Many people dream of turning a hobby into a business, either as a way of boosting pension income in later life or as a means to escape the rat race. But at what point does a hobby become a business?
We have recently been approached by Henry (not his real name) who has a full time day job and a talent for magic. In his spare time Henry has performed at the odd party, usually for family and friends, and has occasionally received small payments for these appearances, but never more than a few hundred pounds a year. This has always been treated as a non-taxable hobby and the income was in any case well within the £1,000 trading allowance, so it has not been declared to HMRC.
However, Henry is becoming well known in his locality and is likely to receive more substantial income from his wizardry to the extent that he may reduce his hours at the office, freeing up time to develop his magic business.
Historically, HMRC have been cautious about accepting a hobby as a business because this would mean that losses could be offset against other income. However, once Henry can demonstrate that he is actively seeking work as a magician, coupled with the fact that he is surrendering some of his regular employment income, that is good evidence to demonstrate to HMRC that he is now acting with a view to making a profit rather than for leisure. There are other things Henry could do to show that he is now trading, for example, opening a dedicated bank account for the business, perhaps putting some of his own savings into the business as capital, developing a website, joining The Magic Circle.
We will be advising Henry on how to register his business with HMRC as well as providing advice on the structure for his new business. We will also be discussing with him issues such as how best to keep his accounting records, retaining cash to pay his tax liabilities and also National Insurance implications given that he still has a paid employment.
Henry has also told us that, over the years, he has bought various pieces of equipment and props; he wonders if he will get any tax relief for these past purchases? We have recommended that he establishes the current market value for these items, perhaps by looking at online auction sites. The equipment will then be introduced at that value on official commencement of the business and tax deductions will be claimed from that point.
If you are thinking of developing a hobby or business idea, please talk to us so that we can help you to establish the point at which you start to trade and advise you on the consequences of trading.