HMRC Badges of Trade

Deciding whether someone is business or is receiving non taxable income from a hobby can be a tricky question to answer especially when it comes to passions like dog breeding, photography or gardening. To help HMRC can use a series of questions that are known as the badges of trade. Whilst they don’t necessarily provide a conclusive answer and HMRC can choose to dismiss the results of the test if they find other evidence, it can help them to reach a decision to the hobby or business conundrum.

What are the Badges of Trade?

Here are the 9 badges HMRC look at as a way to investigate more about the trade and intentions. Not all need to be present in every case they investigate but the ones that are present could be used to help reach a decision:

1. Profit-seeking motive

An intention to make a profit supports trading, but by itself is not conclusive.

2. The number of transactions

Systematic and repeated transactions will support ‘trade’.

3. The nature of the asset

Is the asset a type or amount that it can only be turned to advantage by a sale? Or did it yield an income or give ‘pride of possession’, for example, a picture for personal enjoyment?

4. Existence of similar trading transactions or interests

Transactions that are similar to those of an existing trade may themselves be trading.

5. Changes to the asset

Was the asset repaired, modified or improved to make it more easily saleable or saleable at a greater profit?

6. The way the sale was carried out

Was money borrowed to buy the asset? Could the funds only be repaid by selling the asset?

7. The source of finance

Was money borrowed to buy the asset? Could the funds only be repaid by selling the asset?

8. Interval of time between purchase and sale

Assets that are the subject of trade will normally, but not always, be sold quickly. Therefore, an intention to resell an asset shortly after purchase will support trading. However, an asset, which is to be held indefinitely, is much less likely to be a subject of trade.

9. Method of acquisition

An asset that is acquired by inheritance, or as a gift, is less likely to be the subject of trade.

Source: HMRC

Key Takeaways

  • The badges of trade are a series of tests that HMRC use to decide whether someone has a taxable business or a non-taxable hobby;
  • Not all 9 badges need to apply to reach a decision;
  • The results of the test are not conclusive and can just be used as guidance in an investigation.

About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - the UK small business finance blog for the self-employed community. Here she shares simple, straight-forward guides to make self-employment topics like taxes, bookkeeping and banking easy to understand.