We all enjoy our hobbies, whether it is restoring old cars, photography, writing or even singing in a band. Sometimes we can even make a bit of money on these hobbies, but when does it stop being a hobby and become a business?
Regardless of your own view of what a hobby is and what a business is, HM Revenue and Customs (HMRC) have their own way of deciding what counts as a business. HMRC will be more than happy to decide that you should be paying tax on any money earned.
How do you avoid having HMRC asking for money and administering penalties to you for failing to register your new “business”? It’s simple, just look at the following points and ask yourself if your hobby can be seen as a business.
What is the goal of your activity?
Most of us will carry out a hobby because it is what we enjoy but some money may be made on the side, such as a photographer whose friend asks them to take pictures of a wedding and offers to pay. If the photographer only charges enough money to cover the costs of photographing the wedding, then it is more likely that HMRC will view the activity as a hobby. However, if the photographer decided to charge more in order to make themselves a profit, HMRC will declare it a business and decide tax needs to be paid on the profit.
How long have you owned the item being sold?
Whether or not you have a business or hobby will also depend on how long you have owned the item being sold, for example the person who enjoys fixing up old cars. If he owns the car for several months or a year before selling it in order to make room to start on the next one, then HMRC should see this as a hobby. But if the person only owns the car for a couple of weeks before selling, then it starts to look like a business in the eyes of HMRC.
What is the frequency of transactions?
Another factor taken into consideration is how often you make a sale or get paid for your hobby. If you make jewellery and every now and then have someone purchase a piece you make then it will be regarded as a hobby. However if you sell some jewellery every day or every week then HMRC will decide that you have a business.
Do you get personal use from the items involved?
If you are selling some equipment or items that are of no personal use to you then it can be considered as trading, more so if you work in a situation where the items are already traded. Should you use the items yourself however or they can be used for personal entertainment then it is likely that HMRC will see it as a personal transaction.
What is the reason for acquisition and sale?
Intentionally purchasing an item which you plan to sell will be seen as trading, but if the item was given to you or you sold it quickly to raise finances to pay personal debts then it will be determined that it is a personal transaction.
Was work done to make the item more saleable?
If you carry out work such as repairs in order to make an item more desirable in order to sell it, then this is seen as trading.
If you do have a hobby after following the above then you should have nothing to do, just be sure to keep the above in mind just in case anything changes. If it turns out that you have a business then you probably have to register with HMRC as a new business.
If you need any further advice or assistance with the above, please do not hesitate to contact us.