When does a hobby turn into a business?

There were more than 800,000 new businesses launched in 2021. Many of these will be the brainwaves of people stepping into the world of business for the very first time, as what was once just a hobby has started to generate income.

When this happens, it comes with a series of decisions that need to be made in terms of finances, accounting and taxes. But it’s not always a black and white situation.

At what point does a hobby turn into a business?

The short answer to this, is that there is no definitive answer – it’s different for every single person. For example, a client of ours had spent a few years growing an Instagram following and had received sporadic gifted products to review, though no money was ever paid to her to do so. However, companies soon began to offer payment for reviews in addition to gifting the product itself and on a much more regular basis, including several high value items, which she agreed to. At this point, her hobby turned into what many would consider a business, and she had to begin considering her tax status.

If you’re a keen artist, but you take commissions for your work, or if you print T-shirts at home for a small fee, the lines are still blurred. You might really enjoy doing the activity as a hobby, but if you’re doing so with the intent to generate an income, you might be liable to pay tax on it. The general rule of thumb is that the first £1,000 of gross trading income would be exempt from tax.

Social media influencing is one of the newest and fastest growing industries in the UK, but many who create content within the sector don’t realise they are in fact running a business. Social media influencing is also subject to many traditional and complex tax rules and regulations. Additionally, there are lots to consider in terms of the differences between gifting and advertising, swapping non-transferable gifted items for money and whether you should pay tax on gifts.

What to consider when starting a business

Because so many jobs centre on hobbies – and are sometimes deemed to be different from running a business – many people don’t have a plan in place when it comes to their finances.

If you’re transforming your hobby into a revenue-generating business model, it pays to research the different things you’re obliged to do in terms of your taxes – like keeping records of all your income and expenditure or using accounting software to support with returns. You’ll also need to consider whether you’ll operate as a sole trader, in a partnership or as a limited company – amongst lots of other things.

If you don’t, you run the risk of being penalised later down the line by HMRC, which can be a shock if you’re not expecting it and haven’t been putting away the right money, for the right period of time.

Working with an accountant who can utilise tax planning activities can maximise your earnings and ensure you’re operating in the most tax efficient way both now and into the future. At Champion Accountants, we come across recurring questions from start-up businesses and influencers who want to pay their fair share of tax, and who use our expertise to help put in place strategic, professional plans.

Lucrative market

Our specialist tax advisors were recently asked to help a family with a huge social media following. A hobby for one member of the family had quickly turned into a career for the whole household, as they transformed their day-to-day lives into a lucrative social platform. With millions of subscribers across their channels, profits were streaming in from advertising revenue.

In year one, with earnings of around £250,000, the family called in help from a local, high street accountant. They had no business experience and needed support with their self-assessments, together with advice on avoiding unnecessary taxes.

By year two, profits had leapt to £2.3m, meaning the family were paying a considerable amount of higher rate tax. They decided to seek support from our team of expert tax planners who could better cope with the ever-increasing scale of their business.

We immediately identified several ways in which their finances could be better handled – especially as they had been paying VAT on what should have been zero-rated supplies. We also recommended the family incorporate as a Limited company and address its unnecessary VAT payments. Not only did this drastically reduce tax payments, it also resulted in a c.£1m VAT rebate from HMRC.

Accountancy for start-up businesses

If turning your hobby into a business is something you’re genuinely interested in pursuing, speak to our team. We provide a personal service to help you get to grips with your tax, we’ll hold your hand throughout the process and will also connect you with other relevant industry professionals – such as expert legal teams and insurance brokers – to support you along the way.

They say doing what you love means you’ll never work a day in your life. So do what you love – but just ensure you’re acting compliantly at the same time, too.

To find out more, contact Martin Frain on 0161 703 2500 or martin.frain@championgroup.co.uk.