The Hobby Business Tax Rules have never been so important in the UK with millions of people trading on sites like eBay, Etsy or Amazon worried they might get a call from the tax man.

Who Pays Tax in the UK

Basically, anyone of any age or status must pay tax if they are in business. 

However, how much tax they pay depends on the total amount of money they make after deducting any reliefs and allowances they are entitled to.

Every individual is entitled to certain reliefs and allowances depending on their status.  After deducting all these it may well mean there is no tax to pay.  However it is the individuals responsibility to:

  • Figure out if they have a hobby or a business;
  • Work out their own tax;
  • Declare and pay any tax due through self assessment.

The Exceptions

There are two circumstances where an individual can earn money and NOT pay tax:

  1. They are making cash from a hobby and fall under the HMRC Hobby Business Tax Rules;
  2. They sell less than £1,000 and are entitled to claim the £1,000 HMRC Trading Allowance.

Hobby or Business

A hobby is something you do because you enjoy it, rather than for any financial gain. In these cases there is no need to declare any earnings to HMRC.

HMRC are prescriptive with the rules to decide whether earnings are from a business or hobby.  These rules are called HMRC Badges of Trade. 

HMRC Badges of Trade

The HMRC badges of trade are a series of questions they ask to determine whether someone has a hobby or a business. 

Here are some examples of the questions they may ask:

  • Are you selling regularly to make a profit?
  • Do you buy stock and hold onto it?
  • Do you make items to sell on at a profit?
  • Are you a registered business on Etsy, Amazon or eBay?
  • Do you buy things at wholesale to sell on?
  • Are you working towards creating a brand?

Type of Businesses affected by Hobby Business Tax Rules UK 2018

The rise of online selling means there are certain hobbies that are beginning to attract the attention of HMRC. 

Here are some of the typical online businesses where people can be confused whether they have a hobby or business:

What to Do If You Are In Business

If you decide that you are in business then you must let HMRC know and keep business records.

The easiest way to let HMRC know that you are in business is to register as Self Employed, which you can do yourself online.

By registering as self-employed with HMRC you will be required to submit a self-assessment tax return each year by the 31 January. 

This is a form which contains all your earnings and a calculation of the tax you owe.

Need to Register as Self-Employed? Here’s How You Do It

The £1,000 Trading Allowance

HMRC launched a new tax allowance called the Trading Allowance in 2015. It’s aimed at micro businesses like those on Etsy, Amazon or eBay to help simplify taxes. This allowance means that if you make sales in your store of less than £1,000 you don’t need to tell HMRC about it.

The rules of the HMRC £1,000 Trading Allowance are very strict and using it is not always tax efficient.  You can read more about the HMRC £1,000 trading allowance here.

If you are unsure whether you have a hobby or business then you should definitely seek professional advice.  There are penalties for failing to register as a business.

Updated 9 April 2019

Anita

Anita is a Chartered Accountant with over a decade of experience taking self employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which her corner on the internet where she makes self employment less terrifying.
Anita