Hobby or Business?

If you receive money or gifts in connection with your hobby, do you always have to declare them to HMRC and pay tax on them? Partner Christiaan Hansen discusses the tax implications and responsibilities.

If you undertake a hobby in your spare time which generates income and you are lucky enough to get paid in cash or in kind, you might have to pay tax. The dividing line between income from an activity being taxable or not depends on whether it counts as a hobby or as a trade.

Are you trading?
Receiving payment in return for goods or services you provide doesn’t automatically mean that you’re trading. HMRC’s guidance sets out several criteria that must exist before a mere hobby becomes a business.

What about gifts?
The value of payments in kind, including unsolicited gifts, must normally be considered as income. Usually, you should value these at the amount of money you could sell them for. Therefore, the amount for tax purposes will often be much less than the cost of the gift to the recipient.

Exempt income
If your activity meets the criteria of a business, but the amount of income it generates is relatively low, it may be exempt from tax. The “trading allowance” allows you to receive up to £1,000 of income (before any expenses you incur) per tax year without having to declare it or interact with HMRC. The trading allowance applies automatically in this situation.

Depending on the figures, it may be more beneficial to disclaim the trading allowance to claim expenses against the income instead.

Compliance requirements
If your income is not covered by the trading allowance, you’ll need to register as self-employed with HMRC and complete self-assessment tax returns, even if you make a loss.

Even if currently your income is exempt or is derived from a hobby, you should keep records of it and any associated expenses to protect yourself in the event of questions from HMRC.

IN SUMMARY
Income from a hobby is not taxable. But if your hobby becomes a business the income is tax exempt unless it exceeds £1,000 in a tax year. When working out income you can ignore any costs incurred in generating it. The value of any gifts you receive must also be taken into account.

It is important to keep records to justify your position.

The JRW Hogg & Thorburn team would be more than happy to assist you and answer any further questions you may have.