Is it a trade or a hobby?
There are many people that have hobbies that may generate money, such as buying and selling items at car boot sales or on eBay. Although some individuals seek to claim that an activity such as these is a taxable trade, rather than a non-taxable hobby.
This is becoming more common. In particular, with cases were a loss has come from the trading so that a relief for trading losses can be offset against the individuals other income, often referred to as ‘sideways loss relief’.
HM Revenue and Customs (HMRC) tend to examine many such sideways loss relief claims. Wherein HMRC may contend there is no trade. If there is no trade, there can be no trading loss. However, there is very little guidance one the meaning of ‘trade’ in the tax legislation.
A trade is simply defined as including ‘any venture in the nature of trade’. The lack of statutory guidance on meaning of ‘trade’ has resulted in the extensive case law over the years.
The ’badges of trade’ can sometimes be helpful. Established first by the Royal Commission for the Taxation of Profits and Income in 1955, using previous case law about what constitutes a trade. HMRC guidance lists the badges as follows:
the number of transactions;
the nature of the asset;
existence of similar trading transaction or interests;
changes to the asset;
the way the sale was carried out;
the source of finance;
interval of time between purchase and sale; and
method of acquisition.
However the badges of trade should not be used as a checklist to conclude whether a trade does (or does not) exist. The above HMRC guidance also urges caution about relying too heavily on the badges of trade.