Is your hobby actually a trade?
We’d all love it if our hobbies had the ability to bring us in real money. You might already be buying and selling items on eBay or at car boot sales or offer their skilled services in their spare time.
But when you’re making a profit, at what point does your hobby become a taxable trade?
Unfortunately, there’s no single definition of what actually counts as a business, and there is also no specified allowance that you can earn before you have to register as one. However, if your trading brings in an income over a certain threshold, you may be liable to pay tax on your profits.
“Few people consider the tax implications of selling items through eBay and Amazon, Gumtree and Etsy, and may think it is just a hobby,” says tax specialist at BDO Global, Dawn Register.
“Getting it wrong could involve paying back taxes, late payment interest and penalties to HMRC.”
Buying an item with the aim of selling it for profit is just one of HMRC’s “badges of trade”. These are the criteria used to decide if a hobby is actually a trade. As well as wanting to make a profit, HMRC will look at:
- The number of transactions you make – Are your sales systematic and repeated, or do they just occur every now and then?
- The nature of the asset – Did you only own the item you sold because you planned to sell it, or did it previously bring in an income or give you ‘pride of possession’?
- Any changes to the asset – Were any repairs, modifications or improvements to the item made in order to sell it or sell it for a greater profit?
- The way the sale was carried out – Was the sale like that of a trading organisation, or simply to raise emergency cash?
- The source of finance – Did you borrow money to buy the item, and could you only repay the loan by selling the asset?
- Time between purchase and sale – Did you buy the item with the intention to sell it off quickly, or did you originally plan to keep it?
- Method of acquisition – Did you buy the item yourself, inherit it, or receive it as a gift?
HMRC will consider each of these badges of trade when deciding whether or not your hobby should be classed as a business.
In the past, as soon as your hobby was considered a trade, you would have had to notify HMRC of every penny you made from it. Changes to the Trading Allowance in 2017 mean that traders will now have a £1,000 tax free allowance from their “trading activities”.
The Trading Allowance
In the 2016 Budget, the government announced a £1,000 allowance for trading income to take effect the next year. The plan was then dropped from the Finance Act 2017 before the General Election. But, in an attempt to support the "digital and sharing economy", the allowance was reintroduced later in the year in the Finance (No. 2) Bill.
The reinstatement was published in September, but will apply retroactively from when it was initially planned to take effect back in April 2017.
The aim of the new trading allowance is to simplify income tax obligations for those who earn small amounts from selling goods and services.
If your hobby turns over less than £1,000 a year, you will no longer need to pay income tax, register with HMRC, or file any tax returns on your income. You’ll still need to monitor your income levels each year because, if it exceeds the limit at any point, you’ll have to complete a self-assessment.
Second trades and partial relief
Say you’re a self-employed decorator but tutor maths in your spare time. In this case, your income from both trades would be combined to work out your tax obligations.
If you brought in £501 every year from each business, your total income would be over the £1,000 limit, so you would not be able to claim full relief. You may choose to claim partial relief, effectively deciding to either:
- Deduct your actual business expenses from your trading income as you usually would, or
- Deduct the £1,000 trading allowance from your income.
You can make this decision on a year-by-year basis, so you can choose what is best for you based on the level of expenses you had in that year.
If you have very few overheads, for example when working as a maths tutor, you may benefit more from the trading allowance. If you have recurring outgoings, for a property or supplies, you might be better off claiming on your actual expenses.
I am a trader – what should I do next?
You need to notify HMRC by the 5th October after the end of the tax year in which you started trading.
So, if you started trading between 6th April 2016 and 5th April 2017, you would have to register your business by 5th October 2018.
You can do this online here, and would need to register for both Income Tax and Class 2 National Insurance Contributions.
If you need to register your hobby as a trade, speak to your accountant at Panthera on 01235 768 561 or email the team at email@example.com.