When is a hobby classed as a trading activity?

by Robin Beadle

For those of us with a hobby that either involves making craft goods, or collecting things such as antiques or models, we may well be regular participants at craft fairs, exhibitions or swap meets specific to our own particular interests. However, frequent “trading activity” could be viewed by HM Revenue & Customs (HMRC) as a business rather than a hobby and here is where things become a little more complicated.

Firstly, let’s put things in perspective. If you use a car boot or an online auction site maybe once or twice a year in order to sell off personal items that you no longer have need for, you are not trading and have nothing to fear from HM Revenue & Customs. (True, if you are selling a really high value item, you may be exposed to Capital Gains Tax but I will come back to that in a moment). This is different from buying an item in order to resell it at a profit which is a trading activity. Yes, the purchase of a single item can be classed as a trade.

 

Complexities arise where you may have a partially or self-funding hobby. For example, were you to purchase a job lot of cigarette cards purely to obtain one specific card for your collection, before reselling the others, you may be recycling your collection in order to improve it. Instead, (arguably from HMRC’s point of view) if you purchased the job lot knowing the value of the whole but without knowing of the existence of that one special card, then that again is a trade.

To alleviate the necessity of having to register for Self-Assessment for occasional sundry trading activities, HMRC introduced a £1,000 trading allowance from April 2017. (There is another one very similar available for sundry rental income for people who may let out their driveway, for example). The allowance is given automatically and means that if your turnover (total trading receipts) is less than £1,000 you need not tell HMRC and need not to include it on your Self-Assessment Tax Return (if you already file one), although if you do file already for other reasons, a “white-space note” may be prudent. The trading allowance is also available against more traditional sources of trading activities such as undertaking odd-jobs but there are anti-avoidance measures in order to prevent employers taking advantage of the allowances when paying their staff.

Although the allowance is given automatically, you can elect to disclaim it. This may be for pension purposes or, for example, your trading expenses exceed your income. This would give the possibility of loss relief although if HMRC argue that what you actually have is a hobby, then loss relief would not be allowable against other income.

VAT, however, is a different issue. Whilst the threshold for registration of VAT is a turnover of currently £85,000, if you are already VAT registered, you would need to charge VAT on any income or goods sold through your part-time activities as well, even though you may be able to claim the £1,000 allowance.

The above all relates to income tax and the business taxes of NIC and VAT. Capital Gains Tax (CGT), however, can arise on the profit for any sale of an individual item (or collection of items) not otherwise subject to income tax. Some items, such as cars, are specifically exempt from CGT (otherwise everyone in the country would be permanently making capital losses) and there is also a “Chattel exemption” of £6,000 per item/collection in order to exempt lesser value items from this tax. This means that only high value items (for example paintings) are likely to exceed the chattel exemption – available in addition to your annual CGT allowance of currently £11,700 – and ultimately become subject to the CGT.

For more information on any of the above points, please contact Robin direct.

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Robin Beadle

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