Transferring from "hobby" to sole trader

[BobTB]

Sorry of this is too long or complicated for this forum. Just say and I'll go and pay someone to answer!

I am in receipt of state pension
I still work and have income is through a ltd company as a consultant engineer - paid entirely as dividend. I have an online accountant for this.
Since 2016 I have also provided sound hire for specialist small festivals and concerts. This was never intended to be profit making, just cover costs or make a small loss.
Until 2023-24 tax year revenue was below the Revenue Allowance and no tax return was made. Some records are missing.
In 2023-24 Income was around £6000 and must be declared. There is still a loss of about £1200 (which can be claimed against other income).

My problem is with capital purchases, cables and the like (mainly second hand), prior to April 2023. These are still in use. Depreciation of sound equipment is low, in some cases zero.
£7500 from 2016 to April 2022 are documented, priced at at current value.
£4500 in the 2022-23 tax year are documented, again today's value. I believe that the tax return for this year can still be corrected.

Accounting is on a cash basis for simplicity.

First question - when did trading start? Would HMRC take this as 2016 when the first equipment was purchased and work done or 2023 when profit exceeded the Revenue Allowance.

Next, how can I account for the equipment purchased prior to April 2023?
If trade starts in April 2023 I believe prior expenditure can be counted as incurred at day 1. This is the simplest approach and gives a £10K+ loss
If trade starts in 2016 then expenses prior to 2022 are lost. But I still have the equipment so how is this accounted for? Can it remain my personal property and just never go through the accounts?

This issue aside it is all straight forward and I'm happy to put figures together myself.

Thanks.

[wamstax]

it is a question of fact whether a person is trading and when trading commenced and both these aspects would be considered taking all the circumstances of your activity into account.

First of all I would say that after 2013-14 and subsequent years if profits/losses are calculated on a cash basis then there is no scope for setting off losses against your other income.

There are also provisions that restrict the reliefs available for losses that are incurred in a trade not carried on on a commercial basis - see https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim85705

Otherwise, if you are in fact carruying on a trade on a commercial basis and with a view to profit then you would be chargeable to tax if your profits exceeded any reliefs that were available. Likewise if having carried on a trade with a view to profit but you in fact made losses then you would be able to set off any "tax" losses (i.e. accounts profits adjusted for things like depreciation and personal use etc and taking into account capital allowances that may be allowabe on your plant and equipment etc.) could either be set off against your other income or carried forward against future profits from the same enterprise.

Commencement date would be the date that you ceased operating as a hobby and started to carry on the activity on a commercial basis and with a view to profits. Losses and expenses prior to the date of commencemernt would be lost (and treated as personal) and you would be able to introduce the equipment at its current open market value. Not sure why you would wish to keep the equipmnt as personal as if there are profits you would surely want to keep your exposure to tax to a minimum. Admittedly if you sold any equipment in the future and the selling price exceeded available written down values you would incur a balancing charge but this wouldn't result in any taxes exceeding any relief previousy claimed against the trade profits. Yes Capital gains could apply to such assets but unless any item reaped more than £6K they would be exempt chattels for CGT purposes.

Hope that this helps you but if your activity has increased in frequency to get you £6K profits each year then I would consider that this would be seen as a taxable source of income and to be disclosed to HMRC under SA to regularise matters going forward.