One of my friends bakes cakes for family and friends and another will have a go at making anything from gift bags and tags to canvas artwork but when would these hobbies become a trade?
Unfortunately it is very common to be self employed and not realise it – you aren’t running a business after all, it is just a hobby and you have a full time job – however if you are undertaking work with the intention of earning money chances are that HMRC will consider you to be self employed.
The line between a hobby and a trade is quite a fine one which is judged by criteria known as ‘badges of trade’. These badges include:
– Profit seeking motive
– The number of transactions
– The way the sale was carried out
– Interval of time between purchase and sale
Even just one of the badges may be enough to show trading however it is usually combinations which are considered. For more information on ‘badges of trade’ please see the following – https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim20205
If you think you are self employed you will need to register with HMRC. This can be done online using your NI number, business details (such as address) and the date you started trading. The following link takes you to HMRC self assessment overview – https://www.gov.uk/register-for-self-assessment/overview
Once registered you will need to complete a self assessment by the 31st January following each tax year end – you will be responsible for your own tax and NI contributions, be required to pay any tax due and you may also have to make Class 2 NI contributions.
Any profit you make will be taxable if your total earnings (including that from any other employment) exceed the personal allowance (£11,000 2016-2017). You will need to record your income and expenses on your tax return whether you make a profit or not and if you do this online your liability will then be calculated for you. Also if you make a loss it could be offset against your other income for the year so you could be entitled to reclaim an amount from HMRC rather than making a payment.
And if your circumstances change and you stop your self employment you just need to notify HMRC so that they do not chase you for future self assessments.
If your ‘hobby’ has grown into a business you may also have to start to think about VAT. From 1st April 2016 if your turnover for the previous 12 months exceeded £83,000 or will exceed that amount in the next 30 days alone then you will need to register for VAT.
For any help or advice on becoming self employed please feel free to get in touch with us either by phone on 01782 940380 or by email at firstname.lastname@example.org