He intends to adopt a pattern of spending his summer months each year running his business in Croatia, because that is the most profitable time of year. I have included the bike hire business in a second set of Self-Employment pages and calculated the taxable profits using the normal rules for a sole trade. David is concerned that there might be some differences in how the profits for his second should be calculated and has asked me to re-visit the return and amend it if necessary.
A. Because David’s trade is being carried on wholly outside the UK, there are some differences between how this trade will be treated, compared to a trade which is carried on in the UK, or even partly in the UK.
Broadly, the profits of David’s Croatian trade will be calculated in the same way as his other trade: revenue expenses are deductible if they are incurred wholly and exclusively for the purposes of the trade (Section 34 ITTOIA 2005). However, sections 92-94 of ITTOIA waive the requirement to apply the wholly and exclusively test to certain kinds of expense – ‘qualifying expenses’ defined by S.92(3) – if the trader’s absence from the UK is wholly and exclusively for the purpose of carrying on the foreign trade.
David will be able to deduct the cost of travelling between his hire shop and his home in Leeds at the start and end of the season. If he needs to pay for somewhere to stay near to the shop, that cost is deductible too. If he is not going to return to the UK during the season, there might also be scope for deducting travel costs of family members visiting him while he is away. There is more guidance on deduction of expenses of a trade carried on wholly overseas in the In-Depth part of the Croner-I platform at 293-400 and in HMRC’s manuals at BIM47712.
His National Insurance position is also affected. A trade being conducted wholly outside the UK does not satisfy the three conditions required by S.15 SSCBA 1992. Consequently, David’s bike shop income will not be chargeable to Class 4 NIC.
Hence, overall, the modifications of how a trade is taxed if it is carried on wholly outside the United Kingdom may be welcomed by your client. However, if there are losses on running the shop in future years, you will need to bear in mind that the normal reliefs for a sole trade run on a commercial basis will be precluded by S.95 ITA 2007, which effectively ring-fences the losses to this trade, or another that is conducted wholly outside the UK.
Your client should be advised to seek advice in Croatia re his tax, VAT, and social security obligations there if he hasn’t already done so.
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