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Thread: Hobby Vs Business dilemma

  1. #21
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    Quote Originally Posted by Ceri View Post
    My company has 2 years from when it starts actively trading (making sales and not just purchasing tools, consumables and setting up infrastructure) to become profitable otherwise it would be deemed a hobby and not a business. I am not sure whether or not the same rules apply as a sole trader but I would imagine so otherwise people could offset their losses against their hobbies indefinitely and completely negate their tax obligations.
    Ceri,

    2 years to become profitable or you will be regarded as a hobby? Are you sure this is correct? It doesn’t sound right at all but I am always prepared to be corrected (educated!). I did a lot of research into running a limited company because I ran another business as a Limited Company many years ago and I know many rules have changed.

    However, I don’t recall ever reading anywhere that a limited company must be profitable. There are certain conditions in regard to remaining solvent, but that is completely different to being profitable.

    A limited company is regarded as separate legal entity, almost like it is a separate person, so I am fairly certain you cannot use any losses from the company to offset taxes on your personal income. Just like one person cannot offset their losses against another person’s income. They are two completely separate legal entities.

    Like I said earlier, I always like to be corrected when I am mistaken.

  2. #22
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    Since forming the company at the beginning of 2015 the details and rules about what can and cannot be done have changed. I didn't trade at all for the first year but did what is considered by HMRC to be considered as "pre-trading activities" (Making stock, setting up sales systems...) which is to say the company is not considered dormant but is not actively trading.
    A company may exist in this state, making a loss as long as it is attempting to become profitable within a "reasonable timeframe". I can't remember the exact phrasing and there was no exact timescale stated.

    The HMRC business advisor that I spoke to said it would be about two years of trading before HMRC would take a longer look at my small business unless there were red flags with it's trading activity. He did say that some sole traders have ended up with a tax bill because they were offsetting as if in business but trading as though it was a hobby.

    Business must intend to be profitable unless it is formed as social enterprise which has different rules. As a Sole Trader you must be intending to make a profit which HMRC can tax otherwise you should not be offsetting your losses. If you do this for too long, you will be considered a hobbyist not a business and liable for the tax you offset. I don't understand the full details because I have not read the full guidance manuals. That is the outline given to me by HMRC small business advisor and I trust that it is correct and I would advise anyone querying that to check it out themselves with HMRC. I have checked and no where does it overtly state that a business must make a profit...however in reality if you are constantly making a loss your business will not be regarded as solvent! That said, any worthwhile accountant will reduce your tax liability as much as possible by reducing your profit in a sensible manner (purchasing equipment, depreciation etc...)

    "Relief against income or capital gains: restrictions

    Restrictions may apply for claims to use losses against income or gains. Some restrictions limit the amount of loss, others deny relief for the loss.

    Only claim relief if you ran your trade commercially for profit. If your trade is not commercial, for example your trade is run as a hobby, you must use the losses against profits from the trade in later years:"


    This is taken from here Relief against income or capital gains: https://www.gov.uk/government/public...27-losses-2016


    What HMRC are attempting to do is create a situation which prevents companies from phoenixing after paying out all their profit as tax deductible dividends and all the small changes that they are incorporating are designed to make all businesses activity transparent.

    You cannot offset losses from a limited company against personal tax
    .
    I wasn't aware that you could offset losses as a sole trader against your taxable income but then that isn't something I have ever looked into but see the link above if you do.

    You can offset tax losses from one limited company against another limited company if both companies are owned by the same shell company;

    So for example, if you had a company that imported gemstones, a company that cut gemstones and a company which manufactured jewellery all registered as subsidiaries under the umbrella of another company (lets call it jewels ltd) then losses and tax liability could be offset against each. Accountants will suggest that each subsidiary has a different year end in order to move assets around in circles so that each company appears to make a loss at the appropriate stage of the tax year and a profit when dividends are payable. This structure is often adopted by multinational corporations and many company that wish to trade internationally. It is not always done for nefarious purposes but does perpetuate tax avoidance.

    I don't believe that your mistaken...It's yet another of those lack of plain English, clear as mud, HMRC revisions to rules and guidelines which contradict whatever we thought we knew

    In America the line between Hobby and Business is much more clearly delineated...or not! https://www.forbes.com/sites/mikekap.../#4e4b006d449c
    Last edited by Ceri; 19-08-2017 at 03:55 PM.

  3. #23
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    Hi Ceri,

    The only thing HMRC cares about is taking its share of income. Whether that income is derived from employment or a business or company is irrelevant to the HMRC.
    Running a business as a Sole trader is very different to running a business through a limited company because as I stated earlier, a limited company is viewed as a completely separate entity. It is, for all intents and purposes an ‘individual’. It has its own tax return and accounts which need to be submitted every year.
    One of the main differences between a LTD company and an individual is that a company MUST submit a tax return and company accounts every year regardless of whether it makes a profit or loss.

    I’m sure you have very trustworthy advisers, but I can almost categorically state 100% that there is no how, no way and no why that HMRC or Companies house can oblige you to make a profit, not in 2 years, not in two decades, not ever. No way.

    You can legally and honestly run a company, which can remain solvent but never make a profit, because as the director of a company you are legally permitted to lend the company money. Naturally any money you lend it cannot be considered a deductible expense from your personal income tax.

    So, for example, let’s say your company starts out with an initial capital of £10,000 and you make £5000 in sales but you have £15,000 in expenses. Your company has made a loss of £10,000. However, it can still be considered solvent because it has £0 liabilities. That £10,000 loss cannot be deducted from your personal income tax or any other source of income outside of the company structure. You are entitled to carry the loss forward against future income of the company.

    http://www.gov.uk/guidance/corporati...laiming-a-loss

    Now, if you want to continue doing business through the company and it needs to buy £5000 worth of stock then you as a director can lend it £5000 as long as it appears on the balance sheet. This would now show as £5000 cash as an asset and £5000 loan as a liability. It is still solvent.

    I would be very extremely highly surprised and humbled if I am wrong, but I just don’t believe I am. I have never heard of any clause or requirement for a company to make a reasonable attempt to be profitable. As long as you operate within the law and submit accounts you never have to make a profit.
    Last edited by handmadeblanks; 19-08-2017 at 06:41 PM.

  4. #24
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    Hi handmadeblanks,

    Quote Originally Posted by handmadeblanks View Post
    The only thing HMRC cares about is taking its share of income. Whether that income is derived from employment or a business or company is irrelevant to the HMRC.
    That is true. If employed, your tax and NI are deducted at source, If you run a business Corporation tax is payable annually and VAT (if registered for VAT) as well as the monthly payment of any tax and NI paid on behalf or deducted from employees. If you are self employed or the director of a limited company you must fill in your self assessment and pay/receive a rebate as necessary. Because there are only 7 ways to pay/transfer "money" HMRC is able to monitor all transactions (except cash which is why there have been trading raids on cash businesses in the last few years). If what is being transferred does not equate with expenditure, it's a red flag.


    Quote Originally Posted by handmadeblanks View Post
    Running a business as a Sole trader is very different to running a business through a limited company because as I stated earlier, a limited company is viewed as a completely separate entity. It is, for all intents and purposes an ‘individual’. It has its own tax return and accounts which need to be submitted every year.
    Again I concur. New rules make Annual accounting much easier to submit as a small business or as a micro entity as your accounts need no longer be prepared by an accountant and you can submit abbreviated accounts. https://www.gov.uk/government/public...art-1-accounts



    Quote Originally Posted by handmadeblanks View Post
    One of the main differences between a LTD company and an individual is that a company MUST submit a tax return and company accounts every year regardless of whether it makes a profit or loss.
    This is not so different anymore. As a director of a limited company I submit my annual (in my case abbreviated) accounts to Companies House and HMRC then send "a notice to deliver a Company Tax Return" then I must file a Tax return with them. This must be done regardless of Loss and whether there is any Corporation Tax to pay or not.

    A Sole trader must send in a Self Assessment Return.

    An individual with a stream of income which does not derive from employment (eg renting a room, share dividends etc..) and where Income Tax is not deducted at source must fill in a Self Assessment Return.

    Quote Originally Posted by handmadeblanks View Post
    I’m sure you have very trustworthy advisers, but I can almost categorically state 100% that there is no how, no way and no why that HMRC or Companies house can oblige you to make a profit, not in 2 years, not in two decades, not ever. No way.
    Possibly that is correct, however my trusty advisors were an HMRC small business advisor who has worked for the Inland Revenue (as it once was) for over 40yrs and an independent accountant who has specialised in working with small and developing business for 20yrs. Both of these people are friends I'd trust with my life and whom explain things to me in plain English (although I may unintentionally paraphrase, so two years was the target we agreed I'd set myself based on all of our understanding of the rules that had changed and those that are in the process of changing in the tax year 2016/17).

    Quote Originally Posted by handmadeblanks View Post
    You can legally and honestly run a company, which can remain solvent but never make a profit, because as the director of a company you are legally permitted to lend the company money. The reverse is not true however. Naturally any money you lend it cannot be considered a deductible expense from your personal income tax.
    So if you have the resources to indefinitely float a business that is failing to make a profit without bankrupting yourself, you can run a business that is not intended to make a profit. Likewise if your business generates too much profit in a year you can borrow from the company in the form of a Directors loan...

    Quote Originally Posted by handmadeblanks View Post
    So, for example, let’s say your company starts out with an initial capital of £10,000 and you make £5000 in sales but you have £15,000 in expenses. Your company has made a loss of £10,000. However, it can still be considered solvent because it has £0 liabilities. That £10,000 loss cannot be deducted from your personal income tax or any other source of income outside of the company structure. You are entitled to carry the loss forward against future income of the company.
    But there is a time limit for carrying losses forward...you cannot continue indefinitely. For example;

    Loss carried forward

    You can carry forward your loss, or the unused part of the loss, to use against:
    •profits of the trade in later years
    •income from a company that you transferred your trade to, wholly or partly in exchange for shares in the company (pre-incorporation loss relief). Only make the claim if you still own the shares

    Put the unused 2015 to 2016 loss and any unused losses from earlier years in box 35, box 80 or box 24 as appropriate.

    You must use these losses against the profit in the trade, or income from the company in 2016 to 2017 and later years. Pre-incorporation loss relief is claimed in the Post-cessation trade relief and certain other losses section of the Additional information pages.

    The time limit for claims against profit of the same trade is 5 April 2020.


    http://www.gov.uk/guidance/corporati...laiming-a-loss


    Quote Originally Posted by handmadeblanks View Post
    Now, if you want to continue doing business through the company and it needs to buy £5000 worth of stock then you as a director can lend it £5000 as long as it appears on the balance sheet. This would now show as £5000 cash as an asset and £5000 loan as a liability. It is still solvent. You can continue doing this every year forever if you choose and there is nothing HMRC or Companies house can do because it is totally within the law.

    I would be very extremely highly surprised and humbled if I am wrong, but I just don’t believe I am. I have never heard of any clause or requirement for a company to make a reasonable attempt to be profitable. As long as you operate within the law and submit accounts you never have to make a profit.
    I believe that profitability was not compatible as an indicator of carrying out business when HMRC looked at how business is described when taking into account charities and social enterprise. Now that HMRC are slowly sorting out the characteristics of businesses to determine whether they should be generating profit and therefore income for the coffers they will use profit or lack thereof as an indicator as to whether someone is running a business or is a hobbyist. Course, I am quite prepared to be wrong...I just prefer to err on the side of caution!

  5. #25
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    ...and speaking of caution...did you get a definitive answer from your insurance company?

  6. #26
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    Quote Originally Posted by Ceri View Post
    ...and speaking of caution...did you get a definitive answer from your insurance company?
    No, but I double checked my policy

    Quote Originally Posted by Ceri View Post
    In the early 90s whilst he was on holiday there was a fire at his flat and the insurance company fought the whole pay out because of the computer and software claim whereby they claimed his home insurance was invalidated by working from home.
    From what you wrote earlier, an insurance company claimed your partner invalided his insurance by working from home, right?

    Well this is a copy of the question from my Insurance Statement of Fact, you can see clearly I answered YES:

    Is any part of the property used for business purposes? (note: ‘business purposes’ excludes occasional clerical/administrative work
    where you don’t have visitors to the property)
    Yes

  7. #27
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    Following this with great interest as I'm edging ever closer to turning my hobby into a small business. Had no idea about being classed as a hobbyist rather than a sole trader, so this is a very welcome discussion!

  8. #28
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    I'd recommend if anyone has any questions that they contact HMRC and hear from the horse's mouth so to speak. They were extremely helpful when I was starting https://www.gov.uk/working-for-yourself

    I keep my own accounts with a simple spread sheet, and my tax return took a grand total of 7 minutes to complete online in July. The tax office sent me on a free accounts/tax return course which was for 2 days and really useful.

    Quote Originally Posted by susieq View Post
    Following this with great interest as I'm edging ever closer to turning my hobby into a small business. Had no idea about being classed as a hobbyist rather than a sole trader, so this is a very welcome discussion!
    Last edited by LydiaNiz; 21-08-2017 at 08:06 AM.

  9. #29
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    I agree completely that contacting HMRC is always best for clarification. Please be advised that they are cutting their workforce and closing the majority of their local tax offices and moving a number of their centrally located offices over the next few years. The long term goal of making tax digital (quarterly reports/payments/refunds) and merging the tax and universal credit systems has been delayed but the closing of offices which was meant to occur around the same time hasn't been delayed or cancelled. At the moment it is relatively easy to find an appropriate person to speak to. That may change!

    On the digital front HMRC are very helpful and have a number of webinars and youtube videos to educate people with regards their bookkeeping responsibilities as well as free software for payroll reporting. They also have digital assistants so you can chat through issues online rather than a costly phone call.

  10. #30
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    Quote Originally Posted by susieq View Post
    Following this with great interest as I'm edging ever closer to turning my hobby into a small business. Had no idea about being classed as a hobbyist rather than a sole trader, so this is a very welcome discussion!
    Hi susieq,


    This is the page you need to read, it's a description of the £1000 tax allowance straight from the HMRC.
    REF: https://www.gov.uk/government/public...ailed-proposal

    Under the General description of the measure it says
    "Where the allowances cover all of an individual’s relevant income (before expenses) then they will no longer have to declare or pay tax on this income."
    It can't be any clearer than that.

    ● Earn up to £1000 and the effect of the relief will be that the profits from the trade will be nil, so you do not need to declare it to HMRC.
    ● Earn over £1000 and you will be expected to declare it to HMRC.
    Last edited by handmadeblanks; 24-08-2017 at 07:51 AM.

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