Trading as Business

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It is not always obvious when a pastime becomes a business and when you must declare your earnings to HMRC. There is no statutory definition of a trade other than that it includes a “business like a business.” As a result, while determining whether a trade exists, HMRC looks at the ‘badges of commerce.’ These trading indicators were created using case law.

The signs of business: There are nine trade badges.

  1. Profit-seeking motive: wanting to make money is a good reason to trade, but it’s not enough to prove anything.
  2. The number of transactions: a trade is likely if many transactions are done in the same way over and over again.
  3. The type of asset: Does it have to be sold to make money, does it bring in money, or does it give the owner “pride of ownership”? (for example, a picture for personal enjoyment). When you buy something to sell it, you are trading. When you purchase something to make money from it, you are investing.
  4. Similar trading transactions or interests: Transactions identical to those of an existing trade may also be trading.
  5. Changes to the asset: Has the asset been fixed, changed, or made better so it can be sold more efficiently or for more money?
  6. How the asset was sold: Was it sold in a typical way of a trading organisation, which would indicate a trade, or did it have to be sold quickly to get cash in an emergency?
  7.  Was the money used to buy the asset borrowed, and could the loan only be paid back by selling the asset? 
  8. The time between the purchase and the sale. Usually, but not always, assets that are part of trade are sold quickly. So, the plan to sell an asset soon after buying it will indicate trading. But if the goal is to hold on to the asset for a long time, it is less likely to be traded.
  9. Method of getting the asset: An asset inherited or given as a gift is less likely to be traded.

It’s important to remember that the list above is not a checklist, and not every badge has to be there for a trade to happen. Further, no particular badge is conclusive evidence of a business. Instead, you have to look at each badge and see if it is there to get a general idea of whether or not a trade exists.

If you make a modest amount of money from your pastime, such as selling birthday cakes, you may not need to report HMRC. The trade allowance means you don’t need to report self-employment income under £1,000 to HMRC. Each self-employed person is only given one trade allowance. A self-employed person earning more than £1,000 must pay tax on hobby income, even if it’s less than £1,000.

If your business made more than £1,000 last year, you must register for self-employment by 5 October.

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