Case study: When a hobby becomes a taxable trade
Our tax dispute resolution specialists were recently instructed by an individual who had received a ‘nudge’ letter from HMRC. The letter stated that HMRC had information to suggest that the individual may have been trading on several digital platforms. The letter encouraged the recipient to review their tax affairs to check if they were up to date and whether their activities constituted a taxable trade.
Background: Understanding taxable trade vs hobby
There has been a lot of commentary on whether a hobby or interest may be considered a taxable trade and HMRC recently published guidance to assist individuals. Anyone selling their personal possessions is unlikely to need to pay tax, unless the items are worth more than £6,000, in which case they may need to pay capital gains tax.
However, if goods are bought or an item is made (e.g. jewellery) with the intention of selling it to make a profit, HMRC should be informed if the total value of the items sold is more than £1,000. The same rule applies for providing a service, such as gardening, making online videos or creating online content and receiving income from promoting products. These activities may fall within the scope of a taxable trade.
Scenario
Our client had always been interested in collecting items and this had gradually grown from a hobby into a part-time taxable trade. The transactions involved second-hand items. They were considered to be personal belongings that had been bought and sold initially when our client wanted to own something different or had seen something of interest.
As our client gained knowledge and experience of the market, they realised that they could grow their collection by refurbishing items and selling them online. This moved their activities from solely selling personal items to buying items for resale with the aim of making a profit.
Action
We took time to understand our client’s situation and how the issue arose. We have a deep understanding of the penalty legislation. The first step is to ensure that the computation of the tax owed is correct and that any penalties are kept to a minimum.
HMRC applies specific criteria to decide whether an activity is a trade for UK tax purposes and includes:
- The intention to make a profit;
- The frequency of the transactions;
- The type of goods or services;
- If changes were made to the asset acquired;
- How the asset or services were sold; and
- How the asset was obtained.
Solution
We helped the individual to distinguish between their hobby and the transactions that involved the sale of items to make a profit. We also identified the loss-making transactions and accurately calculated the tax owed.
We prepared a disclosure letter to HMRC, supplying the relevant background information to better understand the profits made and how we arrived at the relevant figures. This included our view of our client’s exposure to tax-geared penalties for not reporting the tax owed.
This ensured that we took all possible steps to resolve this matter as quickly as possible.
Outcome
We successfully brought our client’s historical tax position up to date in 4 months and avoided a costly and protracted tax investigation. Furthermore, we assisted our client with his current tax position to ensure he was comfortable with his ongoing tax compliance.
Help from the experts on navigating taxable trade issues
Our tax dispute resolution specialists help people not only bring their affairs up to date but also minimise their total liability to HMRC. We aim to resolve matters without our clients needing to communicate directly with HMRC.
Contact us for a no-obligation confidential conversation about the options available to resolve your situation.
