Is it a Hobby or Self Employment?

[Cornwall]

At what point does a hobby become a business, in the eyes of the Inland Revenue or NIC?
I understood it to be when it went over a profit of £2,500 per year, is this still correct? Is there any case law to support.
e.g.I buy dolls from america (on the net) and sell through e-bay auctions, so do not make a lot of money in fact made less than £500 in a year, but the Tax Office have contacted me wanting me to register as self employed.
With thanks in anticipation.
signed: Cornwall

[hashman]

£2500 per year - news to me.

Basically if you are carrying on a business (and I use then term neutrally) with a view to profit then you are liable to tax on any profits realised. Even one-off transactions can be(and have been) treated as 'adventures in the nature of trade' and taxed. From what you have said I would say you are definitely trading.

You should have registered within 3 months. But as your profits are currently low the exception for small earnings will apply for Class 2 and 4 NICs. This should also get you out of the penalty of £100 for not registering.

[deanshepherd]

If you are purchasing items with the intention to resell at a higher value then that is a trade and all profits will be taxable.

I am unaware of any £2,500 threshold and in fact I would suggest that the defining point at which a hobby must become a business is when any profits are made.


Dean Shepherd
dean.shepherd@mmi-online.co.uk
MMI Accoutancy
www.mmi-online.co.uk

[King_Maker]

I am not aware of any such "£2500 pa" concession.

If this is your only source of income, it minimum Personal Allowance (£4895 for 2005-06).

If not, it will be taxed at you highest marginal rate of tax.

If you make a profit on a regular basis, it is likely to be classed as a Business. Otherwise it's a hobby, with no relief for any Losses.

If a business, you need to consider Insurance, Business rates, planning permission etc.

[King_Maker]

Sorry, my second parargraph should have read :

"If this is your only source of income, it won't be taxable, as it is less than the minimum Personal Allowance (£4895 for 2005-06)."

[amos]

Dear Cornwall,
Adding to my colleagues comments...
The profit motive is only one of a number of "Badges of Trade" which distinguish a trade from a hobby. "Frequency of transactions" might apply in your case, as well as others. The HMRC website may help you further.
Also, you do not necessarily have to make a profit in your early years, and losses are quite valuable!
The moral of the story, it might pay you to register anyway!
Good Luck!

[hashman]

I realise this is late but hopefully someone will read it.

Basically I have just come across a reference to a limit of £2,500 - but it is applies to the non issuing of tax returns by the Revenue where income does not exceed this amount - provided the tax due can be dealt with through PAYE.

Interesting?

[Cornwall]

With thanks to all for your help.
Just a point of interest, As the Tax Office (NIC) does not actually advise me as an individual that I have to inform them within 3 months,
Can a penalty be appealed on the basis that I had no knowledge of this time limit until I actually registered? Is there any case law to support?
Cornwall

[deanshepherd]

Unfortunately ignorance of the law is no excuse.

However, if your profits remained below the small earnings threshold (circa £4k per annum) since you started then the penalty will not apply.


Dean Shepherd
dean.shepherd@mmi-online.co.uk
MMI Accoutancy
www.mmi-online.co.uk