How many times have you seen an article on a thriving young business or newly-successful entrepreneur, and discovered that their business “started out as a hobby and just grew and grew!”… or something similar. Annoying isn’t it! Here’s the rest of us working hard to build a business, and theirs “just happened”.

Still for every business like that there are probably hundreds of hobby sellers who never make enough money to consider themselves “a business”, but actually – where is the line between the two? More importantly, when does HMRC decide that your sales have turned you into a business, possibly without you even realising it?

Unfortunately there's no precise definition of what constitutes a business, and there's no set amount or allowance that you are entitled to earn before you need to register your business. In fact, even if you are trading but making a loss, HMRC will still expect you to register as a business.

So what do we mean by “trading”? Is selling your unwanted items on eBay considered to be trading? What about making and selling jewellery on Etsy? Does it depend on what you call yourself, or how often you make sales, or total value?

Indicators of Trade

HMRC use "indicators of trade" to establish whether they think you are actually running a business. The main indicators to consider when deciding if your hobby has turned into a business 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?

Be honest with yourself; you will probably know if your activities have moved from being a hobby to running a business. If they have, then get registered with HMRC as soon as possible. If you don’t register you could incur a “failure to notify” penalty of up to 100% of the tax due, as well as still having to pay the tax itself. A real double whammy to be avoided.

Sole Trader or Limited Company

You will need to decide of 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.

Conversely, the recent introduction of the new dividend tax means that the tax advantages of operating as a limited company have been reduced, and the extra accounting workload may outweigh any remaining advantages.

Unfortunately there is no single answer to the best business structure for any business, so take advice from a reputable accountant to find the most appropriate solution for your personal circumstances.

Accounts and Tax Returns

One big issue with “being a business” is having to do annual accounts and tax returns, which can be daunting and very time-consuming. You may find that you'll need the help of a bookkeeper or accountant to ensure that you do not make any mistakes (and HMRC hit you with an “inaccuracy penalty” if you go too far wrong, even if you did not know the rules).

Hiring a financial professional is always a sensible idea and a businesslike thing to do, so if your hobby has turned into a trade, make accounting the first task that you outsource.

If you’re anywhere in the Farnborough area and need help or advice on this issue, please call Kass Verjee of The Financial Management Centre – your local financial experts.