Just when does a hobby become a trade?
Self employed plumber has a keen interest in motor cars. He buys old inexpensive vehicles typically less than £1,000, spends time and money tinkering and repairing before selling - almost always at a profit.
What started as a genuine hobby a few years ago has now started to escalate - bought and sold 4 cars in last year and fewer than that in previous 2 years. However as clients knowledge and expertise grows turnaround of vehicles is increasing.
If sales escalate to maybe a vehicle a month would this constitute a trade?
I have my thoughts what do others think?
Related resources
Replies (9)
Please login or register to join the discussion.
Intention
If it is intention to profit from the sale, it is an adventure in trade from the outset.
I can't see why this would not be considered to be trading in this circumstance.
tinkering
Surely nobody in their right mind would have a hobby of tinkering with cars ? It would be up there with sweeping your street for fun. Isnt the question more when it changes from being a capital gains tax into a trade ? And a car is a chattel...so you need to have a quick look at HMRC helpsheet (hs293) whilst you still think its a capital gain.
Meh..lots of people have that hobby
Surely nobody in their right mind would have a hobby of tinkering with cars ? It would be up there with sweeping your street for fun. Isnt the question more when it changes from being a capital gains tax into a trade ? And a car is a chattel...so you need to have a quick look at HMRC helpsheet (hs293) whilst you still think its a capital gain.
He is just messing about at the moment as far as I can see, the fact he is making a profit seems largely irrelevant to me, he is probably spending a completely uncommercial amount of time doing them up for the money he makes (I am aware this might not be important) but I think you could easily argue based on the numbers of cars and the fact he is doing so for enjoyment and not profit motives that there is no trade. If he went towards a car a month i might change my mind.
Cars are exempt for CGT purposes.
I suggest you check the badges of trade against his activity and see what you think on each one.
Regards
MtF
chattel
Oh yes...but to be fair, the help sheet which I mentioned does say on the first page that a motor car is a chattel, but sale of a private car is exempt from capital gains tax.
You may find the HMRC manuals useful in seeing how they view such matters ~ This para may be a good starting place.
BIM20205 - Trade: badges of trade: summary
A summary of each 'badge of trade' is shown below with a brief pointer to its meaning.
Profit-seeking motive see BIM20210An intention to make a profit supports trading, but by itself is not conclusive.The number of transactions see BIM20230Systematic and repeated transactions will support 'trade'.The nature of the asset see BIM20245 Is the asset of such a type or amount that it can only be turned to advantage by a sale? Or did it yield an income or give 'pride of possession', for example, a picture for personal enjoyment?Existence of similar trading transactions or interests see BIM20270 Transactions that are similar to those of an existing trade may themselves be trading.Changes to the asset see BIM20275 Was the asset repaired, modified or improved to make it more easily saleable or saleable at a greater profit?The way the sale was carried out see BIM20280 Was the asset sold in a way that was typical of trading organisations? Alternatively, did it have to be sold to raise cash for an emergency?The source of finance see BIM20300 Was money borrowed to buy the asset? Could the funds only be repaid by selling the asset?Interval of time between purchase and sale see BIM20310 Assets that are the subject of trade will normally, but not always, be sold quickly. Therefore, an intention to resell an asset shortly after purchase will support trading. However, an asset, which is to be held indefinitely, is much less likely to be a subject of trade.Method of acquisition see BIM20315 An asset that is acquired by inheritance, or as a gift, is less likely to be the subject of trade.
These 'badges' will not be present in every case and of those that are, some may point one way and some the other. The presence or absence of a particular badge is unlikely, by itself, to provide a conclusive answer to the question of whether or not there is a trade. The weight to be attached to each badge will depend on the precise circumstances.
The approach by the courts has been to decide questions of trade on the basis of the overall impression gained from a review of all the badges.
My big brother used to 'tinker' with cars when I was a youth (he's 10 years older than me) and the petrol money he spent looking for bits in scrapyards as well as countless hours wasted meant there was never anything in it for him.
It was always interesting you see what he came back from the auction with - invariably a Cortina or Escort of some shape of fashion.
As he said "you've got to speculate to accumulate" which is why he now lives in a one up, one down on a crap estate in a crap town - he never did find anything he could make money out of.
It's his birthday next week and he just wants money (again).
As for the original question - he's a self employed plumber paying (one would hope) his fair amount of tax.
If his hobby escalates to the point that he's doing less plumbing and more 'tinkering' (rather than doing it all in his spare time) that surely implies a profit motive - has it got to that point yet?
There are several badges of trade the guy is flirting with - go careful.
Quite how he makes a profit is beyond me, my brother never did.
Organised commercially
HMRC will not allow relief for losses for a purported trading activity that isn't organised on a commercial basis. It follows that they can't tax an activity not so organised.
Like Carlos's brother, it may be that the only reason there are profits is because not all costs have been identified.
The thing that turns a trade-like hobby into a trade is when it's run as a business. Whilst it's a VAT case, the tests from Lord Fisher (see the final paragraph of IHTM25152) may also help you identify whether or not it's a business.
Happy Birthday to Carlos's brother.
Thanks one and all.........................I was aware of most of the points made but always useful to get others points of view.
My thoughts are that this does not yet constitute trading, it is a genuine hobby - chap spends most of his spare time working on the cars - whilst his self employed (Plumbing) activities continue.
No doubt there are expenses that could be deducted from profits made on the purchase and sale of the vehicles - purchase of parts, travelling, use of home etc. However at this point all I am aware of is the cost of the vehicles and what they where sold for.
I will monitor number of transactions because I think this will increase and eventually become a commercial enterprise in addition to his existing self employed activities.
The skill/luck is determining when that is.