In recent weeks, we have been contacted by several individuals asking for advice and assistance regarding money they received from selling dogs. To many, the sale of a puppy may simply be a hobby with no profit-making motive, but this is not necessarily the case. As such, HMRC has the right to request further information through their disclosure process.
Understanding what constitutes a trade is important so you can properly maintain relevant documents and calculate and report income if necessary. Please read our expanded article below, published in the Ringwood and Fordingbridge News.
There are millions of people in the UK who operate a side hustle for a little extra money. However, the tax implications of this extra income are not always considered and can get individuals in a bit of hot water with HMRC.
Reselling items online, freelance work, pet sitting, or selling puppies from a litter are commonly overlooked and not reported to HMRC.
It is true that you do not need to report income if the gross trading income does not exceed £1,000. However, beyond the £1,000 mark, you may have to, depending on whether the income generated is deemed to be a trade.
There are nine “badges of trade” which have been established through the UK courts and need to be considered.
- Profit Motive: A consistent intention to make a profit indicates trading.
- Nature of the Asset: Items typically bought and sold in the course of trade (e.g., stock in trade).
- Frequency of Transactions: Regular buying and selling suggest trading activity.
- Supplementary Work: Efforts to make the asset more saleable point towards trade.
- Circumstances of Sale: Selling in an organised manner or through a business structure.
- Original Acquisition: How and why the asset was acquired.
- Length of Ownership: How long were you the legal owner of the item before selling.
- The Type of Finance: Was money borrowed to buy the asset? Could the funds only be repaid by selling the asset?
- Similar Trade: Transactions that are similar to those of an existing trade may themselves be trading.
When these criteria indicate trading activity, the income generated must be reported to HMRC. This reporting is crucial for the correct assessment of income tax, National Insurance contributions, and potentially VAT.
No single badge is likely to be determinative, but all badges must be considered and given appropriate weight in deciding whether an activity is of a trading nature. Getting it wrong can result in HMRC demanding payment of historic tax owed and penalties.
For tax purposes, individuals and businesses should maintain clear and accurate records of their transactions and seek professional advice if there's any uncertainty about their trading status.
If after reading this, you realise that perhaps certain income should have been reported to HMRC, we at Donaldson Ross are available to review your circumstances and provide you with peace of mind. If there was a trade, we at Donaldson Ross can complete a voluntary disclosure.
Contact us at taxman@donaldsonross.co.uk or on 01425 480814.