Badges of trade
Sometimes is difficult to tell when a hobby turns into a business activity. Once it does, you need to declare your income to HMRC. So what is defined as a trade?
There is no statutory definition of trade beyond that a trade includes a ‘venture in the nature of a trade’. When deciding whether your hobby counts as trade exists, HMRC will look into the ‘badges of trade’.
The badges of trade
There are nine badges of trade:
- Profit-seeking motive: an intention to make a profit support trading but is not by itself conclusive.
- The number of transactions: systematic and repeated transactions will suggest a trade.
- The nature of the asset: is the asset of a type that can only be turned to advantage by sale, does it yield an income or does it provide ‘pride of possession’ (for example, a picture for personal enjoyment)? An asset acquired for sale would suggest trading, whereas an asset acquired to yield an income would suggest an investment.
- Existence of similar trading transactions or interests: transactions similar to those of an existing trade may themselves be trading.
- Changes to the asset: such as the asset being repaired, modified or improved to make it more easily saleable at a greater profit.
- The way in which the sale was carried out: was the asset sold in a way that was typical of a trading organisation, which would suggest the existence of a trade, or did it have to be sold to raise cash in an emergency?
- The source of finance: was money borrowed to buy the asset and could the funds only be repaid by selling the asset?
- The interval between the purchase and the sale: assets that are the subject of trade will normally (but not always) be sold quickly. Consequently, the intention to sell an asset shortly after the sale will suggest trading. However, where the intention is to hold the asset indefinitely, it is less likely to be the subject of a trade.
- Method of acquisition: an asset that is acquired by way of inheritance or as a gift is less likely to be the subject of a trade.
More information on each point above can be found on the official government website.
Important note: the badges above are not a checklist and not every badge has to be present for HMRC to declare a trade. Furthermore, no particular badge is conclusive evidence of trade. It’s necessary to consider each badge and whether it is present or absent to form an overall impression of whether a trade exists.
How to inform HMRC
If you are earning a small amount of money from your hobby, such as sometimes selling baked goods for special occasions, it is unlikely that you will need to tell HMRC.
You don’t need to report it to HMRC if the income from self-employment is less than £1,000, also known as the trading allowance. However, each person is only allowed one trading allowance across all sources of self-employment.
If a person who is already self-employed and is earning more than £1,000, then he or she will need to pay tax on any income from a hobby business, even if the income is less than £1,000 a year.
If your income from your business for the tax year is more than £1,000, you must register for self-employment by 5 October after the end of the tax year.