The 'badges of trade' tests, whilst not conclusive, are used by HMRC to help determine whether an activity is a proper economic / business activity or merely a money-making side-line to a hobby. Careful consideration needs to be given to deciding whether a hobby has become a taxable activity.
Both HMRC and the courts are clear that it is important to look at the whole picture rather than looking at each 'badge' in isolation when deciding.
HMRC will consider the following nine badges of trade as part of their overall investigation as to whether a hobby is actually a trade:
- 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
The introduction of the trading allowance in April 2017 allows taxpayers to make small amounts of money from their hobby. Even if HMRC consider that the activities in question are a trade, taxpayers can make up to £1,000 per year from their hobby using the trading allowance.