HMRC has recently published new guidance which is intended to clarify whether or not certain activities amount to being a business, or it’s merely a hobby. Unfortunately, like many things HMRC tries to do to help the public better understand its rules, all that they effectively achieve is to sow even more confusion.
The changes announced mainly concern small charities, churches and not-for-profit organisations who are operating nurseries and crèches, with HMRC’s original view being that where a charity supplies nursery or crèche facilities for a fee designed to only cover its costs, this was not a business activity for tax purposes. The new guidance effectively ignores the charitable objectives and instead just asks if there is a link between what the customer receives in return for their payment.
If the new guidance is to be believed, HMRC are effectively saying small charitable groups, who are just trying to help stressed parents with their childcare, are proper businesses. They are adding the cost and bureaucracy that this involves for absolutely no point; I stress this because there is absolutely no possibility of a profit being made and tax collected. So why oh why are you doing this Mr Harra?
Business or Hobby: It isn’t just about charities
The above snippet of news, I gleaned from my periodical trawl of HMRC’s press releases, got me thinking. I suspect that very few people have any idea if or when their little hobby business, probably started during the various Covid lockdowns, has potentially morphed into what HMRC consider a proper business.
So whether you sell things you’ve made such as crafts or cakes, buy and sell on Ebay or earn money playing in a band, it’s important to understand what the tax rules are, so read on.
Is my hobby actually a business?
If you are in any doubt, you need to start off by answering a series of questions known as HMRC Badges of Trade. https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim20205
- Do you sell products or services to make a regular income?
- Do you make items to sell on at a profit?
- Have you registered as a business on Etsy, eBay, or Amazon?
- Do you buy and hold stock?
- Do you buy items from wholesale sources to sell on for a profit?
- Do you plan to increase your income from your hobby?
- Do you have a website or a social media page where you market your products or services?
- Are you working towards creating a brand?
If you’ve answered yes to any of the questions, then it is likely that your hobby has now morphed into a business, and you have some actions to take.
Business or Hobby: What to do next?
First of all, you have to establish how big a problem you have. HMRC are not interested in tiny micro-businesses making no more than £1,000, but if your income is comfortably above this threshold then you are obliged to notify them, potentially pay tax on any profits and complete a self-assessment tax return each year.
However, if you do not have any other income, because perhaps you’re a stay-at-home parent, your hobby business profits will need to exceed the current Income Tax threshold of £12,570, also the NIC threshold from 6th July, before you pay anything to HMRC.
It is also worth noting that in recent years, HMRC have started to take a more relaxed attitude to hobby businesses with a profit level consistently well below the tax threshold and are increasingly telling those individuals that they do not have to complete tax returns in future.
However, if your hobby business is making more than £1,000, you are legally required to register for self-assessment. So, if you need help in this regard, or have any questions, please complete the information box on our website and we will contact you to have an initial chat and if necessary, arrange an initial appointment which will be free of charge.
Tax Accountant’s view
The changed guidelines on church crèches and the like is a prime example of yet again HMRC making a change with no thought to the consequences and I strongly suspect that once the howls of protest reach their doors, a rapid U-turn will be made.