An example may illustrate the answer to this question.
Harry updates his iPad and decides to sell his old one – he does not use the iPad for his employment or any business, it’s used purely for recreational purposes. He sets up an account on eBay and manages to sell for a reasonable price. Encouraged, he sells a number of other, no longer used, personal items on the same eBay account.
At this point, it would be difficult for the tax office to argue that Harry was engaged in a trade.
Harry then has an opportunity to buy an iPad from a friend, and the price his friend wants is reasonable, so reasonable that Harry is tempted to purchase and resell on eBay for a quick profit. This he does. With a small profit in the bank Harry starts to consider that he may be onto a good thing and plans to buy and sell more items online.
Buying with an anticipation of selling in order to make a profit is a so-called “badge of trade”, and if Harry continued with this activity he may need to register his online trade with HMRC and submit a tax return.
The criteria that HMRC will apply to decide if a hobby (sometime described as an adventure in the nature of a trade) is a trade are listed below. These are the badges of trade that will be considered by HMRC together with any relevant case law:
- profit seeking motive
- the number of transactions
- the nature of the asset
- existence of similar trading transactions or interests
- changes to the asset
- the way the sale was carried out
- the source of finance
- interval of time between purchase and sale
- method of acquisition.
We are waiting to see if a new Trading Allowance of £1,000 will be reintroduced after the election, if it is, Harry would not pay tax as long as the income from his eBay account did not exceed £1,000.
We would be happy to discuss this issue with any readers who are unsure of their present status. You should be aware that there may be penalties if you do not register a business activity with HMRC, file a tax return and pay any tax due.