The basics

As you know, if you make a profit, HM Revenue & Customs want to know. Actually, they’re not really bothered about the legality or morality of what you’re doing – they just want to know if they can tax you on it!

But what about those things you do just because they’re simply what you like to do? What if you make some money out of them – do you still have to declare it?  The answer is – it depends!

I’m thinking about examples like someone who paints or draws pictures for pleasure – but exhibits them at a local event and then someone likes the pictures so much they buy them. Or someone whose hobby is writing but then someone offers them payment to publish. Or someone who runs a local group like a choir or a sports team – and then people want to hire them.  At what point does this become a business venture ? Of course some such activities have charitable or ‘club’ status – and then the rules are different – but there are plenty of ‘hobby’ activities that won’t fall into this category.

The indicators

First of all, as always, it’s not what you call it that matters – it’s what it is. So you won’t avoid HMRC just by calling it a ‘hobby business’!

In 1955 a report by the Royal Commission on the Taxation of Profits and Income reviewed case law and identified six badges of trade. This was the starting point and, as you can imagine, there’s been a lot of development and quite a number of cases in the last 60 years. Currently HMRC lists nine badges of trade, as follows:

  • profit seeking motive
  • the number of transactions
  • the nature of the asset
  • existence of similar trading transactions or interests
  • changes to the asset
  • the way the sale was carried out
  • the source of finance
  • interval of time between purchase and sale
  • method of acquisition

A bit of case law

In the 1974 case of Ransom v Higgs, several learned judges attempted to define what is meant by trade (you can look up the case if you want to read these!). But the HMRC view remains that whether or not a trade exists is primarily a question of fact. The decision as to whether there is a trade in any particular case will depend on an evaluation of all the facts and circumstances of that case, including the weighting to be given to each of those facts and circumstances. In the later case of Marson v Morton & Others, the judge cemented this by saying (in nice judicial language):

‘It is clear that the question of whether or not there has been an adventure in the nature of trade depends on all the facts and circumstances of each particular case and depends on the interaction between the various factors that are present in any given case’.

More to follow

Any clearer?  Well in the next few blogs, I’ll try to give you a bit of help on how HMRC is likely to apply each of their nine current criteria!