Income taxation on Hobby Income

[John Walker]

I understand that it's ok to earn up to £1000 per annum without being taxed for income from a hobby or trial start-up business etc.

 

One of my family who is an excellent photographer is considering going down the stock route but is concerned about the hassle of declaring income on what only amount to a few pounds initially.

 

Checking on-line would seem to confirm this but any thoughts or comments on this?

 

John

[spacecadet]

There is a new £1000 exemption.

However if he is starting a business he can deduct pre-trading expenditure and offset any losses against tax on his other income and get a refund. I'd call it financially incompetent not to show a loss for the first couple of years of trading.

You can't do both, though- it's either the £1000 exemption and keep records of the income, or declare it and fill in a SA return.

[Reimar]

Although, I'm in Canada, I would say forget about the exemption.  Claim all photo income no matter how small.  And then claim equipment, car, travel etc... expenses.  You'll be way ahead.  A big part of my stock income (almost half) derives from reducing my pension income tax bite.

[Sally]

2 hours ago, spacecadet said:

There is a new £1000 exemption.

However if he is starting a business he can deduct pre-trading expenditure and offset any losses against tax on his other income and get a refund. I'd call it financially incompetent not to show a loss for the first couple of years of trading.

You can't do both, though- it's either the £1000 exemption and keep records of the income, or declare it and fill in a SA return.

The difficulty is knowing whether you will, eventually earn any decent income.  If you have several years of earning less than £1,000, then it might be difficult to maintain that you are starting a business. But I see that it is advantageous to do so in the initial years when the expenses are probably greater due to buying equipment.  I earned almost nothing 2017/2018 but had a lot of expenses, but if I project for the new tax year based on the first three months of 2018, I'd be over the £1,000 cut off. I don't know if it's too late to declare myself as a business for 2017/2108.

[spacecadet]

Your problem is that there's a requirement to register for NI within three months of starting. You could do it now, and have your year end on February 4th. and still be within the time limit. You could then declare pre-trading expenditure for the previous 7 years. Of course if you have other taxed income you can show a loss and get a refund. If not, you can carry forward losses to reduce future taxable profits.

Sounds as if you can forget the £1000 hobby exemption.

Year end doesn't have to be the same as the tax year end. Mine is Dec 31st.

[M.Chapman]

4 hours ago, Reimar said:

Although, I'm in Canada, I would say forget about the exemption.  Claim all photo income no matter how small.  And then claim equipment, car, travel etc... expenses.  You'll be way ahead.  A big part of my stock income (almost half) derives from reducing my pension income tax bite.

 

Don't take it too far though - in the UK the taxman would not be happy about someone declaring a loss from their "business" year on year and thereby reducing the tax on their pension.

 

Mark

[John Mitchell]

1 hour ago, M.Chapman said:

 

Don't take it too far though - in the UK the taxman would not be happy about someone declaring a loss from their "business" year on year and thereby reducing the tax on their pension.

 

Mark

 

I'd say that that is good advice for any country. I've never come close to having to declare a loss, and this year I'm actually getting a small refund (due mainly to a lot more medical expenses than usual).

[Sally]

2 hours ago, spacecadet said:

Your problem is that there's a requirement to register for NI within three months of starting. You could do it now, and have your year end on February 4th. and still be within the time limit. You could then declare pre-trading expenditure for the previous 7 years. Of course if you have other taxed income you can show a loss and get a refund. If not, you can carry forward losses to reduce future taxable profits.

Sounds as if you can forget the £1000 hobby exemption.

Year end doesn't have to be the same as the tax year end. Mine is Dec 31st.

That’s helpful, thanks. I’ll have to give it some serious thought...quickly. But my understanding is that you can’t  offset expenses against a different source of income. Each ‘business’ remains separate. I have been self employed in a completely different capacity, and was told by HMRC that I couldn’t do this.

[Cryptoprocta]

47 minutes ago, Sally said:

That’s helpful, thanks. I’ll have to give it some serious thought...quickly. But my understanding is that you can’t  offset expenses against a different source of income. Each ‘business’ remains separate. I have been self employed in a completely different capacity, and was told by HMRC that I couldn’t do this.

The rules keep changing so often (as does the actual tax return form) that I find using an accountant worth it for the peace of mind. And she's very strict about what I can claim as expenses, but I understood (possibly misunderstood) that you could claim expenses off your total tax.

[M.Chapman]

8 hours ago, Cryptoprocta said:

The rules keep changing so often (as does the actual tax return form) that I find using an accountant worth it for the peace of mind. And she's very strict about what I can claim as expenses, but I understood (possibly misunderstood) that you could claim expenses off your total tax.

 

You can claim expenses that will offset your total tax. When I retired from full-time employment I registered as a sole trader with a broad business scope that covered both engineering consultancy and freelance photography. I keep a single set of accounts (using a simple spreadsheet) for the combined activities and then fill in a self assessment tax return that includes all my income (personal pension, interest on investments and business income) as well as all my allowable expenses (including capital equipment and day to day expenses). I complete my self-assessment return on-line and the system calculates my net income and calculates the tax due. The online system is great as it calculates the tax before you have to submit it making it easier to spot mistakes.

 

If your profits are low, you will have the option of deciding whether to pay NI or not. But, before claiming a low profit NI exemption, take a close look at how many years of contribution you have towards your state pension. If you haven't reached the maximum number of years, then can be well worth paying the extra NI. It can be a very effective way of gaining extra state pension at low cost.

 

Mark

[spacecadet]

10 hours ago, Sally said:

That’s helpful, thanks. I’ll have to give it some serious thought...quickly. But my understanding is that you can’t  offset expenses against a different source of income. Each ‘business’ remains separate. I have been self employed in a completely different capacity, and was told by HMRC that I couldn’t do this.

 I said "other taxed income". I though it was clear enough. You can offset a trading loss against tax paid under PAYE.

[Sally]

1 minute ago, spacecadet said:

 I said "other taxed income". I though it was clear enough. You can offset a trading loss against tax paid under PAYE.

Yes, thanks understand that now. 

[spacecadet]

I think it's advantageous to have as loose a definition of your business as you can as far as the Revenue is concerned. For some years I simply added a word to the description on my return to cover another source of income. Either HMRC didn't care, or they didn't notice. As far as they were concerned I had one business. But then, I didn't ask them about it as you did. It's not always helpful to ask a question unless you already know the answer, and they are put on notice.

[Graham]

17 hours ago, spacecadet said:

However if he is starting a business he can deduct pre-trading expenditure and offset any losses against tax on his other income and get a refund. I'd call it financially incompetent not to show a loss for the first couple of years of trading.

 

I am afraid that the various comments about setting off trading losses from one business against profits from another or other income are not correct (sideways set-off).

 

This is what I also thought, until three years ago an HMRC brown envelope dropped through the letterbox.  This is an extract from one of the letters sent by HMRC during the course of their investigation:

 

Quote

As regards the sideways set off of losses which you have claimed for [the tax years concerned]; S74 ITA 2007 recognises that losses may be made in the opening years of a new
trade, but excludes from relief losses made in the first 4 years, unless the trade was carried
on, throughout the basis period for the tax year:
· On a commercial basis, and
· In such a way that profits could reasonably be expected in the basis period or within
a reasonable time afterwards.
In general, HMRC expects ‘reasonable’ to be a fairly short period of time – say a year or so.

 

What does this mean?  It means in effect that if you do not expect to make a profit from one line of business in any particular year, you cannot carry across the loss to set against other sources of income.  Put another way, if you are not going to be in profit within a year, then you cannot set off losses against other sources of income.

 

This gives rise to the apparently bizarre conclusion that you cannot sideways set off a business loss unless that business is making a profit!  In other words, it is almost never applicable.  The lady I was dealing with at HMRC agreed with this summary.  I asked her to give an example of how there could ever be an effective sideways set-off of one start-up business loss against other sources of income.  After something of a struggle to think of an example, she hypothesised a business which looked like it was going to be profitable for most of the tax year, but suffered a last-minute calamity such as a fire which unexpectedly caused the business to make a loss for that year.

 

I had never heard of this provision before, and the lady at HMRC agreed that it was not well-known.  More importantly, my accountants (the private client department of one of the major international firms of accountants) had never heard of it before either, although I pointed out to them that it was their job to have done so.  The upshot was having to repay the sideways set-off which I had claimed for several tax years, and a backdated interest change calculated at I think it was 8% (only governmental organisations can get away with charging something they label as interest which bears absolutely no relation to anything realistically available in the market - it was a fine in all but name).  HMRC did not impose a penalty on top of the interest because they accepted that I had acted in good faith with no knowledge of what they admitted was an obscure provision, and my accountants dealt with the interest because they accepted they should have been aware of this.  Nevertheless I was faced with an unwelcome back payment of tax as a result of the recalculation of several previous years' returns as well as a lot of hassle dealing with the investigation.

 

I have no idea why I was picked up on this: I have never gone in for aggressive tax mitigation, my returns are dealt with by very reputable accountants, and we were not dealing with megabucks amounts of money.  Nevertheless, it was picked up somehow.

 

Sorry for the bad news.  I am not an accountant nor a tax expert, I am simply reporting what happened to me on account of having dealt with my taxes in a way which several of the above posts have been advocating.  What business is what and its/their respective extents is a matter of fact, not a matter of self-definition or obfuscation: if you have more than one business, not disclosing this to HMRC will not help you if you are investigated and have to justify your position.  I now keep separate spreadsheets with a strict separation of each of my various sources of income and return them as separate businesses.  Tax is a horrendously complex area with plenty of pitfalls for amateurs such as I, and I suggest that those of you who have accountants have a discussion with them before assuming that you can create losses from, in the present context, you photographic business and set them against other sources of income.

 

Graham

[spacecadet]

I stand by what I've said for a new business.

You decided to comply with the demands, probably wisely, but HMRC advice isn't the law, what it "expects" isn't the law either and it's not up to HMRC to decide what "reasonable" means. I recall, for two separate trades some years apart, claiming refunds over more than one tax year.

[M.Chapman]

6 hours ago, Graham said:

What does this mean?  It means in effect that if you do not expect to make a profit from one line of business in any particular year, you cannot carry across the loss to set against other sources of income.  Put another way, if you are not going to be in profit within a year, then you cannot set off losses against other sources of income.

 

I'm with Spacecadet on this one and query your interpretation. Look at any company accounts where they are involved in multiple lines of business and you will see profits in one sector being offset against losses in another, sometimes for a number of years whilst they try to establish themselves in a new sector.

 

Although taxation is complex, in general, IMHO the underlying principles are usually sound. Because one tax officer gives a ruling doesn't mean they are right. I've experienced several HMRC errors which, after some persistence, have been rectified. Obviously I don't know the details of your case, but if the sums involved are significant, and given your experienced accountants had never run into this "provision", I'd have though it might have been worth an appeal?

 

What I believe the tax man won't allow is deliberate reduction of tax by using profits of an activity to fund unreasonable expenses, or costs of other activities that are unlikely to deliver a profit within a reasonable timescale. Reasonable timescales can definitely extend beyond the current tax year... and if the profits are likely to be significant may extend over several years.

 

6 hours ago, Graham said:

What business is what and its/their respective extents is a matter of fact, not a matter of self-definition or obfuscation: if you have more than one business, not disclosing this to HMRC will not help you if you are investigated and have to justify your position. 

 

Surely your business is absolutely a matter of self-definition (nobody else knows your business - it's up to you to define it). I agree with the rest of your statement. The important thing is to define your business upfront and inform HMRC if there any any significant changes. There's a box on the Self Assessment form where details can be entered.

 

Mark

[spacecadet]

Graham's experience is cautionary though.

I'm sure the Revenue endeavour to give accurate advice, and don't deliberately mislead, but the ICTA is the size of a planet and there's a flavour of "well, they would say that, wouldn't they" about this one. I'd be interested to hear anyone who's had advice from them that reduced the tax due.