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Where Taxpayers and Advisers Meet

Is it a Hobby or Self Employment?

Cornwall
Posts: 16
Joined: Wed Aug 06, 2008 3:34 pm

Postby Cornwall » Mon Feb 13, 2006 7:35 am

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
Posts: 1277
Joined: Wed Aug 06, 2008 3:31 pm

Postby hashman » Mon Feb 13, 2006 7:56 am

£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
Posts: 1019
Joined: Wed Aug 06, 2008 3:23 pm

Postby deanshepherd » Mon Feb 13, 2006 7:58 am

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
Posts: 6538
Joined: Wed Aug 06, 2008 3:22 pm

Postby King_Maker » Mon Feb 13, 2006 8:01 am

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
Posts: 6538
Joined: Wed Aug 06, 2008 3:22 pm

Postby King_Maker » Mon Feb 13, 2006 8:03 am

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
Posts: 1
Joined: Wed Aug 06, 2008 3:34 pm

Postby amos » Tue Feb 14, 2006 2:28 am

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
Posts: 1277
Joined: Wed Aug 06, 2008 3:31 pm

Postby hashman » Wed Feb 15, 2006 7:31 am

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
Posts: 16
Joined: Wed Aug 06, 2008 3:34 pm

Postby Cornwall » Mon Feb 20, 2006 4:10 am

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
Posts: 1019
Joined: Wed Aug 06, 2008 3:23 pm

Postby deanshepherd » Thu Feb 23, 2006 5:13 am

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


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