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Do you have a hobby? Most people accept that being able to have some ‘me-time’ during the course of our busy lives is a must, especially if looking for that much sought after work/life balance.
So what happens if your hobby begins to take on a life of its own, encroaching into the work (or any other) side of that finely tuned balancing act? Going to the gym, binge watching box sets, a round of golf or even playing retro arcade games on your mobile – they can begin to eat into your spare time.
But, what if you have a creative hobby, and you find that, where once upon a time, you might showcase your skills at Christmas or for birthdays, you are now being asked to produce or provide something for someone every week? A keen artist, baker, photographer, piano player, sculptor, carpenter (the list is almost endless) could all find that their hobby that once took up their Saturday afternoons at their leisure may now be a five nights a week commitment.
And, if they’re really that good, they may find that there’s a financial incentive on offer, to ease the burden of the inevitable time cost suffered, if nothing else. In situations like this, when does a hobby become a business, and what are the tax consequences?
Over time, the UK has developed the ‘badges of trade’ – a set of commonly accepted indicators based on a wide range of tax cases. These seek to determine whether a trade does exist, and can be summarised as follows:
- Profit seeking motive – was the item or service sold with a view to making a profit
- Number of transactions – was there only one occasion of sale, or are there many
- Nature of the asset – is it something that is commonly expected to be sold
- Existence of a similar activity – do others operate a business undertaking the same activity
- Applying a process – do you change, manufacture, add to/repair something before selling it
- How was it sold – was it an ‘over the counter’ sale or was another method needed
- How was the creation of the asset funded – was a loan needed to acquire it
- The amount of time that passes – was the item held for a short or longer period prior to sale
- How it was acquired – was it bought, received as a gift or inherited
If an artist draws portraits in the park at weekends for their own pleasure, this is clearly a hobby – while some of the above might vaguely apply, common sense tells us the artist is not trading. But, suppose they set up a stall in the park, get a chair and desk and put up a sign advertising what they do and the cost per picture? While not all of the badges would apply, it’s clear that several do, and that same common sense will tell us they must be trading.
Only this month, HMRC announced a crackdown on ‘side hustlers’ who use the likes of Gumtree, Vinted, Etsy, Ebay etc. to sell goods. While the rules HMRC refers to have been around for many years (so are not ‘new’), someone expanding their hobby by selling goods they’ve made in this way probably is trading. There is of course a fine line in most cases, but if a creative hobby starts to take up more of your time, and starts to be come financially beneficial, it’s probably time to consider whether that boundary has been crossed from hobby to trade. For more information on what to look out for, and help with your tax affairs, please contact Ian Haynes at ihaynes@hwca.com.
