Paying hobby or small busness??

[pren]

Even' all.

When I started out with woodworking, it was primarily a hobby that let me make basic furniture for myself, friends and family. I'd ask for material costs and a few beers at the end of the project. I'd look on it as they were giving me a chance to develop my skills on projects that I either couldn't afford or didn't need.

Recently, however, I've been getting requests from friends of friends and family to make a few things for them too. I'm going to be making some nursery storage units for a colleagues sister in the near future, for example, followed by some scroll-saw gifts to be given as presents by others.

These individuals have all expressed a willingness to pay me a decent rate for my efforts, which is great.

In the future, I do see myself following Mailees path and building up a small joinery business whilst still remaining employed in my current job.
I do like this set-up at the moment, as it allows me to take jobs or leave them and still keep a regular income from my main job (even if it is a awful one )

My issue at the moment is; what am in? If I'm taking someones money to make them some woodwork item - am I trading or am I just enjoying a paying hobby? I work 45hrs a week in a warehouse so only have evenings and weekends to live my 'double life' :roll: :lol:


Does this make a difference? Should I be registering myself for tax on this as well as paying it on my regular wage? Like I said, I want to follow this further in the future so I want to cross my eyes and dot my T's as much as possible at the outset.

I'm only really expecting to make one or two items per month, so we're not talking much at all in the way of profit. I'm still seeing it as a hobby so I'm happy to only ask for £30-40 or so for labour (I know - don't undersell your skills but I always feel greedy asking for money for myself ).

Anyway ... bit of a ramble. I really would appreciate any pointers from those who are living at the end of my path.

Many thanks.

Bryn

 

[BradNaylor]

If I'm taking someones money to make them some woodwork item - am I trading or am I just enjoying a paying hobby?

Should I be registering myself for tax on this as well as paying it on my regular wage? Like I said, I want to follow this further in the future so I want to cross my eyes and dot my T's as much as possible at the outset.

I'm only really expecting to make one or two items per month, so we're not talking much at all in the way of profit. I'm still seeing it as a hobby so I'm happy to only ask for £30-40 or so for labour

Hi Bryn,

I guess the 'correct' answer to your question is that you should register yourself as being self-employed with HMRC and complete a self-assessment tax return covering the portion of your income that you earn from woodworking, less your legitimate expenses.

However, from what you say your earnings are going to be minimal. This puts you in the league of woodturners who sell a few pieces at craft fairs or people who sell tat at car boot sales every now and again.

Or a plasterer in full time employment who does a 'foreigner' for cash at the weekend.

How many of these people declare these earnings to the HMRC?

My guess would be none.

Its up to you. On reflection I would come down on the side of registering and declaring; simply because at the rates you are talking about charging you will undoubtedly be losing money when set against the costs of running your workshop.

These accumulated losses could be very useful to set against any future profits should your earnings from woodworking increase, thus reducing your tax liability.

Cheers
Duncan

PS Purely in the interests of your own self-respect you should charge your labour out at at least minimum wage rates ie £5.73 per hour. No-one could possibly have a problem with this...

:wink:

 

[Oryxdesign]

If you do set up as self employed don't forget that you can count your tools as start up expenses and start claiming a right down every year. In fact you probably will pay less tax overall for the next couple of years.

 

[catface]

Hello Pren, great to hear you're on the way up with the woodworking. Not to be mr awkward but there is another issue regarding the step from hobby to pro & this is premises use. If you do register as Self Employed you are probably also agreeing that your workshop use is commercial ie wherever the workshop is that you are using. Thats fine if you've got an industrial unit, but if you work from home in the garage, or a shed etc , you can have issues with the local authority regarding (a) change of use (from domestic to commercial use) , and (b) that part of the building being now rateable at business rates values not domestic rates values (for council tax). Whether these are really issues or not depends in part on how much work of what kind and in what facilities you have, ie. is negotiable with the Local Authority. But it needs to be borne in mind, because for example, if you receive a noise complaint and you are a commercial operation in a domestic setting, you are much easier to shut down.

The other thing is Health and safety ; although your own premises may be limited to your own use only, you also need to consider eg public liability insurance, because others will be using products bought from you.

Don;t let this put you off, its just stuff you need to think about before going too far down the commercial road & getting in a pickle with someon e" in authority".

Hope this helps, regards, Catface

 

[woodbloke]

Some good points from DanT and others on HMRC and change of use of the 'shop. I recently registered with the HMG as a 'sole trader' simply 'cos of the stuff I do for F&C and will always be making a loss...but it keeps SWIMBO happy (who's an accountant and knows the penalties for non-declaration of income :shock so for peace of mind I'd go down the 'sole trader' route and bare all to the taxman - Rob

 

[pren]

Hey.

Thanks alot for taking the time to give me your input on this. I really do appreciate it .

There are three key issues that I can see straight away.

- Running a business from home
- Offseting tax (tax confuses me! :lol: )
- Public Liability insurance.

Running a business from home
I'm currently working from a 5x3m shed in my garden. I try to keep noise to a minimum and I'm lucky to have supportive neighbours but running a full time business from there may be pushing it.

At present, if I had to move to a commercial unit as my mortgage agreement prohibits running a business from home, then my income would be totally swallowed by rent/utilities. Although, I guess if I made the leap to full-time self employment, I could afford the space rent.


Offseting tax
How does the cost of my tools and accumulated losses (DanT) help with what tax I pay on start up? I'd say that my entire tool collection amounts to around £1000 and I use approx £10 of electric per week, plus around £5 of consumables depending on the projects. Could someone please give me a quick example of how this would work, tax-wise, if I were to start up tomorrow?

I apologise for asking these basic questions, the answers for which can be found via google but I'm moderately dyslexic and have difficulty getting my head around complex topics that i'm reading if i've no frame of reference


Public Liability insurance
How does this work? Presumably it works like car insurance where the higher the risk you are, the higher your premiums? Would I be right in thinking that a builder would have higher premiums than a cabinet maker on the basis being a failing shelf is less likely to kill a client than a failing roof?

Finally: If I register as a sole trader and remain in full time employment in my current job and only happen to take on one woodwork project in the tax year, do I just pay tax on that one project or is there some ... charge .... for being tax registered?

Soooooooo many questions!!! :shock: :lol:

I really do appreciate any help or advice you can give me with this.

many, many thanks!

Bryn

 

[Aled Dafis]

I'm watching this thread with great interest, as my little "venture" might bring a little cash, so I'd also like to know where I stand.

Please keep the advice coming.

Cheers

Aled

 

[9fingers]

Bryn,

I have a day job (well for another 2 weeks - but that is another story) and as well i am a sole trader with a small scale engineering business.

HMRC allow you offset allowable expenses against profits of the business.

eg I claim 40p per mile to use my own car to visit clients and deliver the results of my labours.

I claim for consumables such as milling cutters (like router bits) and repairs/spares for my machines.

I claim for a modest amount of electricity, use of the phone and a proportion of my internet connection.

I also claim for 25% capital allowances on a reducing balance basis which works like this:

At the start of year one, set a sensible value for your machinery, lets say this is £1000. In the course of the year say you spend £200 more on capital items.
In the first tax return you can claim 25% of the total of £1200 ie £300.
The reducing balance carried into year 2 is £900.
In year 2 say you spend £100 making £1000. in year 2 tax return you claim £250 (25% of £1000) and the carried forward balance is £750 at the start of year 3 and so on.
You cannot claim the actual cost of the machines through the books.

keep you eyes open at budget time. Every now and then the Govt encourages small businesses by giving 100% relief for certain classes of capital expenditure like computers.


The taxman regards investing in capital as a good indication that you are operating a real small business because you are taking risk. If you are careful about when you send invoices and when you spend out on new toys you can have 'good years' in which you make profits and buy new equipment and yet pay little tax and also follow these by 'bad years' where you don't have much work and yet still get the capital allowances. If the capital allowances are greater than you earning for the year then 'negative tax' can be set against PAYE from your day job.
You need to complete the more comprehensive tax return which will have some pages in the back to enter your self employment earnings as well as the normal PAYE section.

I have run this arrangement for over 20 years and legitimately paid very little extra tax but have effectively turned my free time into tax free machine tools. I am about to retire from my day job and I will be interesting if I can continue to claim capital allowance tax relief against the tax due on my day job pension !!

Good Luck

Bob

 

[Escudo]

Here fellas have a look at this straight from the Inspector of Taxes, Business Income Manual. The key sentence is the last one in the second paragraph.

http://www.hmrc.gov.uk/manuals/bimmanual/bim14065.htm

It can be a bit of a grey area to determine when a business or "source of income" begins. In this case a trade.

I think the key point is to establish when the venture becomes commercial, or an intention is clearly made to trade with a view to making a profit. (Note: Trading losses will not be available for relief if they arise from a venture which has no view or likelihood of achieving a profit or is uncommercial.)

This is different to just doing a few little jobs for family or friends, perhaps to receive an unsolicited payment or contribution. In this case it would be easy to demonstrate at a later date that a profit was not achieved.

Once intentions are clear and the venture becomes commercial that is the time to register with HMRC. Individuals have three months to do so by completing a form 41G.

It would be wise at this juncture to engage the services of a local accountant for guidance on this and a whole range of other business matters eg - as mentioned above determining capital introduced into the business on "day one" in the form of tools and equipment for which a valuable capital allowance claim may be made. (Tax allowable depreciation)

Hope this response is helpful, it is difficult to cover all the issues in a reply on the forum.

Cheers, Tony

 

[archersam]

.


I also claim for 25% capital allowances on a reducing balance basis which works like this:

At the start of year one, set a sensible value for your machinery, lets say this is £1000. In the course of the year say you spend £200 more on capital items.
In the first tax return you can claim 25% of the total of £1200 ie £300.
The reducing balance carried into year 2 is £900.
In year 2 say you spend £100 making £1000. in year 2 tax return you claim £250 (25% of £1000) and the carried forward balance is £750 at the start of year 3 and so on.
You cannot claim the actual cost of the machines through the books.

keep you eyes open at budget time. Every now and then the Govt encourages small businesses by giving 100% relief for certain classes of capital expenditure like computers.

Bob

All very good advice Bob but one thing you might want to double check is that you can actually claim 50% in the first year of introducing an asset, ie if you register as s/e empoyed and you introduce machinery at the start of the business at £1000, you can offset £500 in the first year carrying forward £500 value to the next. The next year you can then offset 25% of the £500. If you buy a nice p/t or something and it is £500 you can offset £250 of it in the year of purchase.

You can also offset some broadband useage, telephone, (both fixed and mobile) and electricty, gas oh and council tax BUT not your Sky TV :lol: (I tried it on the basis that I watch lots of home design and woodwork programmes but my accountant thought it was pushing it a bit too far). Oh and you can also offset ALL your wood magazines. I pay an accountant a small fee for the advice and for filling in my tax return and as always she saves me more than she costs just for having the inside and up to date knowledge.

Also if you have a full time PAYE job, ie taxed at source etc and you do not think you will earn much (if anything) you can register for National Insurance exemption for your self-employed earnings.

Sam

 

[9fingers]

Thanks Sam,

I did not know about the 50% first year allowance.
I too used an accountant in my first few years (87-90) to keep up with the latest rules.
Once i was established (and not buying much machinery) the accountant moved away and I did not use another one but instead did the tax return myself. Looks like I could have saved more tax.

I have been using an even more effective ruse to reduce tax since the changes in pension law since April 06 which has meant I have paid no tax (legally!) since then. So any tax allowances from sole trading have paled into insignificance recently.

Bob

 

[archersam]

hey rules are good sometimes, it is about understanding them etc.
i was late registering my self-employment but they were understanding particularly as I was not turning a profit which meant they needed to give me a refund!

i have never met my accountant. i deal with her by email or phone, I keep very very detailed excel profit and loss with a capital account and automatic calculations for the my capital allowances and whilst I reckon I could save her fees i don't think that they are unreasonable and if one year something new happens that i have not heard about then it should save me her fees alone (oh and you lot will get the advice for free too as I will of course post on here)

 

[Harbo]

I don't wish to be glib - but I pay an accountant £250 a year to do my tax - well worth it in my opinion.

Rod

 

[joiner_sim]

One question. Is earning something like £50 once every now and again worth declaring or is it best to just keep it as a drink?

 

[BradNaylor]

After glancing through all these complicated replies I've changed my mind.

Keep schtum and pocket the cash.

I've got a mate who is now in his sixties who has made a living for the last forty-odd years as a guitar player in various pub bands and as a jobbing gardener.

He's never had a bank account.
He's never filled in a tax return.
He's never been on the electoral roll.
He's never claimed any benefits.

Every time I bump into him he's living with a different woman; normally in a very nice house. He's one of the happiest blokes I know!

Maybe he's got the right idea.

I just wonder what's going to happen when he goes and claims his pension.

Dan

 

[woodbloke]

I just wonder what's going to happen when he goes and claims his pension.

Dan

...but he must have a NI and presumably an NHS number as well as a passport? I assume you can still pick up your pension from the PO in cash money rather than have it paid into a bank account? - Rob

 

[archersam]

I just wonder what's going to happen when he goes and claims his pension.

Dan

...but he must have a NI and presumably an NHS number as well as a passport? I assume you can still pick up your pension from the PO in cash money rather than have it paid into a bank account? - Rob

IF you can find one that is still open that is..... :lol:

 

[pren]

Thankyou all once again for your input! Really is appreciated .

I think I'm in a bit of a 'Catch-22' situation.

If I declare my earnings and register for tax, I'm more than likely to get a kick in the pants from my mortgage providers/council for running a business from home. My available free time in which I intend to make peices is not enough to bring in the cash required for rent of a workshop and the inherent rates and insurances.

If I don't declare, I run the risk of a kicking from the boys from HMRC, presumably jepordizing any future ventures? However, It does mean that I can carry on as I am until I feel both the time and my skills are right to take the leap.

I think, on balance, I'm going to take DanT's advice (probably because it's the one I wanted to hear :lol: ) and take the money and run... for now.

As I've said, I really don't see myself bringing in more that £30-50 every month or so, if that at all. I think I'll keep using any commissioned projects to develop my skills to the stage where my efforts become commercially viable and I've developed a customer/contact base that can generate commissions..... Am I convincing anyone yet? :lol:

Once I'm in a position to move up the food chain, I'll register myself properly, unless any other opportunities come along.

One other thing I think I've realised that I need to do is to learn more about this Tax mumbo-jumbo. I do have a tame accountant who owes me a favour so I intend to bend his ear once I've found out what I don't know.

Anyway ... apologies for the ramblings! :roll: :lol:

Thanks again.
Bryn

 

[big soft moose]

Thankyou all once again for your input! Really is appreciated .

I think I'm in a bit of a 'Catch-22' situation.

If I declare my earnings and register for tax, I'm more than likely to get a kick in the pants from my mortgage providers/council for running a business from home. My available free time in which I intend to make peices is not enough to bring in the cash required for rent of a workshop and the inherent rates and insurances.

If I don't declare, I run the risk of a kicking from the boys from HMRC, presumably jepordizing any future ventures? However, It does mean that I can carry on as I am until I feel both the time and my skills are right to take the leap.

I think, on balance, I'm going to take DanT's advice (probably because it's the one I wanted to hear :lol: ) and take the money and run... for now.

As I've said, I really don't see myself bringing in more that £30-50 every month or so, if that at all. I think I'll keep using any commissioned projects to develop my skills to the stage where my efforts become commercially viable and I've developed a customer/contact base that can generate commissions..... Am I convincing anyone yet? :lol:

Once I'm in a position to move up the food chain, I'll register myself properly, unless any other opportunities come along.

One other thing I think I've realised that I need to do is to learn more about this Tax mumbo-jumbo. I do have a tame accountant who owes me a favour so I intend to bend his ear once I've found out what I don't know.

Anyway ... apologies for the ramblings! :roll: :lol:

Thanks again.
Bryn

Bryn

if you are only bringing in £50 odd notes a month then taking the depreciation on your equipment , the cost of wood, power bills, etc etc into account then you arent making a profit and thus have no tax to pay

if you choose not to register with HMRC for fear of the council finding out you are running a buisness , then just make sure you keep good records so that if it ever came up you can demonstrate that you have not "failed to declare income" because there was no income to declare.

 

[pren]

Bryn

if you are only bringing in £50 odd notes a month then taking the depreciation on your equipment , the cost of wood, power bills, etc etc into account then you arent making a profit and thus have no tax to pay

Now that, Sir, is the sort of thinking like!

I effect, if I work out a budget for running my workshop and keep any income below that level then everything should be hunky dory?

Cheers!
Bryn