When does my hobby become a business?

Isn’t it great when your hobby and something that you love doing starts to earn you some money. But with the profit comes a stack of officialdom that running a business entails.

So how do you know when you have moved from a hobby into actually running a business?

Unfortunately there’s no precise definition of what constitutes a business. Equally there’s no amount or allowance that you are entitled to earn before you need to register your business for tax with HMRC.

In fact even if you are trading but making a loss HMRC will still expect you to register the business and file tax returns.

Badges of trade

HMRC refer to “badges of trade” to establish if you are actually running a business. The main indicators to consider are:

• Do you intend to make a profit?
• Did you buy, make or do up the goods with the intention of selling them on?
• Did you borrow any money to get things off the ground?
• Does the frequency and number of transactions (many and often) suggest that you are running a business?

You have to be honest with yourself; you’ll know if things have moved from being a hobby to running a business. Don’t try to kid yourself or HMRC that you are not trading. If you don’t register your business with HMRC you could incur a failure to notify penalty which may cost you up to 100% of the tax due as well as still having to pay that tax!

So as soon as you start to trade get registered for taxes and make sure that you complete your returns on time.

Sole Trader or Limited Company

Now that you’re trading you’ll  need to decide if you want to operate your business as a sole trader or a limited company. Tax returns and accounts can be simpler if you operate as a sole trader but there can be advantages for setting up as a limited company from the outset such as having limited liability for debts if things go wrong.

Changes in the taxation systems, with the introduction of the new dividend tax, mean that the tax advantages of operating as a limited company have been reduced although it can still be beneficial for businesses with larger profits in excess of £30,000.

There is never a “one size fits all” answer to the best business structure for any business; taking advice from a reputable accountant is essential to find the most appropriate solution for your personal circumstances.

Doing the Books

Every business needs to keep proper accounting records; getting a system of some sort would really help with this. It doesn’t have to be complicated and can even be a simple spreadsheet although the many Cloud online accountancy systems may be more suitable for your business needs allowing you to keep better control of your finances, knowing how much you are owed, what you have in the bank and how much you need to put aside for the tax man.

A Cloud system doesn’t need to cost a fortune and you should be able to negotiate competitive accountancy fees to compensate for any outlay as keeping your books in good order will reduce the work for your accountant.

Filing accounts and tax returns

Filing your annual accounts and tax returns can be a bit daunting. You may find that you’ll need the help of an accountant to ensure that you do not make any mistakes. It’s worth remembering that HMRC can fine you for getting it wrong even if you did not know the rules. They call this the inaccuracy penalty. Rather than risk incurring a fine, hiring a professional in areas of your business where your skills are weak or lacking is always a sensible idea and accounting is a perfect example of where this rule should be applied.

All that said …

Don’t let all the officialdom of running a business put you off; it can be frightening but being your own boss, even on a part time basis, could be one of the most rewarding things that you ever do in your life.