when is a hobby a taxable trade

HC Monthly News Bulletin: May 2022 | HaesCooper – Chartered Accountants & Chartered Tax Advisers


Reporting on news items affecting UK tax and business matters primarily of interest to UK Small and Medium-Sized Enterprises (SMEs).

UK Tax News Items

Basis Period for UK tax

The Chancellor announced in his Spring Budget a major change to the UK tax system for the annual basis period to be applied to ‘unincorporated’ UK businesses.

This primarily affects UK SMEs who trade as sole traders / partnerships and who have a current annual accounting date that is not in line with the date of 31 March or up to and including the tax year end date of 5 April.

From April 2024, the new annual basis period for establishing the annual taxable profits for unincorporated businesses, is to be in line with the tax year end date. (An unincorporated business’s accounting year end date that is currently 31 March or is from 1 April to 4 April inclusive will be accepted as co-terminus with the 5 April. So the proposed change to the UK Basis Period tax rules will not apply to those unincorporated businesses).

As the announced start date for the new basis period rules was said to be April 2024, many affected SMEs have deferred looking to see the impact on their taxation position of these proposals. This is not the best idea. The proposed changes to the basis period for taxing unincorporated businesses, show that the current tax year to 5 April 2023 is to contain ‘transitional’ provisions that could increase your 2022/2023 taxable profits. In addition, if you are an unincorporated business that incurred losses up to 5 April 2022 (perhaps due to the Covid pandemic) then by not reviewing the proposed new rules, and not taking any necessary action, you could curtail the loss relief available to you.

In short, if you are an unincorporated business that has an annual accounting date that does not correspond the tax year end (or 31 March) then you should provide your up-to-date business financial records to your accountant as soon as possible. This is so action can be taken to either change your business’s annual accounting date to 5 April 2022 (or 31 March 2022) or change your business’s annual accounting date to 5 April 2023 (or 31 March 2023) with advice as to the rather complex transitional provisions for the proposed change to the basis period tax rules, and their impact on your tax position for the tax year 2022/2023.

The majority of unincorporated UK SMEs already have an annual accounting date that corresponds to the tax year end date (or 31 March) and so will not be affected by the proposed new basis period tax rules. However, if you are unincorporated UK business with an annual accounting date that is not 5 April (or 31 March) then you need to act now so that you are aware as to what impact the proposed changes to the basis period tax rules will have on you and what you should be doing to mitigate any increase to your tax liability for the ‘transitional’ current tax year 2022/2023.

SEISS Grants

In our previous SEISS Tax Issues blog, we discussed how SEISS Grant claimants should check their claims to ensure that no SEISS Grant had been overpaid to them. If that is found to be the case, then those businesses should ensure that they repay to HMRC the overpaid SEISS Grants asap.

HMRC previously announced that they are to check all SEISS Grant claims. HMRC have now announced that they are to start to write to those taxpayers who HMRC are aware have had their 4th and/or 5th SEISS Grant reduced by more than £100 asking them to repay the overpaid amount. The reduction in the SEISS Grant entitlement being due to amendments made after 3 March 2021 (the date by which the claimant’s 2019/2020 Tax Return had to be filed to HMRC) to the claimant’s Tax Returns for any of the tax years 2016/2017 to 2019/2020. These four tax years being the basis period for the calculation of the claimant’s average taxable profit to establish that the claimant qualified for the 4th and/or 5th SEISS Grants under the ‘profits condition test’.

If you should receive one of these HMRC letters, it’s important you deal with it by either repaying the overpaid SEISS Grant or requesting a time to pay arrangement with HMRC.

If you disagree with the HMRC’s decision, then you can lodge an appeal to HMRC within 30 days of the date of the HMRC’s letter.

Employment Status

In previous HaesCooper Bulletins we have covered the tax complexities of establishing whether somebody is an employee or self-employed for the purposes of the UK Income Tax and National Insurance (NI) rules. This subject is ever-changing due to the number of cases being decided through the Courts. Over recent times, some self-employed status decisions found for the taxpayer and in other cases, quasi employment status found for HMRC. These recent Court cases have primarily considered the anti-avoidance tax rules more commonly known as ‘IR35’, or ‘disguised employment’, usually involving the taxpayer’s use of a limited liability personal service company.

The fundamentals of employment status go right back to a 1967 ‘Ready Mixed Concrete’ case involving the NI status of one of the company’s drivers. The Court found for the company – the driver was classed as self-employed – having looked at the main tests of substitution, control and mutuality of obligations.

Deciding on the answers to the above tests, and then agreeing them with HMRC, became less clear over the years since 1967. In view of this, and following on from the relatively new IR35 anti-avoidance tax rules, HMRC developed an aid for use by taxpayers known as the ‘Check Employment Status for Tax’ (CEST).

The HMRC admits the problem is that about 20% of the cases using CEST do not receive a clear determination of their employment status for UK tax and NI. So, while helpful to most users, CEST still doesn’t bring a wholly satisfactory solution to this long-term employment status determination issue.

As recently suggested by the Chartered Institute of Taxation (CIOT), isn’t it time for HMRC to look at IR35 yet again and come up with a solution? Perhaps – as the CIOT suggest – based on the Statutory Residency Test (SRT). SRT was introduced a few years back now to establish a clear set of tests that would decide if a person was resident in the UK for tax purposes. Surely it is possible to come up with a similar ‘statutory based’ tests system to establish if somebody is employed or self-employed for UK tax purposes!

When is a hobby a taxable trade?

In these tricky economic times, you may be considering expanding a hobby in order to make some extra cash. If this is the case, you may also like to know when HMRC will take an interest into your income producing hobby activities!

The first thing to say is that HMRC are reluctant to actively pursue the trading status for a hobby, as HMRC are concerned as to the likelihood of providing tax relief for annual losses. However, HMRC have published guidance as to what they consider is a trade within their HMRC Manuals – see BIM20205 – which sets out the so called ‘nine badges of trade’ as based on tax case law.

In short, it can be said that a hobby is usually undertaken for pleasure whereas a trade must be conducted with a view to profit.

A trade needs to be set up with a recognised business structure including buying plant & equipment for use in the trade, developing a business plan as to how to attract business including clients/customers and to complete the necessary supplier network in order to fulfil the business trading activities.

A hobby is normally quite recognisable but what may start off as a hobby for pleasure, with small incidental amounts of income, may morph into something altogether different. It is then that the tax considerations of carrying on a trade with a view to making a profit should be considered, along with registration for tax purposes with HMRC.

Net Zero and Green Taxes

Detailed below is a reminder of a couple changes introduced in the Chancellor’s Spring Statement which came into effect from 1 April 2022. They may be useful to people and UK businesses looking to complete plans to reduce their energy costs in the medium to long term.

The rate of VAT on the cost of energy sources (such as solar panels, wind and water turbines) installed in domestic properties, and incurred during the period from 1 April 2022 to 31 March 2027 inc., is reduced from 5% to Zero%.

For businesses in England that pay business rates, the so called ‘green reliefs’ started on 1 April 2022 – a year earlier than originally planned. The green relief exempts business from business rates for the costs of installing renewal energy sources providing energy to their business premises.

In addition, 100% business rate relief will apply to heat networks which are separately assessed to business rates in England.

The above business rate exemptions will apply from 1 April 2022 to 2035, although the final details of the green reliefs have yet to be provided by the Government.

Small to Medium-Size Enterprises (SMEs)

Our monthly HaesCooper Bulletins are produced with the UK SMEs in focus. A UK SME is defined as a UK business having under 250 employees and an annual turnover of below £50m.

UK SMEs are very important to the economic welfare of the UK:

So how are UK SMEs looking to maintain their businesses given the continuous challenges of the Covid pandemic, social movements and the climate emergency? The Covid pandemic triggered the public to support and use local businesses which are mainly SMEs. This now allows those SMEs to build on that local customer base by centring on personal branding to include sharing your business’s story through the use of the social media sites and the digitalisation of your business marketing.

It is an old adage, but it remains true even in these digital times, that people do business with people they know, like, and trust. SMEs need to build up their customer base by considering appropriate trading collaborations / partnerships and maintaining that business network through use of advancing technology.

In addition, artificial intelligence (AI) is starting to provide business solutions and AI will become an ever-increasing support tool to UK SMEs. Ways to finance a SME’s business expansion needs are also changing with the use of crowd funding and peer to peer networks.

Business retail methods developed due to the Covid pandemic experience will also continue as they suit the consumer, namely contactless payments and the buy now pay later schemes.

For UK SMEs there is also the business opportunities provided by the consumers thirst for environmentally sustainable goods and the use of recycled, second-hand products.

The current business economic outlook for the UK and indeed the rest of the World, is at best challenging – not helped by the tragedy of the war in Ukraine. For the year ahead, having recovered from the pandemic, SMEs now need to be resilient. To maintain their position in their business market, SMEs need the right safeguards in place to ensure that they grow their customer base while having the necessary sound supplier network and cash flow protection. Perhaps where possible, SMEs should be looking to grow their sustainable business by collaborating with other like-minded businesses, including larger ones.

As Chartered Accountants and Chartered Tax Advisers, we are professionally qualified to support and advise businesses whether small, medium or large. We specialise in dealing with fiscal and financial business management requirements. We love meeting new clients and offer competitive fee rates.

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