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. Eventually, taxpayers may have to decide if their hobby has morphed into a trade – and therefore subject to tax. The badges of trade can be used at this time to help resolve this dilemma.
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 considering options.
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 without concerns about any tax complications. Even if HMRC considers that the activities in question are a trade, taxpayers can make up to £1,000 per year from their hobby tax-free.