HMRC Clamping Down on Hobby Businesses


Second income from hobby or small business

UPDATED 29/03/2016: The government have recently announced some relief for smaller hobby businesses trading online with a new £1,000 tax allowance starting in 2017.

Research released by RBS in January claimed that 1 in 5 UK adults are ‘hidden entrepreneurs’. These are defined as people who are running small businesses in their spare time or who are using their spare time to plan a new business venture. 38% of these people reported that they earned extra money from their hobby.

HM Revenue & Customs have launched a new campaign today aimed at people with this kind of ‘Second Income’. They define ‘Second Incomes’ as people who are employed and are paid wages through PAYE for their main job but who earn extra money from activities such as:

  • consultancy or other services such as public speaking or providing training
  • organising parties and events or providing entertainment
  • activities such as taxi driving, hairdressing, providing fitness training or landscape gardening
  • making and selling craft items
  • buying and selling goods, for example regular market stalls, boot sales etc

What to do if you have this kind of Second Income?

The ‘Second Income’ campaign is one of the regular campaigns that HMRC run targeting different groups (recent ones have targeted eBay sellers and electrician). With these campaigns HMRC offer a kind of amnesty. If you have a second income which you have not been telling HMRC about you can declare it now. You will still have to pay any tax you owe but any potential fines will be reduced (or waived) and HMRC are less likely to take criminal action against you.

If you declare your second income voluntarily they will normally limit the declaration to 6 years. If they find out about your second income without you declaring it then HMRC can go through all of your tax affairs for the last 20 years.

You can notify HMRC of your second income by filling out a form online. If you want to find out more about how the scheme works there is a dedicated Second Incomes page on the main government website.

What to do if you plan to have a ‘Second Income’ in the future?

If you are planning to start a business in your spare time, or earn some money from your hobby, then you need to tell HMRC. The two most common ways to do this are:

Register as a sole trader – this tells HMRC you will be earning some extra money. They will then send you a Self Assessment Tax return to complete at the end of the year where you declare any income and profits. This is a very simple and cheap way to do things but it does mean that you are personally liable for any losses or problems with the business. You can register as a sole trader for free on our website.

Free Sole Trader Registration

Register a company – this is a more complicated option which will involve a lot more paperwork. However it can be a good option if you are starting a business with other people as it gives a formal structure through which you can share ownership and responsibilities. It can also be a good idea if you will be doing large deals or running big events as a limited company will offer some liability protection. If you form a company HMRC will be told automatically and will expect you to complete tax returns each year. You can register a company for free on our website.

Keeping track of your earnings

If you are earning extra money then you need to make sure you are keeping accurate records of your incomings and outgoings. HMRC will expect you to accurately complete tax returns at the end of each year using the records you have kept and can ask to see your information at any point.

If you are only doing a few transactions per month then a simple spreadsheet will be enough to get you going. As you start to get busier then it is worth investing in some specialist bookkeeping software which will let you manage your business finances more smoothly. You can get a free 1 month trial of specialist bookkeeping software by registering on The Company Warehouse website.

 

Not sure what you need to do?

Our team of business consultants can help. Simply give them a call on 01245 492777 or contact us through our website.

If you are an eBay trader and need to register your business our eBay Trader Company Formation will get your company formed and register your business for VAT. 

25 thoughts on “HMRC Clamping Down on Hobby Businesses

  1. Gregg

    I own(ed) my own house (outright valued £80,000) and I did a ltte bit of work “on the side” for a couple of years, nothing ridiculous. I got made redundant (58) and I couldnt get another job. No, I didnt sign on (too proud) but I kept looking for work while working “on the side”.. I claimed nothing. Pretty soon another 3 years had gone by and I was 61 and still jobless and still working “on the side”. Oh I had put money away for tax and NI but had no idea what to do or how to pay it. I never even realised that I was supposed to tell HMRC. I’d never evr heard from them since I was 17… So here I was, I was working for myself (I was totally clueless)… I then figured things out after stumbling across tax sites on the web and I decided to go the route of “self disclosure”. Got myself a tax specialist and I was TOTALLY open with them and with HMRC. I gave them all paper work bank statements etc, and I held nothing back. I receieved 70% penalty (ouch), and every “fine” in the book. Paid the £65,000 (the amount of lost tax by one payment from my bank)… but they wanted another £45,500 in penalties. So I lost all my life savngs (and wifes savings), lost the house and was declared bankrupt. They said I should be grateful that I was not going to jail… Oh, I am. Would I self disclose again? Is there anything in it for someone to self disclose? The reality is there is no amnesty, there is nothing. Its not exactly the return of the prodigal son and hey, nice, thank you for saving up all that tax…. Bit late but thank you – NO! that’s not how it works !

  2. Christina

    For an unprompted disclosure that sounds too high. Your penalty shouldn’t have been more than 30% under the common penalty regime – if that!

  3. Bridget Atkinson

    I think this is what is really meant by clamping down on tax avoidance – rather than making the Googles and Amazons of this world pay their fair share.

  4. Emily

    how about instead of squeezing every last penny out of people who can bairly afford it, going after all celebrity’s and politicians who don’t pay ANY tax through off shore schemes. Or how about those large high street shops like Boots who do the exact same thing. The government would get millions from each case, but no lets punish those who atleast pay tax with paying more tax, make the rich richer and the poor poorer keep the divide even bigger to put us in our place.

  5. Lynne Selleck

    Again the government pick on easier targets. Typical tories after the working classes cash instead of multinational companies, who they make deals with and keep quite about.

  6. Steve Burton

    Whilst agreeing with the general disgust against Amazon and Starbucks etc it is difficult for a genuine self employed person to compete with people turning a hobby into “making a few quid on the side”
    Despite my business being my sole source of income I’m being undercut by people who don’t pay VAT or any other taxes on their income. That undercuts me by about 50% on the same profit margin. That’s before you factor in things like insurance etc.
    I work in the event photography market but I know professional wedding photographers are getting crucified by cut price “weekend warriors”
    Steve Burton
    Smartpicsuk

  7. Steve Francis

    I’ve been selling at craft fairs for a couple of years now. However, the figures show that I still haven’t recouped set-up costs so I have been assuming that I don’t have to make a tax return yet. Is this correct, or should I be making some kind of declaration?

  8. les

    Actually what Google and other large companies are doing is completely legal as far as international tax law goes (t’s quite simple and open to ANY business to do if they don’t mind fees of £4k+ p.a. for the running costs). Because it is legal in international law it needs many countries to get together to stop it — thats why it is easier for the Government to pick on small businesses and individuals… they are far less able to do anything about it, and far less likely to be able to pay an expert to keep the taxman under control

  9. Peter

    Hi Steve,
    HMRC say that you should “Register as soon as you can after starting your business”.

    So technically you should be registered with HMRC even if you are making no profit. However, any tax you have to pay at the end of the year will be on the profit after everything you have spent is taken into account. So if you keep track of all of your costs now you can reduce your tax bill at the end of the year.

    If you haven’t made any profit at the end of the year then you can file a tax return to show this and no tax will be due (except NI contributions).

    Hope that helps.

  10. Grace

    It would be nice if they also chased the benefit cheats who work on the side and get much more that I do being self employed. They do nothing about them.

  11. Monics

    How do these people sleep at night? That is appalling!!

    Another thing that happening, working tax credit will only be granted on self employed hours worked in a business that is either in profit or working towards profit. What about start-ups? This is very limiting for the tiny new start up business. Shame on you HMRC!!

  12. Guy

    What about selling personal belongings? A hobby of mine is the creation of beautiful fine art photographic prints. I keep them myself, and dont sell them, but I may soon be made redundant, and I’m curious about selling my stockpile of prints as a way to pay the mortgage.
    These images have been built up over the last 30 years and some I keep on film negative, others digital and yet more are clogging up my studio as prints. So I don’t think anyone can argue that these are simply personal belongings, I’ve accumuated over the years. A local gallery think I would be able to charge upwards of £200-£300 each, so I’d only need to sell a handful every month.

  13. Guy

    If a hobby is to be treated as a business, then can the “historic” costs associated with that hobby be offset against income tax paid on primary job PAYE? I do still have the receipts for the work, as well as camera equipment, model hire, travel for landscape work, internet subscriptions and so on. If not, then why not? It seems logical that the cost of the extension to our house to include a photographic studio (hobby only), should be offet against the income tax paid on my 9-5 job, paying approx £60k/yr. I’ve not old a single print or image yet, but am considering selling some of it.
    I don’t see that primary and secondary incomes should be considered entirely separately, so sureley second income expenses may be offset against PAYE and I’m in for a substantial rebate.

  14. Peter

    Hi Guy,
    The question here is going to be how often you are selling things. You only normally register with HMRC if you are considered to be a ‘trading business’. The HMRC guidance says you are not normally considered to be trading if “you occasionally sell a personal possession that you have acquired or bought some time ago”. So selling the odd print here or there should not be an issue.

    However if they see regular selling then it can be considered trading. Unfortunately, they don’t really define what ‘regular’ and ‘occasional’ selling are.

    You can see more detailed guidance from HMRC here – https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/366965/hometraders.pdf

    I hope that helps.

    Peter

  15. Peter

    Hi Guy,
    If you were setting up a business, and had bought equipment in preparation for that business, then you could claim back expenses up to 4 years in the past. As tax is only paid on business profits you would only pay tax after these expenses had been taken into account.

    However, if you originally bought the equipment as part of a hobby then you would normally need to ‘sell’ the equipment to the business (for what it is currently worth). The business would still incur an expense which would reduce tax but it would also show as income to you as an individual which could be taxable.

    If you are a higher rate tax payer, and have a substantial amount of equipment or prints, then it is probably worth sitting down with an accountant to work through what the most tax efficient way of arranging things is going to be for your circumstances.

    Thanks

    Peter

  16. Rob

    Typical – its much easier for HMRC to go after the couple of quid we make at the car boot sale, selling a painting or two or pots of jam or the myriad of little things we do to make ends meet or even just for fun or as they say as a ‘Hobby’. Whilst at the same time the serious earners the Amazons and the Googles and the Prime Minister and his cronies get away with paying little or no tax on their millions. It makes me sick to the stomach.

  17. Hayley

    Hi there,

    I am thinking of setting up a bit of a hobby business, I have an ide, created some leaflets and created a name although I haven’t registered the name or anything. I don’t know that I will even have any interest. Should I be registering at this stage or should I try and get it running and see what happens first?

    I don’t want all the hassle of filling in forms and things if I don’t have any interest.

    Thanks,

  18. Peter

    Dear Hayley,
    According to the HMRC you should register if your intention is to trade as a business – you might find this helpful on what that means – https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/366965/hometraders.pdf

    However, on the government website they do say that you don’t have to register immediately. Instead they say that you should:

    “Register as soon as you can after starting your business. At the latest, you should register by 5 October in your business’s second tax year”. https://www.gov.uk/set-up-sole-trader/register

    So, if you use that as a guideline you can start the business now and register later.

    Either way, it is important that you start keeping track off all your expenses now so that if you do have to complete a tax return you can do it accurately.

    Thanks

    Peter

  19. Neil

    I’m planning to start a business, not quite sure what it means by “register as soon as you can after starting your business” though.

    I’m thinking about selling products online, it would just be myself running the business so I assume I can just set up as a sole trader?

  20. Peter

    Hi Neil,
    HMRC are a bit vague on this. If you are spending money to get the business up and running, or have started making sales then you should be looking to get registered. That way it gives a clear marker for HMRC as to when the business started so there shouldn’t be any dispute later on about when you should be taxed from.

    If you are planning on registering as a sole trader then you can do it now, once you have registered nothing will then happen for a few months until HMRC send you a tax form to complete.

    If you have any questions please give us a call on 01245 492777.

    Thanks

    Peter

  21. Elena

    Hi there,

    I’m currently on a full time job and I have been asked to help a friend on a regular monthly basis. I’m going to be a consultant for her and her business partner for a total of 15 hours a month, the average month extra income would be 100 pounds. What should I do exactly? Should I just register for the self assessment without registering as a sole trader ? I am afraid that the company where I currently work (I have just started this January) will not be happy about me becoming a self employed on the side.
    This consulting side job will not be continuous but I want to make sure that I’ll be cover while I earn extra money. If anyone could clear this for me it would be appreciated!
    Thanks in advance

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