Are you aware of the difference between a hobby and a business? It may sound like a simple question, but actually there are a few grey lines that can make it a little confusing to distinguish between the two. If you have a hobby or are working a business, it could affect your tax liability.
It’s also best to be honest, HMRC can issue heavy penalties if they find you trading without registering. If you don’t register your business with HMRC you could incur a failure to notify penalty which may cost you up to 100% of the tax due as well as still having to pay that tax! This is not something that you want to happen.
Are you making money from your hobby?
HMRC look to main indicators to establish whether you are trading as a business, which is more than just a hobby. These generally are:
- Do you intend to make a profit?
- Did you borrow money to get your venture off the ground?
- Are your transactions regular and frequent?
- You are paying for advertising or marketing
If you realise that your hobby has become more than just a hobby and it’s transitioning into becoming a business, you need to register with HMRC. From here you’ll need to make the choice of becoming a sole-trader or setting up a Limited company. There are advantages to both, and it will come down to personal preference and circumstances and where you see your business heading in the future.
Struggling to make a profit?
You may have been involved in your hobby for some time, however the first few years of running a business can be tough, especially trying to make a profit and being able to prove that you’re proactively intending to make a profit. You may feel that you’re running on fumes and credit cards, but don’t give up – if you’re doing something that you love, you’re already halfway through the battle of achievement.
There is no set gross money limit that indicates a business.
Just because you’re not making huge profits, doesn’t mean that you’re not running a business and HMRC may look at your activity to make the assumption that your hobby is in fact a business. If you’re enjoying your hobby for personal enjoyment and don’t plan to make this a business, there are some guidelines that are good to stick to:
- You do not intend to make a profit
- You do not make a profit
- There’s no set schedule for your hobby to take place
- You sell your items for the cost of your materials
- It’s just a hobby for recreation
Even if your hobby is an expensive one, you don’t have to declare your income from the hobby if you can prove that you adhere to the above guidelines. At the same time, you can’t report any income losses on your tax form – if you complete self-assessments.
Your hobby online
When running your hobby online, it can become a place for your hobby (or business) to get confusing – and there are some distinctions. If you sell online for your own personal use, you need to prove that you do not intend to make a profit, if this becomes a regular occurrence.
If you’re buying and selling items on (for example) Amazon, you’re restoring or altering the items and then you’re making a profit on all your sales, with an increase of income that’s coming in from this activity – you are crossing the line into running a business.
This is due to a couple of factors:
- Your intention is to make a profit
- You repeated the activity and are making sales
- You used a specific website to do the buying and selling
If you’re doing this for a hobby rather than wanting to turn it into a business, you need to think about not making a profit, selling for the love of selling rather than having an intention of making money – selling at a similar cost or less than the purchase price. Not paying for advertising or intending on selling the product in order to make an income.
Whatever avenue you decide to take, we advise that you keep a record of everything you do and keep track of incomings and outgoings.
If you’re still unsure where you stand with your hobby / business, we advise that you get financial advice to avoid any unnecessary penalties. Feel free to get in touch with us at Kara Accountants for more information.