Are you pursuing a trade, or following a hobby?

by Paul Weller | Monday, July 24, 2023

Many of us have hobbies that are dear to our heart, whether it’s playing guitar, building a giant model train system or knitting copious numbers of jumpers for our family.

In many cases, it’s pretty clear whether these activities are being carried out in the course of a trade, or are nothing more than a personal hobby. But disputes with HM Revenue & Customs (HMRC) do arise. Are the profitable activities you carry out as part of your niche interest no more than a hobby? Or are the loss-making activities you carry out considered to be a trade, with the losses used to reduce your overall tax bill?

Let’s look at how you prove if this is simply a hobby, or a profit-making trade?

The nine ‘badges of trade’ and what they tell you

There’s not much meaningful guidance in the UK legal statute on what does and what does not constitute a trade or hobby. So, how do you make the differentiation?

One approach has been to consider the ‘badges of trade’. These badges can show the presence or absence of certain aspects that indicate whether a trade does or does not exist.

These nine badges are:

• Profit-seeking motive: An intention to make a profit supports trading, but by itself is not conclusive.
• Number of transactions: Systematic and repeated transactions will support ‘trade’.
• The nature of any asset acquired: Is the asset of such a type or amount that it can only be turned to advantage by a sale? Or did it yield an income or give ‘pride of possession’, for example, a picture for personal enjoyment?
• Existence of similar transactions: Transactions that are similar to those of an existing trade may themselves be trading.
• Changes to the asset: Was the asset repaired, modified or improved to make it more easily saleable or saleable at a greater profit?
• The way the sale was carried out: Was the asset sold in a way that was typical of trading organisations? Alternatively, did it have to be sold to raise cash for an emergency?
• The source of finance: Was money borrowed to buy the asset? Could the funds only be repaid by selling the asset?
• Interval of time between purchase and sale: Assets that are the subject of trade will normally, but not always, be sold quickly. Therefore, an intention to resell an asset shortly after purchase will support trading. However, an asset which is to be held indefinitely, is much less likely to be a subject of trade.
• Method of acquisition: An asset that is acquired by inheritance, or as a gift, is less likely to be the subject of trade.

These badges are not an ‘all or nothing’ indicator. But when considered in the round, they may lead to an overall impression of whether or not a trade is being carried out.

Even if it is agreed that a trade exists, HMRC may argue that it’s not being carried out on a commercial basis. If so, this would deny any sideways loss relief (offsetting the losses of one activity against the profits of another for tax purposes).

Talk to us about checking the status of your hobby or trade

With the new trading allowance of £1,000 per annum, any activities you carry out which generate income below £1,000 won’t be required to be reported on your tax return. Because of this, there’s no danger of minor income from hobbies being targeted as trading activities.

The emerging problem is in areas such as crypto assets and day-trading of shares. Depending on the specific circumstances, these can be considered as trading, or generating capital gains and losses, or being outside of taxation altogether.

Where you carry out any activities outside of your mainstream business, talk to us so that we can advise you of any potential tax traps and tax benefits that may arise.

Get in touch to talk through your non-business activities.

Tour Operators Margin Scheme (TOMS)

by Paul Weller | Friday, July 21, 2023

VAT on Serviced Accommodation and Holiday Lets

The long-awaited decision in Sonder Europe Ltd has been released, and Sonder have won quite convincingly, meaning that the court decided that TOMS should apply to the business’ sales of serviced apartments. We’re really pleased with this result and think this gives good grounds for other businesses to apply TOMS to serviced apartment in some circumstances, but would also add an air of caution as there are limits to the application of the decision at this time.

The Sonder case concerned whether TOMS could apply to sales of serviced apartments. Sonder leased apartments on long leases (3+ years) from landlords and sold on to guests directly for an average of 5 nights. Sonder sometimes took on the apartments from landlords on a furnished basis and other times unfurnished, and often added cosmetic changes to the apartments such as paint touch-ups and decorations. There was no mention of who paid for utilities. HMRC contested that Sonder could not fall into TOMS because it was not a tour operator and because it had materially altered the apartments.

The court decided that Sonder was a tour operator for the purpose of TOMS and that it did not materially alter the apartment. On this second point, this was for two main reasons:

The court did not accept that the lease duration mismatch was material alteration, saying that we must look at the characteristics of the actual apartment itself, rather than the terms on which it was supplied; and

The court believed that cosmetic additions to apartments which could easily be removed were not enough to materially alter the apartment and that they would expect “material alteration” of this nature to instead be structural.

With this in mind, it is clear at this stage that the court is seeking to apply TOMS widely.

Whilst being great news for the industry, this is by no means the end of the matter. Firstly, HMRC have 56 days to appeal the decision and, if appealed, it will likely be some time before a final answer is given to Sonder. Secondly, the time period in question relates to pre-Brexit where EU law took precedent, which may also change things for the position going forward. Thirdly, HMRC could decide to seek a change to the UK TOMS provisions going forward.

With this in mind, we would advise businesses to continue to exercise caution whilst using TOMS, and ensure that you fully review your position.

For those of you using the “two company strategy”, we would advise to continue with this to ensure any risks are limited.

We would ask those of you who are not currently using TOMS to consider lodging a backdated claim with HMRC as a first point on the back of this decision. This carries with it virtually no risk and would give your business a decision on whether you can use TOMS in your own circumstances.

Please do not get carried away and use TOMS for every supply without taking proper advice! It is easy to jump on the bandwagon when everyone in the industry is celebrating and deciding to use TOMS, but we still have a way to go to get a proper and final position going forward.

We now offer a full review service package for your eligibility for the TOMS scheme which may save VAT for operators in this sector.

The review will cover –

• Your customer base
• Your contracts with your landlords
• Your contracts with your customers
• Your eligibility to use the scheme

Please get in touch for further details.