With such rapid advances in technology and social media in the last decade, so too have we witnessed an increase in the number of individuals using such platforms to showcase the products of their hobbies (for example, baking) and, in some cases, generate income as a result.
You might begin by selling to close friends and relatives, which soon develops into friends of friends, neighbours and local faces, but as word travels you could soon find that orders are coming in from individuals up and down the country.
So, the question is; how do you know when your hobby has become a ‘trading activity’ in the eyes of HM Revenue & Customs (HMRC)?
Are you regularly turning a profit?
If you rarely make a profit from your products, or if your intent is simply to make enough from a sale to cover your own costs, it is unlikely that you will be classed as a ‘business owner’ that is ‘trading’. However, if you adhere to a regular pattern of selling your products/trade in order to make a profit, then HMRC may deem that you are running a business.
This may also be the case if you are responsible for the quality of the product or trade, and if you would consider employing additional individuals to assist you with fulfilling the orders that you receive.
HMRC’s ‘badges of trade’
HMRC does treat each case on its individual merits, but typically relies upon 9 ‘badges of trade’ to help determine whether a trading activity is taking place.
- Profit-seeking motive
- The number of transactions
- The nature of the asset
- Existence of similar trading transactions or interests
- Changes to the asset
- The way the sale was carried out
- The source of finance
- Interval of time between purchase and sale
- Method of acquisition
In April 2017, the trading allowance was first introduced; this allows taxpayers to make up to £1,000 per annum, tax-free, from their hobby without being subject to any tax complications. This applies even if HMRC consider that the activities in question constitute a trade.
Do I need to register for self-assessment?
If your income, from one or more trades, does not exceed the £1,000 trading allowance, it is unlikely that you’ll need to notify HMRC about this.
You can earn up to your personal allowance of £12,500 in 2019/20 (the personal allowance will be £12,500 for 2020/21, also), tax-free; so, if it is your only source of income, if your profits do not exceed this, you will not pay tax.
As for whether you are required to register for self-assessment, this will be determined by your individual circumstances and not simply whether you pay tax or not. Consequently, if you are unsure, you should seek professional advice at the earliest opportunity, to ensure you are compliant with HMRCs rules.
Turning your hobby into a business
Turning your hobby into a business, is a big step and you should consider seeking professional advice to avoid making costly mistakes.
There are a number of things you’ll need to consider and important decisions to be made; for example, you will need to decide whether it is best for you to register as a limited company with Companies House, or to operate as a sole trader and notify HMRC of your self-employed status, putting yourself within scope of the self-assessment system.
Not only that but, in order to run a successful business in the long-term, you will need a sound business plan, reliable cashflow projections, budgets and trading forecasts, a system for maintaining timely and accurate records and commitment to complying with any number of statutory requirements.
How can George Hay help?
When starting out in business, there are many decisions to be made and each seemingly as important as the next. The decisions you make in the first few weeks and months will dictate the way in which business is to be conducted, how you can fund your activities and how you extract income from the business. If you’re unsure about where to start, we can ensure you put your best foot forward – so contact our team today.