Does the taxman need to know about your side-hustle?
Updated: Mar 18
Hint: almost definitely yes!
When does that hobby turn into a business? That side-line become taxable?
Trading profits are taxable. So what is 'trade? There is no statutory definition, but indicators have emerged through case law. The following 'badges of trade' indicate trading is taking place:
Was the intention to make a profit? Yes indicates trade (even if you actually make a loss)
Is it a one off or are there repeated transactions? The more repeated and systematic the more likely its trade
Did you up-cycle, improve, add to, combine or in any way make changes to goods in order to sell something on? All indicative of trade
Was the sale done in a way typical of trade for that product / service / market? Indicates trade
Did you borrow money to get started? Indicative of trade
How much time between the purchase and onward sale? A longer period might indicate the purchase is an 'investment' rather than goods for trading
Was the item originally inherited or gifted? This is less likely to be trade
Don't think that because your activity doesn't meet one or two of the items above it's not trade - these are just the main indicators and if it feels like trade it probably is. Trading includes selling online, through car boot sales or classified ads, being paid for any kind of service you provide or earning a commission for selling for other people.
If you are trading (and haven't already set up your business through another vehicle like a limited company or partnership) you are 'self employed'. You can be self employed and employed at the same time (e.g. by having a day job and working on your sideline in the evening or at weekends). You must register your business with HMRC.
Find out more about trading as a limited company here
Find out more about registering for self assessment here
Register for self assessment
If you have earned more than £1,000 from self employment you must register with HMRC for self assessment. Do this as soon as possible so as to give yourself plenty of time to gather records and plan for tax return deadlines. The absolute latest you can register for self assessment without incurring a fine is by 5th October in your business's second tax year (6th April to 5th April).
In addition you will need to:
keep records of your business's sales and expenses
send a self assessment tax return every year
pay income tax on your profits plus national insurance contributions
name your business and use this on any official paperwork
You may also need to register for VAT if your sales are more than £85,000.
Find out more about VAT here.
Help is at hand
Seek advice early. A good accountant or bookkeeper will help you keep good records, make sure you meet deadlines and keep you penalty and interest free. They can also help you seek funding for your business, help you manage your cash flows, ensure you get paid on time and help in many other practical ways.
The information contained within in this article is provided for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice specific to your own circumstances from your own adviser.