Formations companies have seen a steady growth in the level of sole-trader or small entrepreneurial company registrations over the past few years in the UK. Something that a study conducted by insurance firm RSA confirms and claims that UK businesses are increasingly “micro” in size – and is something that is having a large impact on the economy.
The UK has a very high level of registered SMEs in operation, however the RSA research has found that micro-sized companies are the only business category to have significantly grown their proportions of business stock by a notable 1.4 million, or 45%, since the year 2000.
The new generation of micropreneurs, or zero-employee firms, have grown by 21.4 % since the recession hit, making them the fastest growing business sector analysed. It is thought that the recession heavily impacted on SMEs with the result that many companies are now intentionally forming as smaller micro-businesses.
The growth in the micro-business sector is still happening despite HMRC trying to tighten the rules over the past few years on people running hobby businesses in their spare time from home. People working a business on the side have been encouraged to register their businesses even if they are are only trading on a very small scale using online selling sites such eBay, AirBnB and Etsy.
In an effort to track down online micro-businesses, HMRC have been approaching online marketplaces for data so they can check to see if sellers have registered their businesses for a tax code with the HMRC. While most online hobby business owners are happy to pay tax on their profits, there are some people who either don’t think it is fair to be treated in the same way as larger businesses, or they are simply unaware that they are supposed to pay tax on their profits.
For those really small online sellers who may only be selling on their creative hobby creations, such as home-made crafts or home-baked cakes to generate a bit of spare spending money, the government has now announced that it will be introducing a new trading allowance from April 2017. This new allowance will mean that individuals operating very small online hobby businesses will not be required to pay tax on their profits up to the allowance limit of £1,000.
With the rapid increase of the digital micropreneur, HMRC would be hard pressed to be able to track and monitor every single one of them, especially since the government are reducing the number of staff working for HMRC. The cost of the manpower and resources they would need to keep on top of everyone who dabbles in a profitable hobby on the side would far outweigh the amount of tax that could be recouped. Plus the fact that quite a lot of hobby business owners find the rules on tax to be a little overwhelming.
So from April 2017, individuals with property income or trading income below the £1,000 allowance will no longer need to declare or pay tax on that income. This new allowance will also be of benefit for those micro-traders who earn over the allowance because they will be able to deduct the allowance amount from their profits instead of having to work out their exact expenses.
This has seen a shift in attitude from HMRC where they will no longer be going after the online micro-trader to squeeze every penny from them, to instead be seen as a boost for small businesses such as hobby crafters and online marketplace traders. This will also encourage more entrepreneurs online because it gives them an opportunity to test out their new ideas on a small scale alongside working at their full-time jobs without having to worry about registering each business and paying tax on top.
The allowance may seem small to some people, but if it allows the occasional trader and hobby crafter to cover their overheads while they get started in their business, then it will be a welcome relief for many future online entrepreneurs.
As long as an individuals profits do not exceed the new trading allowance, any micro-business operators will not need to register their business with HMRC. But if the business takes off and starts to generate profits over the £1,000 limit, then they will be required to register their business with HMRC – usually as a sole-trader if it is an individual. However, once the business start to grow and employ others, then registering as a limited company would make more sense as it adds a layer of protection to everyone running the company.