The craft sector is a great industry to make a second income – from making cards to dressmaking and cake decorating – most crafters use their hobby to make money.
Research recently released by RBS claimed that 1 in 5 UK adults are ‘hidden entrepreneurs’. These are defined as people who are running small businesses in their spare time or who are using their spare time to plan a new business venture. 38% of these people reported that they earned extra money from their hobby!
But it is important to remember that if you are making a second income then you have to declare this with HM Revenue & Customs (HMRC); who are now imposing clampdowns to claim tax and VAT from these small businesses. They define ‘Second Incomes’ as people who are employed and are paid wages through PAYE for their main job but who earn extra money from activities such as:
- making and selling craft items
- buying and selling goods, for example regular market stalls, boot sales etc
- consultancy or other services such as public speaking or providing training
- organising parties and events or providing entertainment
- activities such as taxi driving, hairdressing, providing fitness training or landscape gardening
Here are some tips on what to do if you are planning to take your hobby to the next level. And remember, we’ve members who are specialists in tax and business so get in touch if you need more information.
What to do if you have this kind of Second Income?
You can notify HMRC of your second income by filling out a form online. If you want to find out more about how the scheme works there is a dedicated Second Incomes page on the main government website.
What to do if you plan to have a ‘Second Income’ in the future?
If you are planning to start a business in your spare time, or earn some money from your hobby, then you need to tell HMRC. The two most common ways to do this are:
Register as a sole trader – this tells HMRC you will be earning some extra money. They will then send you a Self Assessment Tax return to complete at the end of the year where you declare any income and profits. This is a very simple and cheap way to do things but it does mean that you are personally liable for any losses or problems with the business.
Register a company – this is a more complicated option which will involve a lot more paperwork. However it can be a good option if you are starting a business with other people as it gives a formal structure through which you can share ownership and responsibilities. It can also be a good idea if you will be doing large deals or running big events as a limited company will offer some liability protection. If you form a company HMRC will be told automatically and will expect you to complete tax returns each year.
Keeping track of your earnings
If you are earning extra money then you need to make sure you are keeping accurate records of your incomings and outgoings. HMRC will expect you to accurately complete tax returns at the end of each year using the records you have kept and can ask to see your information at any point.
If you are only doing a few transactions per month then a simple spreadsheet will be enough to get you going. As you start to get busier then it is worth investing in some specialist bookkeeping software which will let you manage your business finances more smoothly.
It may seem daunting but it is best to stay on the right side of HMRC. Remember, we can put you in touch wth the right members that can help you further with you business needs.
You can get a £1000 allowance from HMRC!
Starting from April 2017 individuals running small online businesses will have a £1,000 trading allowance. The government have said that:
‘Individuals with property income or trading income below the level of allowance will no longer need to declare or pay tax on that income. Those with relevant incomes above £1,000 can benefit by simply deducting the allowance instead of calculating their exact expenses.’
This new initiative could be a real boost to small online businesses and crafters. It could also be a real help for entrepreneurs looking to start a full-time business. Many entrepreneurs choose to test their startup idea out by doing a small amount of trading alongside their full-time job. This can be a great way to test ideas about how much you will be able to charge, how easy it is to attract customers and how big your profit margin is likely to be. The new allowance will let budding entrepreneurs do these initial test trades without the need to register their business or worry about paying the tax on them.
Whilst a £1,000 allowance will not go far for many businesses it will reduce overheads for occasional traders and make it easier for people to get started with their online business. Once people get over the £1,000 allowance (and until it is introduced in April 2017) people will still need to register their business.