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Trade, activity or hobby?

Most of us have one hobby or activities we enjoy doing in our spare time that is now a trade. This might be because we don’t monitor this activity and then it turns this turns into a small business.

In the UK, we are expected to inform HMRC revenue if we are engaged in a trade and you should expect the profit from the trade to be taxed.


So what is a trade?

It is not defined in the legislation we depend on case law and from the decision made from court cases. That is the reason why its 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 is Badges of trade?

These are  series of tests you can carry out

They are as follow:

  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 that 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 item 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 a 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 6th month after the Tax year.

For example, if your hobby turned to a business in June 2017, you have to inform them by 5th of October  2018.This is 6 months after the tax year of 2017/18. You would also be expected to submit a Self-assessment return. Deadline for paper forms is 31st of October 2018 and 31st of January 2019 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 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 your self now.

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