Many of us partake in hobbies which are purely for our own pleasure. Sometimes, however, particularly if those hobbies are of a creative nature, they can be appreciated or utilized by third parties, which often means they are accompanied by a monetary transaction. Is this type of income taxable? It depends.
WHAT IS YOUR INTENT?
As far as HMRC are concerned, hobbies are not normally considered to be a trade, and therefore any incidental income is not taxable. However, you should consider the following checklist which the Inspector uses to determine whether or not you are trading rather than indulging in a pastime:
- Are you seeking to make a profit?
- Is the income frequent and of a similar nature?
- If you are selling assets, how long have they been in your possession and why are you selling them?
- Is the income connected to an existing trade?
- Do you advertise or promote the items you are selling?
These criteria are known as the “badges of trade” and can be used to determine your intent – i.e., to make a profit, or just to reimburse your costs.
For example, if you are making occasional greetings cards for third parties and being reimbursed for the costs you have a different intent than if you are advertising and regularly selling at a price that includes an added amount for your time and skill.
Similarly, if you purchased an antique, kept it for a year or so and then sold it on E-bay, your intent would be different than if you were regularly buying antiques for the purpose of selling them in an auction. (Note: If that single item was sold for more than £6,000, any profit (or gain) would however be liable to capital gains tax. )
WHAT MUST YOU DO?
If the badges of trade do suggest you are trading, then you must register your activity with HMRC, within 3 months of the date you began, even if your income is minimal. Failure to do this may result in a fine of £100. You will also be liable to pay Class 2 NIC (self-employed stamp) and to complete a self-assessment return for each year your trading activity continues. You are also obligated to keep adequate records of your income and expenditure, so that you can accurately determine what profit (or loss) you have made. Generally speaking, losses can be set against your other income for the same tax year, although if the Inspector considers that you are purposely not seeking to make a profit, he may disallow the set-off.
Many successful businesses started off as hobbies for their proprietors, and it can be very satisfying as well as rewarding to earn your living by indulging in your favourite pastime or sharing your particular talent with others – just don’t forget to share it with the taxman!