Making Money From A Hobby

The ‘badges of trade’ tests whilst not conclusive are used by HMRC to help determine whether an activity is a proper economic / business activity or just a money-making side line to a hobby. However, there is a point where careful consideration needs to be given to deciding whether your hobby has in fact become a taxable trading activity.

It is clear from the significant amount of case law on this subject that a decision on whether there is a business activity is often not black and white. In fact, both HMRC and the courts are clear that it is important to look at the whole picture rather than looking at each ‘badge’ in isolation or even relying too heavily on the badges of trade at all. In some cases, taxpayers will seek to argue that their hobby is actually a trade in order to benefit from certain tax reliefs, usually related to having a trading loss.

HMRC will consider the following nine badges of trade as part of their overall investigation as to whether a hobby is actually a trade:

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

The introduction of the trading allowance from April 2017 can help taxpayers making small amounts of money from their hobby. Even if HMRC considers that the activities in question are a trade, taxpayers can make up to £1,000 per year from their hobby using the trading allowance.

The sale of unwanted personal possessions is not considered trading (or a hobby) although there may be Capital Gains Tax implication if large profits are made.

If you are unsure of whether is it a hobby or a trade – we would be pleased to offer you our opinion.

Posted by Cassey Nixon on

22nd June 2018

Categories

  • Protecting yourself from an HMRC investigation

    A tax investigation is stressful, time consuming and usually very expensive. And it could easily happen to you. HMRC’s investigations are more focused than ever before. During the tax year 2017-18, the tax man collected over £30 billion through ‘compliance activity’. Special investigators are using high tech methods to gain information and maximise tax revenues. […]

  • Loss Buying Restrictions

    Under qualifying circumstances, Corporation Tax relief is available where your company makes a trading loss. The trading loss can be used by offsetting the loss against other gains or profits of your business in the same or previous accounting period. The loss can also be set against future qualifying trading income. However, there are restrictions […]