With the tough times that we’ve all had over recent years, many have turned to their hobbies to start earning some extra income; but just when does that hobby become a business with all of the officialdom that comes with such a venture?
Elaine Clark, Managing Director of CheapAccounting.co.uk explains:
There is no precise definition of what is a business and certainly there is no amount that you are entitled to earn before you need to register your business.
The main things to consider when deciding if your hobby has become a business are:
- Do you intend to make a profit?
- Does the frequency and number of transactions (many and often) suggest that you are running a business?
- Did you buy, make or do up the goods to sell them on?
- Did you borrow any money to finance getting started?
If any of the above apply to you then it is likely that your hobby has turned into a business; so it really is time to get the accounts and tax on track and register with HMRC.
Don’t try to kid yourself or HMRC that you are not trading – you could incur a failure to notify penalty which may cost you up to 100% of the tax due as well as still having to pay that tax!
Sole Trader or Limited Company
You can register your business with HMRC at:
Tax returns and accounts can be simpler if you operate as a sole trader but there can be advantages for setting up as a limited company from the outset such as saving on tax and having limited liability for debts if things go wrong.
There is never a “one size fits all” answer to the best business structure for you and it is recommended that you take advice specific to your personal circumstances from a reputable accountant.
Keeping the Books
Every business needs to keep proper accounting records. So getting a system of some sort set up from the outset is essential. It doesn’t have to be complicated and can even be a simple spreadsheet.
However there are advantages from using an on line (Cloud) accountancy system such as being able to keep better control of your finances, knowing how much you are owed, what you have in the bank and how much you need to put aside for the tax man.
An on line system doesn’t need to cost a fortune and you should be able to negotiate competitive accountancy fees to compensate for any outlay as having your books in good order will reduce the work for your accountant.
Your accounts and tax returns
Each year you will have to complete your accounts and file a tax return. This can be a bit daunting and you may need the help of an accountant to ensure that you do not make any mistakes. Once again, HMRC can fine you for getting it wrong even if you did not know the rules. They call this the inaccuracy penalty!
Don’t let all the officialdom put you off though; starting your own business can be a scary but being your own boss, even on a part time basis, could be one of the most rewarding things that you ever do in your career.
Follow Elaine on Twitter: @cheapaccounting
About the author
Elaine was named Woman in Finance by the Network of Aspiring Women in 2011. She has made several appearances on BBC R4’s Money Box with Paul Lewis and is frequently asked by newspapers, magazines and websites to provide expert comment about tax, finance and other issues relevant to small and medium-sized businesses in the UK.