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  1. #1
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    Question Hobby Vs Business dilemma

    Hobby Vs Business dilemma

    Under the guidelines on the HMRC website you are probably not trading if you donít plan to make a profit.

    ďYouíre probably not trading if you sell some unwanted items occasionally or you donít plan to make a profit. You canít use any losses you make as part of a hobby to reduce your tax bill.Ē
    So, that pretty much describes my intention. I have a full time job and only want to sell items Iíve made in my spare time to cover the cost of materials used i.e. No Profit.

    However, I read somewhere that merely selling an item on eBay constitutes an act of Ďbusinessí and could void home insurance! So I searched around for Home Business insurance and the quote I found was cheaper than my current non-business home insurance, so naturally I signed up. So Iím covered either way. But now this raises an interesting dilemma. Iím wondering if HMRC could use that fact that I have Home Business Insurance as evidence that I am actually trading?
    I should note that I have yet to sell any items, I am purely at the hobbyist stage but I was hoping that someone could provide a definitive answer on this.

    Who gets the final word on whether you are trading: HMRC or insurance companies?

  2. #2
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    Interesting question. You are trying to play the system. I don't think that there is a definitive answer to your question because it is you who makes the choice as to whether you are trading or not. However the situation that you have put yourself in leaves you open to potentially substantial consequences.

    Your insurer may refuse to pay out if you make a claim and if you are not registered as a self employed or have a limited company run from your home because you have, in effect, lied about being a business. As someone whose partner was screwed over by an insurance company because he was registered as self employed at his home address despite the fact that he worked from an office, I would dot the i and cross the t with your insurance provider. Tell them what you read and explain exactly what you are doing and make them decide whether business or personal home insurance is more appropriate. That way they can't wriggle out.

    HMRC would not be interested in pursuing a case against you if you are truly a hobby seller however if you are selling regularly they will view it as a business if other factors suggest that it is so..eg wholesale suppliers, business accounts with suppliers, professional associations, and business insurance.

    Where did you read "merely selling an item on ebay constitutes an act of business and could void home insurance" because the clause there is "could" and that is something to discuss with the insurance provider.

    HMRC did have a problem with hobby sellers registering as businesses and claiming their VAT back but never paying VAT on sales as they were selling at a loss (in effect, but breaking even because of VAT claims) and that is the only time they would make the determination that a hobby seller was a business or not. They have since closed the loophole by stating that business must make a profit.

    Paypal would probably make the determination that you are a business seller before either HMRC or your insurance company and demand that you get a business account!

    Hope that clarifies things for you,

    Ceri.

  3. #3
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    Ah, this is interesting.

    I am registered with HMRC as a sole trader, as was told that you had to be registered even if you had a tiny Etsy store that only sold an occasional piece. I also have a part time job.

    I've spent the past few years building up tools and equipment and investing in the business, so am yet to make a profit, although very much intend to. Would HMRC therefore class me as a hobby? If they class you as a hobbyist, do you still need to fill in a tax return every year? I'm not VAT registered so would not be trying to claim this back.

  4. #4
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    @ceri: I didn’t lie! I have every intention of selling items I make online so I was under (given) the impression that doing this constitutes a business. Everything I read up to that time implied that making and selling items from home constitutes running a business as opposed to administrative tasks only. This is exactly where I find the rules to be vague. I stated on my insurance application that my home business was not the primary source of income.

    Everything I read (and it also made more sense) that running a business and not telling your insurance company could invalidate insurance, not sure why telling them you are running a business when you are not would cause them any bother. All they care about is whether your activity poses a higher risk to your property or other people. But I will take your advice and double check my policy.

    @ShinyLauren: From the HMRC website:
    This will set out the form of the relief, which will depend on whether either the trading or property income exceeds the £1,000 allowance or not. Where the individual’s trading or property income is less than the allowance, full relief will be given so that the income is not charged to tax, unless the individual elects otherwise.
    Unless I make over £1000 I don’t need to register as a sole trader. As far as I understand it was for this reason the Government introduced the relief. They were smart enough to realise that there are many micro-entrepreneurs like me who want to test out a business idea first without having to be overly concerned about the tax implications if it fails or if it is very small in scale.

    This makes me think I have done the right thing as far as insurance & HMRC is concerned.

  5. #5
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    Aug 2016
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    You might be interested in this article from The Telegraph from a couple of years ago. When HMRC are deciding whether you are trading or not they use various 'Badges of Trade' which are listed at the bottom of the article, although I'm not sure how they would apply some of these guidelines to artists/makers/crafters.

    http://www.telegraph.co.uk/finance/p...y-taxable.html

  6. #6
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    Ultimately cases are decided on individual merit (or whim) by the inland revenue. So you need to negotiate personally, or employ a chartered accountant to do so for you. Dennis.

  7. #7
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    Quote Originally Posted by angmc View Post
    You might be interested in this article from The Telegraph from a couple of years ago. When HMRC are deciding whether you are trading or not they use various 'Badges of Trade' which are listed at the bottom of the article, although I'm not sure how they would apply some of these guidelines to artists/makers/crafters.

    http://www.telegraph.co.uk/finance/p...y-taxable.html

    Hi angmc,

    That is an excellent article but I think some of the information has been superseded by the new £1000 allowance introduced for 2017/2018 tax year. I haven’t found anything to suggest the allowance has been revoked. This means that a person can legally run a hobby business from home and as long as their income is below the £1000 threshold they do not need to declare anything to HMRC. But, you would still need Home Business Insurance, this is unambiguous to me.

    Getting back to my original question though: If a person assesses that they are NOT trading according to the HMRC ‘nine badges of trade’ test, does this also mean they do not need Home Business Insurance?

    Basically, do Insurance companies apply the same ‘nine badges of trade’ test as HMRC? If the answer is ‘no’, then does this create a contradiction i.e. you have Home Business Insurance even though you’ve told HMRC you aren’t trading.

    I suppose we have to find out for ourselves by contacting the insurance providers.

  8. #8
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    If you do tell HMRC then if you make a loss (expenditure v income) simply because you bought more than you've sold you can set that loss against any other tax. Maybe that is why the govt made that rule, they were missing out?
    Easy enough to get a business account from a bank then put all your income and expenditure through that and keep separate. easy then to do accounts at end of year. If you do online you have to do all the sums but the actual page if you have made a small profit or loss is only one or two pages as I recall from my days of doing that, and they don't ask for all the figures, just totals (but keep the paperwork just in case)
    Author: Pearls A Practical Guide
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  9. #9
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    if you don't want to set up a separate business bank account, but want to keep track of everything I can recommend the Wave accounting app. In it's most basic form it's free, and you can import both Paypal and Etsy transactions in quite straightforward to use. It also has the facility to scan and add receipts from 'real life' purchases via a photo app, which I find really useful. You can also link it directly to a bank account.

  10. #10
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    Quote Originally Posted by pearlescence View Post
    If you do tell HMRC then if you make a loss (expenditure v income) simply because you bought more than you've sold you can set that loss against any other tax. Maybe that is why the govt made that rule, they were missing out?
    No, I don't believe this is correct. I am not a tax expert but I remember reading on the HMRC website that you can only deduct expenses from income related to the carrying on of the trade, not any other income. It would be open to fraud if you could just deduct everything you buy as an expense against another source of income that is completely unrelated.

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