Many people have hobbies that generate money, such as buying and selling items at car boot sales or on eBay. It may seem puzzling that some individuals seek to claim that an activity is a taxable trade, rather than a non-taxable hobby. However, this appears to be becoming increasingly common. In particular, an individual may contend that loss-making activities amount to a trade so that relief for trading losses can be offset against the individual’s other income.
Is there a trade?
Not surprisingly, HMRC tend to examine many such sideways loss relief claims. If there is no trade, there can be no trading loss. Unfortunately, there is very little guidance on the meaning of ‘trade’ in the tax legislation. A trade is defined as including ‘any venture in the nature of trade’. The lack of statutory guidance on the meaning of ‘trade’ has resulted in extensive case law over the years.
The 9 ‘badges of trade’ can sometimes be helpful. HMRC guidance lists the badges as follows:
- 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
Is it commercial?
Even if it is accepted that there is a trade, HMRC will sometimes argue that the trade is not being undertaken on a commercial basis, and/or with a view to the realisation of profits of the trade. Sideways loss relief is not available in those circumstances.
HMRC’s guidance includes extensive commentary on the meaning of ‘trade’. Whilst HMRC’s guidance does not carry the force of law, it is potentially useful to be aware of HMRC’s view and its general approach in establishing whether or not a trade exists. A detailed business plan may be helpful in establishing that a trade is being carried on commercially, and with a view to making profits.
The government announced in Budget 2016 a new allowance of £1,000 for trading and property income from April 2017. This will be particularly helpful for those whose trading activities are on the smallest scale.