It will not always be apparent when a hobby tips over into a trade and the point at which you need to declare your income to HMRC. There is no statutory definition of a trade beyond that a trade includes a ‘venture in the nature of a trade’. Consequently, in deciding whether a trade exists, HMRC look to the ‘badges of trade’. These are indicators of trading developed from case law.
The badges of trade
There are nine badges of trade.
It is important to note that the above is not a checklist and it is not necessary for every badge to be present for there to be a trade. Further, no particular badge is conclusive evidence of a trade. Rather, it is a case of considering each badge and whether it is present or absent to form an overall impression of whether a trade exists.
If you are earning a small amount of money from your hobby, for example, making and selling occasional birthday cakes, it is unlikely that you will need to tell HMRC. The trading allowance means that if the income from your self-employment is less than £1,000 you do not need to report it to HMRC. However, it should be noted that each person is only allowed one trading allowance across all sources of self-employment. Consequently, a person who is already self-employed and earning more than £1,000 will need to pay tax on any income from a hobby business, even if the income from the hobby is less than £1,000 a year.
If your income from your business for the tax year is more than £1,000, you will need to register for self-employment by 5 October after the end of the tax year.
Partner note: HMRC’s Business Income Manual BIM20000ff.; ITTOIA 2005, Pt. 6A, Ch. 1.
For more information please go to:
Contact Us: 01782 40544