How Can You Tell When Having A Hobby Turns Into Running A Business?

You might be thinking about starting, or perhaps you already have started, some sort of side hustle – from selling handmade clothing or refurbishing old furniture, to selling drawings, paintings and even performing the occasional gig. It’s something you love doing anyway, so why not earn a bit of extra cash doing it? 

But when do you cross the line from having a hobby to operating and running your own business? 

Unfortunately, contrary to what The Jackson 5 will tell you, it’s not as easy as 1 2 3. There is no single element that differentiates a hobby from a business. Rather, it is often based on the consideration of several elements, in the context of your individual circumstances. 

While this may sound confusing, don’t worry! This article will run you through the differences between having a hobby and running a business, and how to work out what kind of operation you’ve got going.

Being clear on what you are doing is integral to making sure that you are meeting your obligations in terms of the law, tax, and insurance.

What Is A Hobby?

The easiest place to start when it comes to distinguishing between two activities is to know what each of them are and what they involve.

Let’s begin with hobbies.

A hobby generally takes the form of an activity you do in your free time, for your own personal enjoyment or satisfaction. You’re in complete control. You can choose to keep your hobby private, give your products as presents, or even sell them for the cost of materials. The good news is, when your activity is a hobby, you don’t need to worry about reporting obligations, such as reporting taxes to HM Revenue and Customs (HMRC).

But, income-earning hobbies can grow into a business – and this is where things can get a bit tricky! It can help to keep track of any changes you experience in terms of income or practice. Staying on top of this will make sure you’re prepared to take on obligations you may end up having and avoid any penalties.

Tip: Some types of hobbies and activities may require a licence or permit if you wish to operate as a business. Find out if this applies to you by using this tool.

What Is A Business?

Now that we know what a hobby is, we can look at what makes a business a business.

One of the main ways to tell if you’re operating a business is if you engage in the activity with the aim of making a profit. 

If you answer ‘yes’ to at least 2 of the following questions, it would be reasonable to assume that you’re in business:

• Are you doing the activity for commercial reasons?
• Do you undertake the activity with the main intention of making a profit?
• Do you perform the activity on a regular basis?
• Do you carry out the activity in a planned, organised or business-like manner?

Why Would You Want To Operate A Business?

You might be wondering why you should bother starting a business if you can make a bit of extra money with your hobby. After all, when you have a hobby, you won’t need to to deal with the headache of figuring out how to comply with any reporting obligations you might have.

Before you jump the gun, it’s important to consider the benefits that come with being in business and what they mean for you.

A primary benefit of running a proper business is that you can receive certain government concessions and other services. For example, this could include tax concessions and dividend exemptions (however, this is more significant for companies).

What Are My Obligations If I Decide To Run A Business?

As Spiderman says, with great power comes great responsibility. Or in this case, reporting obligations.

Once you’re operating a business, certain reporting requirements will kick in that you will need to comply with in order to ensure you are meeting your legal, tax and other obligations. Although these processes may seem tedious, you can use them to your own advantage to make informed business decisions. 

Maintaining good records can help you to:

• Manage and keep track of your business’ cash flow
• Present your business’ financial position to investors, banks, and other potential lenders
• Quickly and easily access an overview of how your business is going to make good business decisions

Reporting Obligations For Tax And Workplace Pensions

You will need to keep a record of all tax and workplace pension transactions, and respective supporting documents, related to your business.

The specific records you will be required to keep will depend on your business structure (such as whether you are a sole trader, partnership, company, or trust), as well as what the tax and workplace pension obligations are for your particular business.

For example, UK companies need to report:

• Confirmation statements
• Consolidated accounts
• Audits for certain matters, such as turnover threshold
• Annual accounts

As a business, you are required to keep your records for at least 6 years after 31 January of the relevant tax year. This includes details about key personnel, loans, transactions and shareholder votes.

Although there is no express requirement to keep your records in electronic form, it is a good idea to use electronic record keeping in situations where you can. Electronic systems are, in many cases, more convenient – saving you time and making many tasks easier.

It also means you can reduce your paper usage as you won’t need to keep paper copies, unless required by a particular law or regulation.

If you already have a system in place that utilises paper records, you can choose to convert them into a digital file, and even destroy the original paper versions.

It is recommended that you ensure your records are stored in a secure place. Be sure to back up your records regularly, especially if they are stored on a computer or other electronic device. To comply with your reporting obligations, you will also need to:

• have access to the computer or device the records are stored on;
• have the ability to control the information that is processed, entered and sent;
• and make sure that the records are backed up in the event that the device fails.

Using A Business Name

Depending on your business, you might be thinking about whether you should register a business name to operate under, rather than using your own name. 

There are a few things to think about before hitting the go button on registration. 

First and foremost, you will need to check whether the business name is free and available for you to register. You can find this out by running a search on this business name availability register.

In addition to this, it’s a good idea to check this trademark database to ensure your proposed business name doesn’t infringe on an existing registered trademark.

Fair Trading Obligations

If you sell a product or a service, it is important to understand and comply with laws that operate to protect you, your business, and your customers from unfair trading practices. These laws are known as fair trading laws, and include the Consumer Protection from Unfair Trading Regulations.

Fair trading laws operate in conjunction with industry codes of practice to help you conduct business in a fair and competitive way, whilst protecting customers and ensuring that they are properly informed.

These unfair trading laws cover a range of areas, including but not limited to:

• Unfair market practices
• Product safety and labelling
• Price monitoring
• Industry codes and regulations

Key Factors

Is There Money Involved?

In many cases, if you sell your work publicly and make a profit, it may be indicative of you running a business. Contrarily, if you do not charge for your work at all, it is likely that you will be considered to be engaged in a hobby.

However, there are some cases in which you might charge money for your work even if you are carrying out a hobby. For example, if you are charging for the cost of materials, or charging for the cost of materials plus a little bit extra to cover additional costs, such as electricity.

Why Do You Advertise Your Work?

If you are promoting your work to establish your reputation and increase your reach in order to boost sales, it is likely that you are in business.

However, there are a range of reasons why you might want to share your work with others, and this is where things can get a little bit more murky. For example, sharing your work to build a reputation and/or following in and of itself, can be indicative of a hobby or a business.

Do You Keep Financial Records?

If you’re in business, it is likely that you will maintain records to ensure you are effectively managing your finances, and keeping track of your business expenses and sales.

Alternatively, if you have a hobby, you might not keep records at all, or may do so to understand and keep track of how much the hobby is costing you personally.

Still Not Sure Whether You Have A Hobby Or Are Running A Business?

The lines between having a hobby and running a business can get quite murky and it is often quite tricky to define which of the two you are involved with.

It is always a good idea to seek advice that is specific to your own circumstances. This is especially the case when it comes to working out whether you have a hobby or a business, as it relies upon an evaluation of what actually takes place, and in what context.

There is no clearly defined line or any one element that tips the scale one way or the other.

We are here to help! Reach out to our team of friendly and experienced lawyers for a free, no-obligations chat at [email protected] or 08081347754.

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