 796?

No, when using the alternative calculation under section 796, no deduction for expenses or any other matter is permitted. Rent-a-room receipts are taken at their gross figures. The deductible amount provided by the formula already replaces normal expense deductions with a flat allowance, so claiming actual costs is not available.

Income Tax (Trading and Other Income) Act 2005 section 796

Alternative calculation of profits: trading income

Section 796 sets out how to calculate taxable trading profits under the rent-a-room scheme when an individual's rent-a-room receipts that count as trading income exceed the rent-a-room limit and they have elected the alternative method.

Trading profits are calculated as the total rent-a-room receipts from the trade plus any relevant balancing charge, minus a deductible amount
If all rent-a-room receipts arise from the trade, the deductible amount equals the individual's rent-a-room limit (L), subject to a maximum of the receipts themselves (T)
If only some rent-a-room receipts arise from the trade, the deductible amount is the rent-a-room limit multiplied by the proportion that trade receipts bear to total rent-a-room receipts (L × T / R), again subject to a maximum of T
No deduction for expenses or any other matter is allowed when calculating the amount of rent-a-room receipts for this purpose

Access full legislation.And much more.

By becoming a member, your team gets full access to Tax World research tools and source-backed tax resources.

Become a member