As technology advances and becomes increasingly accessible to people of all ages, abilities and affluence, personal hobbies seem to be becoming more popular. The correlation between these is surely no coincidence.
Whether it’s because people want to take advantage of new software and devices, or because they want to escape the grips of modern technology, we are investing a great deal of time and money into our hobbies.
In fact, research released by Statista revealed that in the first quarter or 2018, UK households spent a whopping £5.6 billion on hobby-related items.
This figure has shown a steady increase over the years and is a significant hike from the £4 billion invested in hobbies during Q1 of 2012.
It comes as no surprise then that more and more hobbies seem to be blossoming into operational businesses, but this is where the tricky grey areas and blurred lines of difference come into play.
How to tell the difference between a hobby and a business
Unfortunately, there really isn’t a list of prescriptive attributes or a financial threshold which defines something as a business. However, HMRC highlight something which they call ‘Indicators of Trade’ which can help you tell when your pastime has crossed the line into entrepreneurship.
These so-called Indicators of Trade include (but are by no means exclusive to) the following:
Agreement of fixed prices – if you are agreeing prices with a client or customer (outside of family and friends) via written or verbal contracts then this could be considered trading.
Intent of sale and profit – if you’re generating goods or services with the intent of selling them and making money from doing so, what you’re doing is no longer just a hobby.
You have a regular stream of customers – If you’re servicing multiple people simultaneously, each with their own fixed prices and/or contracts, this would almost definitely be considered trading.
Employing staff to get the job done – If you’re dealing with enough custom to warrant the recruitment of employees then you’re most probably way, way beyond hobby territory.
You have a quality control process – A hobby means loose commitment and minimal expectations on quality. If you provide to people who are expecting a certain level of quality and service in exchange for their money, it sounds like you might be doing business.
If your hobby launches into a lucrative success that enables you to earn money, it’s time to declare yourself to HMRC as active trading.
Honest mistakes or blissful ignorance are perfectly understandable but if HMRC deems your hobby to be a trade and you haven’t made them aware of it, you risk facing massive penalties and a tab of backdated tax payments.
If you think your hobby has taken the leap into the realms of business and might need to be on HMRC’s radar, our team of trained accountants can help guide you in the right direction.
Alternatively, if you’re suddenly starting to feel a little overwhelmed at the prospect of paperwork, VAT and tax deadlines then you might want to check out our user-friendly, cloud-based bookkeeping software, Pandle.