Many of us have hobbies or activities that we enjoy doing in our spare time and which have evolved into a trade. In the UK, you are expected to inform HMRC if you are engaged in a trade and you should expect the profit from the trade to be taxed. Interestingly, many do not monitor these activities as a hobby and then it takes a turn into a small business.

So what is a trade?

It is not defined in the legislation we depend on case law and the decision made from court cases. That is the reason why it’s more difficult to prove.

If you are uncertain you can apply a test that was developed by the courts named the badges of trade.

What are the Badges of trade?

These are a series of tests you can carry out

They are as follows:

1. Is there a profit-seeking motive in this activity you are carrying out?
2. How often do you carry out this activity?
3. Do you modify the item to make you gain more profit or make it sell quickly?
4. How long have you owned the particular item before actually selling it? The shorter the time the more likely it is trading.
5. Do you have a system in place for the item e.g. office, marketing system, and payment system?
6. What was the reason why you got the item initially?
7. What’s the nature of the asset?
8. Is the activity connected to what you do in your main job?
9. Do you have a financing arrangement in place to make items saleable?

So what happens if you have a trade?

If your answer is yes then it is most likely that you are trading.

You would need to register your business with HMRC revenue.

This can be done by getting more professional help or calling or the self-assessment helpline.

According to the law, you are required to inform HMRC about the existence of this trade or business by the 6^th month after the Tax year.

For example, if your hobby turned into a business in June 2019, you have to inform them by the 5^th of October  2021.

This is 6 months after the tax year of 2019/20.

You would also be expected to submit a self-assessment return.

The deadline for paper forms is 31^st of October 2021 and 31^st of January 2022 if you’re submitting online.

The penalty for not declaring trade to HMRC revenue

When HMRC finds out about this trade, you might have to pay a penalty.

This would be based on the amount of tax unpaid over the years including interest on the unpaid amount

Advice on the new hobby /activity turned into a trade

Rather than turning this hobby into a  financial burden and stress.

1. Inform the HMRC revenue tax of this new business.

2. You can write down business activities or write a business plan.

3. Get professional help to help the business finance.

4. Business marketing-Think of the marketing strategies to apply to make it more successful.

5. Get a budget in place and cash flow to help plan for the future.

Conclusion on your trade

The time factor is very important when it comes to the declaration with HMRC, I would recommend that you access yourself now.

For more information or support you can contact us

or click http:// https://www.gov.uk/log-in-file-self-assessment-tax-return