When does a hobby become a business?

Image representing eBay as depicted in CrunchBase

Image via CrunchBase

HMRC are actively searching the internet for evidence of eBay traders that are consistently selling goods on eBay. They are known to be exploring the use of ‘internet robots’ to scour cyberspace!

And this activity is not necessarily restricted to eBay traders. What about car boot sales, sales via classified ads? Which raises an interesting question – when does a hobby become a trade, and more importantly, when do any surplus funds become subject to tax?

Generally speaking if you are selling your own private possessions you will not be trading. However you may be considered ‘in business’ if you habitually buy and sell goods on eBay and/or at car boot events. The list that follows is the published ‘badges of trade’ that HMRC use when considering this matter.

1. An intention to make a profit supports trading.
2. The number of transactions involved – systematic and repeated transactions support trade.
3. The nature of the goods sold – are the goods only capable of being turned to advantage by being sold? Or do they yield income, or give enjoyment through pride of ownership?
4. Existence of similar trading transactions – was this a one-off transaction or part of a pattern that suggests trading?
5. Changes to the goods – were the goods repaired, modified or improved to sell them more easily?
6. The way the sale was carried out – were the goods sold in a way that indicates trading, or to raise cash in an emergency?
7. The source of finance – was money borrowed to buy the goods? Were any profits to be used to repay the loan?
8. Interval of time between purchase and sale – goods being traded are usually bought then sold quickly
9. Method of acquisition of the goods – goods acquired by an inheritance, or as a gift, are less likely to be the subject of trade

As you can see one or more of these cases could apply to most hobbies.

The current penalty regimen adopted by HMRC precludes sticking your head in the sand. Don’t wait for the brown envelope to appear. If you are uncertain about the tax status of your money-making hobby call us now.

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Good news for those working from home

Working from home allowance

You may be interested to learn that HMRC have increased the tax free allowance that employers can pay their employees if they are required to work from home. The allowance is intended to compensate employees for the additional costs of home working, heat and light etc. From 2008-09 onwards the allowance has been increased to £3 a week. (Previously £2 per week)

If by chance you work from home and your employer does not pay you the allowance, you may be able to make a claim for the cost of running a home office. Unfortunately the present agreed weekly allowance is still £2 per week – HMRC have not yet confirmed that they will allow a similar 50% increase. However it is reasonable to assume that this would apply.

In both cases if it can be demonstrated that actual additional costs of home working are more than £2/£3 per week, employers could pay more than the £3 allowance and un-reimbursed employees may be able to claim their actual costs.

Unfortunately the criteria which apply to the tax free payment from employers is less restrictive than the rules which apply to a claim from employees who have to meet their own homeworking costs. If you would like more information on this issue please call.