BUSINESS: Navigating the Road from Hobby to Small Business - Tax

This article was originally published in the Winter 2008 issue of UK Handmade Magazine. Figures mentioned in the original article have been adjusted for 2011-2012 tax year.

A familiar scenario: you have been a keen crafter/maker for years, you love making things and have been gladly giving your handmade goodies away, much to the delight of friends and family. In fact they love your handmade goodies so much that they encourage you to put your handmade items up for sale.

Welcome to the hobby-small business crossroad. So, what now?

Illustration by Askey Illustration
 

The first question is “are you actually trading”? There are some easy questions you can ask yourself to answer this:

• Are you selling your handmade items at a profit i.e. at more than cost of materials?
• Are you advertising your handmade items for sale?

If your answer to either of the above is “Yes” then you are likely to be trading and you will have crossed the threshold from hobby to small business.

Registering as Self Employed
Once you have established that you are trading, Her Majesty’s Revenue & Customs (“HMRC” aka the “taxman”) requires that you register as self-employed as soon as possible and within 3 months of the end of your first month of trading. If you register later than 3 months you may be fined £100 for late notification.

There is often some confusion about contacting the taxman to register as self-employed as everyone is entitled to earn up to a certain amount each year tax free, known as your personal tax allowance (for 2011/2012 this amount is £7,475). So, if your hobby turned small business is your only annual income and you don’t envisage earning more than this amount it’s easy to feel that you need not inform the tax man but that’s where you’d be wrong.

Regardless of whether or not you think your income will exceed your personal tax allowance, you should register with HMRC as self-employed. This applies even if you are currently employed by somebody else and are just running a small business in your spare time.

Registering as self-employed is pretty straight forward and the form “CWF1” to register is available to download here: http://www.hmrc.gov.uk/forms/cwf1.pdf or you register online here. If in doubt you can call the self assessment helpline on 0845 900 0444     .

Once you are registered, HMRC will send you an annual self-assessment tax return to complete along with useful guidance notes on how and when to complete it. You can also complete your tax return online!

National Insurance Contributions (NIC)
Being registered as self-employed will also generally (there are a few exceptions which are covered below) mean that you need to pay Class 2 National Insurance Contributions. 

The requirement to pay Class 2 contributions kicks in if you earn more than a certain amount per year (currently £5,315 for 2011/2012). Class 2 contributions are charged at a flat rate which is currently £2.50/week for 2011/2012 so the easiest way to pay them is via Direct Debit (you can download the form CA5601here: http://www.hmrc.gov.uk/pdfs/ca5601.pdf).

There are, however, a number of exceptions where you won’t need to pay Class 2 contributions:

• If you're under 16;
• If you are over the State Retirement Age (60 for women, 65 for men);
• If you are a married woman or widow who holds a valid Married Women's Reduced Rate Election certificate. (Withdrawn in 1977 for new claimants); 
• If, you earn less than the threshold amount per year (i.e. less than £5,315 for 2011/2012) you can apply to the taxman for a “certificate of small earnings exception”, which you can download here: www.hmrc.gov.uk/forms/cf10.pdf); or
• If you have any complete weeks of work where you haven't been able to work due to illness or you're caring for someone and are receiving certain benefits.

If your profits are high enough, you may also need to pay Class 4 contributions. This requirement kicks in if you make more than a certain amount of yearly profit. Currently for 2011/2012, any profits over £7,225 are charged at 9% of profits and any profits over £42,475 are charged at 2% of profits. Class 4 contributions are payable together with your tax as part of your annual self-assessment tax return.

If you are self employed but also have a “day job” (i.e. are employed by someone else) and think that you will be paying too much NIC overall then you can defer or postpone payment of your Class 2 and Class 4 NICs until the end of the tax year by filling out form CA72 which you can download here: http://www.hmrc.gov.uk/forms/ca72b.pdf

For further information you can contact HMRC.

Value Added Tax (VAT)
VAT registration will only be an issue if your turnover for the previous 12 months is more than £73,000 or if you think your turnover will exceed that amount in the next 30 days. This is known as the VAT registration threshold and changes each year.

The information supplied on the website and in the magazine is provided for general reference purposes only. Whilst every effort is made to ensure that the information is up to date and accurate, the authors do not warrant, nor do they accept any responsibility or liability for, the accuracy or completeness of the content or for any loss which may arise from reliance on information contained in any articles. General information is not the same as getting financial or other professional advice. For advice based on your own circumstances, talk to a professional adviser.
 

©  Anna Stassen; all right reserved