There’s been an increase in the popularity of second-hand shopping and selling, particularly in the clothing sector over recent years, and that growth is continuing.  Driven by economic pressures, environmental concerns, and changing consumer attitudes, and with the rise of platforms like Vinted, Depop, and eBay, more people than ever are using second-hand markets to declutter their homes and find affordable, sustainable shopping options. This has led to a lot of interest in recent months around whether this selling is trading, or just a hobby.  

Determining whether your hobby has become a taxable activity (or trade) can be complex, but there are several key factors to consider. Let’s take a look…

The Trading Allowance

Individuals can earn up to £1,000 from casual or small-scale trading without needing to report it or pay tax. This applies to hobby income as well. If your gross income from your hobby exceeds £1,000 in a tax year, you’ll need to report it to HMRC.

The Badges of Trade

HMRC uses a set of criteria known as the “badges of trade” to determine whether an activity constitutes a trade (and is therefore taxable) or remains a hobby. These badges include:

1. Profit-seeking motive: An intention to make a profit supports trading, but it’s not conclusive on its own. HMRC considers this alongside other factors to determine if an activity is trade.

2. Frequency of transactions: Repeated and systematic transactions indicate a trading activity rather than a one-off sale. The more frequent the transactions, the more likely it is to be considered trade.

3. Nature of the asset: Assets held with the intention to sell or those yielding income are more indicative of trading. Personal-use items or those providing ‘pride of possession’ are less likely to be considered trade.

4. Existence of similar trading transactions or interests: If similar transactions are present or related to an existing trade, it implies a trading intention. For example, a mechanic selling a car is more likely to be considered trading than an accountant doing the same.

5. Changes to the asset: Significant alterations or improvements to an asset can suggest an intention to enhance its value for sale, which may indicate trading activity.

6. The way the sale was carried out: A formal selling approach indicative of a business model can imply trading intent. This includes using methods typical of established traders in that field.

7. Source of finance: The means by which the asset was financed can imply trading. For instance, using business loans or short-term financing may suggest a trading intention.

8. Interval between purchase and sale: A short period between buying and selling often indicates profit-seeking behaviour. However, this isn’t always conclusive, as some legitimate investments may also be short-term.

9. Method of acquisition: How the asset was acquired can provide insights into trading intent. Assets inherited or received as gifts are less likely to be considered subjects of trade.

It’s important to note that these badges are not a definitive checklist. HMRC and tax tribunals consider the overall picture rather than relying on any single indicator.

What to do if your hobby becomes taxable

If you believe your hobby has become a taxable activity:

1. Register for Self Assessment: You’ll need to do this if your income exceeds the £1,000 trading allowance.

2. Keep accurate records: Maintain detailed records of your income and expenses.

3. Report your income: You’ll need to complete a Self Assessment tax return each year.

4. Consider allowable expenses: You may be able to offset some of your costs against your income.

Conclusion…

The line between hobby and trade isn’t always clear. If you’re unsure about your own situation, it’s best to err on the side of caution. Keep track of your income and expenses, and if you think you might be approaching or exceeding the £1,000 trading allowance, consider seeking professional advice.

If you’re concerned about the tax status of your activities or need help navigating these complex issues, do get in touch with us. We’re here to help ensure you’re compliant without over-complicating life!