You’ve been employed or you’re working part-time. Either way you’ve had that niggling inclination to re-invent yourself, to indulge your passion in doing something creative or have a go at doing something completely new.
You start selling on Etsy, take a few portrait photographs for friends, design some jewellery – you ‘re loving being able to unleash that creative talent. You sell a few of your products and the idea catches on. You’re really enjoying this creating and selling thing! But, you still consider yourself to be engaged in a hobby.
Well, here’s the thing – the likely scenario is that you’ve never had to think about employment status or tax before. Why? Because being employed is administratively straight forward – someone else calculated your tax and dealt with all the paperwork.
Being your own boss is an entirely different scenario. If you’re self-employed, you have responsibilities and these involve self-assessment and paying tax on the profits of your sales.
It all boils down to whether you are considered to be “trading” and hence self-employed or whether you are indulging in a “hobby” and earning casual income.
What determines whether you are self-employed or engaging in a hobby?
In many cases it is a fine line between carrying out a hobby and being self-employed and as everyone’s situation is slightly different, there are no hard and fast rules to help you decide. HMRC will look at a combination of factors to decide whether you are trading. These are called “badges of trade” and you can view them here in more detail.
You are very likely trading if you:
- Sell regularly and in an organised manner to make a profit
- Make items with the intention of making a profit
- You are selling something that didn’t give you personal enjoyment
- Selling similar products
- Earn commission by selling for other people
- Are paid for a service that you provide
Even if you are not making a profit, get paid in cash or don’t spend any of the money you could still be self-employed.
What about selling items on ebay?
As with any hobby, all the “badges of trade” need to be considered and looked at holistically but it’s worth noting the following:
It is irrelevant whether you are registered as a private seller or as a business on the ebay website you may still be regarded as trading. Selling unwanted personal possessions on ebay is not considered trading (although you may end up with a capital gains tax liability depending on the asset type).
If I am self-employed what do I need to do?
If you have established that you are trading and hence self-employed then you need to let HMRC know. You can do this online by registering your business here.
You will be responsible for completing an annual self assessment return and paying your own Income tax and National Insurance (Class 2 and Class 4). I’ve written some helpful posts on taking those initial steps in getting organised in advance of the self-assessment deadline. You can read more here.
The good thing about having a business, as opposed to casual income is the fact that you can claim deductions against your business income. If you make a loss in your first few years of trading there is also tax relief that you may be eligible for.
If I am “not self-employed” but earning casual income, what do I need to do?
Just because you don’t fall under the definition of “trading” doesn’t mean that any profits you make are not taxable.
If your work is one-off, occasional or very low value (say under £2,000 per year), then your income may qualify as casual income. Even if you are not already completing a tax return you may need to start filing one. If you have income from other sources e.g rental property or employment income and your combined income is over the tax-free personal allowance (£11,000 in 2016/17) with no other complicating factors, you will need to pay tax.
It makes no difference if you are already paying tax on your employment income through PAYE. Tax is always calculated on total income and you will need complete a tax return to facilitate this calculation.
Don’t wait for HMRC to take the initiative and get in touch with you first. Contact them here to request a self-assessment tax return.
When you complete your tax return, casual income can be declared in the “Other Income” section.
If you’re still in “creation mode” and ready to turn your talent into profit, take a peep at my one-to-one coaching program “Taking the leap into self-employment – what you need to know”.
It’s a coaching session for sole traders in the early stages of business and it’s meant to help you shift from bewilderment and frustration to clarity and momentum. I cover everything from the taxes you pay, how it is calculated, record-keeping, what expenditure you can deduct from your income and some nifty little tax saving strategies.
I would love to hear from you
I would love to hear what creative passions you have indulged in? Have these resulted in a fully fledged business? What’s been your experience? Have I covered all the posts? Do drop me a line in the comment box below. I love entrepreneurial stories!
And remember, whatever you decide to base your business on you don’t need to pioneer anything new: you just need to do something better than anyone else.
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