Badges of Trade
22 May 2015, Artists, Musicians, Sole Traders
Do I have to pay tax on my hobby?
If you run a business from home the likelihood is that you will have to pay tax on profits. Not all activities related to buying and selling are recognised as trading by HMRC. To establish whether a person is carrying on a trade you need to consider the Badges of Trade. If you are selling off your old CD collection on eBay you are unlikely to be seen as carrying on a trade, but if you regularly buy and sell items online you will be considered to be carrying on a trade and subject to tax on profits.
Can I offset my losses?
The flip side to not recognising a trade is that losses from non-trading activity can’t be offset against other income. The most commonly cited example of this is gambling. Most gambling transactions result in a loss so HMRC take the view that anyone placing a bet doesn’t have a profit-seeking motive (first of the badges of trade). Gambling winnings are therefore not subject to tax, but the corollary is that your losses can’t be offset either.
Badges of Trade
Profit-seeking motive
An intention to make a profit suggests trading, but it is not conclusive by itself.
The number of transactions
Systematic and repeated transactions, i.e. buying and selling frequently, indicate a trade.
The nature of the asset
If assets are used to sell for a financial gain only this indicates a trade. However where they are used to generate income or for personal benefit, e.g. buying vintage cars and selling them after a lengthy period of ownership, this indicates a non-trading motive for ownership.
Existence of similar trading transactions or interests
Transactions that are similar to those of an existing trade imply trading.
Changes to the asset
If assets are repaired, modified or improved to make them more easily saleable or saleable at a greater profit this suggests a trade.
The way the sale was carried out
If assets are sold in a way that was typical of trading organisations, e.g. via an online shop, this indicates trading.
The source of finance
If money was borrowed to buy the assets sold with the intention to repay the loan from sale proceeds, this indicates a trade unless ownership of the assets was an investment or for personal enjoyment.
Interval of time between purchase and sale
Trading assets will normally, but not always, be sold quickly after acquisition. Therefore, an intention to resell an asset shortly after purchase will indicate trading. However, an asset which is to be held indefinitely is much less likely to be a subject of trade.
Method of acquisition
An asset that is acquired by inheritance, or as a gift, is unlikely to be the subject of trade.
All the badges will not be present in every situation. Some of those that are may point one way and some the other. The presence or absence of a particular badge is unlikely to provide a conclusive answer to the question of whether or not there is a trade.
