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Hobby Trading Losses

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You might think you have a business, but HMRC can disagree with you.  If HMRC considers that you are never going to make a profit, they will also refuse any loss relief.

Losses and profits

You might think that HMRC is being unfair in refusing loss relief, but if your activity is a hobby you won’t have to pay tax on profits either.  This rule can be tricky as revealed in the case of P, when  HMRC dismissed his claim for loss relief.

Trade or personal loss?

HMRC challenged P’s claim at a tribunal because in its view it related to non-business transactions and so was a personal financial loss and not one arising from a trade. Non-trading losses can’t be set against taxable income and it’s not just HMRC being difficult.

Trading tests

HMRC and tax specialists refer to the so-called “badges of trade” to decide if a trade exists. These tests were set out in a court judgment decades ago, but remain valid today. One of the tests to establish if a trade exists is that there must be an intention to make profit from a business. In P’s case the tribunal extended this test a little further.

Incapable of making a profit

P started two “businesses”, neither of which made a profit because, in the tribunal’s view, he was inexperienced and couldn’t devote enough time to them. Neither venture was capable of making a profit without P reducing the hours he spent in his main job. In essence P didn’t have the business acumen or time to devote to making his business profitable.

Putting the boot on the other foot

The ruling in P’s case is useful, not just for guidance on when losses are deductible, but for countering HMRC if it claims money you make from a hobby is taxable. Its view has always been that if you advertise your hobby in a newspaper or online you’re probably trading. But the tribunal’s judgment, supported by HMRC, dispelled that idea. If you don’t have the time or intention to carry on a trade, profit you make from isolated sales isn’t liable to income tax.

Turn your hobby into a business

For advice on converting your hobby to a profitable business, including help with setting up a limited company or registering for VAT, please contact Alterledger.


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