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Could your hobby be a trade?

Do you make money doing what you love?

Thanks to a huge number of popular online platforms, more and more people are now able to make a bit of extra money in their spare time.

Whether it’s buying and selling items on eBay, selling your crafts on Etsy, or listing your talents on People Per Hour, your hobby could provide extra income for you to put to one side for a rainy day.

But with HMRC cracking down on tax evaders, how do you know when your pastime has become a business activity?

What HMRC have to say

There is no single definition as to what counts as a business, or any specified allowance you may earn before you need to register as one. This can lead to a lot of confusion where tax liabilities are concerned.

Tax specialist at BDO Global, Dawn Register, says that “few people consider the tax implications of selling items through eBay and Amazon, Gumtree and Etsy, and may think it is just a hobby.

“Getting it wrong could involve paying back taxes, late payment interest and penalties to HMRC,” says Register. So, figuring out the turning point at which your hobby becomes a taxable trade is absolutely vital.

HMRC’s “badges of trade” are a good starting point. These are the semi-official criteria for determining whether or not an activity should be classed as business.

HMRC will consider:

  • Whether or not the item was purchased solely to make a profit from selling it.
  • How many transactions you make, for example if your sales are regular and repeated, or if you just sell things every now and then.
  • If you bought the asset with the intention of selling it for a profit, or if it is no longer useful to you or brought you ‘pride of possession’
  • How the sale was carried out, either like a trading organisation or as an effort to raise emergency funds
  • If you made any modifications, repairs or improvements to the item, and if these were made in order to sell the item or sell it for a greater profit.
  • The time between you purchasing the asset and putting it up for sale, which will suggest whether you bought the item to sell off quickly or if you originally planned to keep it.
  • If you borrowed money to buy the asset and if the resale was necessary to pay back the loan.
  • Whether the item was bought yourself, inherited, or received as a gift.

If HMRC decide your hobby is in fact a trading operation, you will have to pay tax on your profits.

In the past, you needed to report to the taxman for every single pound you made. This has changed with the introduction of the Trading Allowance introduced earlier this year. People now have a £1,000 tax free allowance for “trading activities”. This £1,000 is turnover and not profit – please remember that.

Changes to the Trading Allowance

Making every effort to encourage a “digital and sharing economy”, the government announced that they would be instating this new allowance for trading income. The bill was published in September, but applies to activities made since April 2017.

Simplifying income tax obligations for hobby traders, the allowance means those who turn over less than £1,000 a year from trading will no longer have to pay income tax. They’ll also no longer be obliged to register their business or file any tax returns.

If your annual turnover exceeds £1,000 at any point, however, you will need to complete a self-assessment form.

Are you a trader?

If you believe your hobby may be a trade, you’re obliged to notify HMRC yourself. This should be done by the end of the tax year in which you started trading.

For example, a business that starts trading between 6th April 2017 and 5th April 2018 would need to register with HMRC by 5th October 2019.

You can register your business online, and you’ll also need to register for Income Tax and Class 2 National Insurance Contributions.

Establishing your hobby as a trade does not have to be complicated process. Our highly experienced team, here at Kelsall Steele can guide you through every step of the process. Call us today on 01872 271655 or email enquiries@kelsallsteele.co.uk