What's stopping someone doing this...
What's stopping someone doing this...
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Discussion

jon-

Original Poster:

16,534 posts

247 months

Thursday 14th May 2009
quotequote all
I've just been musing over the small business tax rules in my head and have come up with the following scenario. It's more than likely going to be illegal but I can't see how yet...

I'm using photography as an example as it's an interest of mine, but I guess it could be used in many situations.

Lets say Alan earns 80k/pa for his day job. Alan decides he wants to get into photography as a hobby.

Being well off, Alan buys £10ks worth of gear. What's to stop Alan registering as a sole trader, calling the camera gear capital allowances then being a really bad photographer and only selling a few hundred quids worth via stock photography sites.

As far as I understand, Alan could then reclaim £4k in tax from PAYE. He wouldn't pay any extra NI as his turn over would be so low so could claim to be exempt from it.

I'm obviously missing something staggering, but you don't know unless you ask...

spikeyhead

20,639 posts

228 months

Thursday 14th May 2009
quotequote all
If the photography business doesn't meet the badges of trade then it's not a business. In the example given I suspect that lack of an intention to make a profit would be sufficient to show that it wasn't a business.


jon-

Original Poster:

16,534 posts

247 months

Thursday 14th May 2009
quotequote all
spikeyhead said:
If the photography business doesn't meet the badges of trade then it's not a business. In the example given I suspect that lack of an intention to make a profit would be sufficient to show that it wasn't a business.
I'm just wondering what sort of auditing they would go through to work out 'lack of intent'. Alan could take photos every weekend and be uploading them to istockphoto in hope of a sale but wouldn't generate much income. I guess HMRCs decision would be purely subjective and quite difficult to call.

For the record I have no intent of doing this. I recently registered as a sole trader, and while going through the rules to bring myself up to speed on what I need to be doing scenarios on how to fiddle things keep popping into my mind!

Perhaps I could have done accounting afterall scratchchinhehe

Mx_Stu

837 posts

254 months

Thursday 14th May 2009
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I think if you submitted a tax return for several years showing a loss on the self employment pages it wouldn't take long for HMRC to enquire into your returns and investigate whether it was a bona fide business.

As mentioned above the badges of trade definately come into play and you would have to question whether the business was run with a profit motive.

In addtion you would have to ensure that the capital allowances reflected the personal use of the camera equipment.


Eric Mc

125,920 posts

296 months

Thursday 14th May 2009
quotequote all
Can't add any more to what has been said except that I had to handle a tax investigation in which the main Revenue argument was exactly this. Because the small business continuously made losses, they tried to argue that it was a hobby and not a business - and therefore the losses were not trading losses and therefore were not available for tax relief.

We won that one on the basis that just because the buisness made losses didn't mean that the trader wasn't TRYING to make a profit.

It's the intent that counts.

jon-

Original Poster:

16,534 posts

247 months

Thursday 14th May 2009
quotequote all
Good info, thanks everyone.

Eric Mc said:
Can't add any more to what has been said except that I had to handle a tax investigation in which the main Revenue argument was exactly this. Because the small business continuously made losses, they tried to argue that it was a hobby and not a business - and therefore the losses were not trading losses and therefore were not available for tax relief.

We won that one on the basis that just because the buisness made losses didn't mean that the trader wasn't TRYING to make a profit.

It's the intent that counts.
That doesn't surprise me. If it's a bad business they try and stop your tax relief by calling it a hobby, but if it's a hobby that you happen to make a few quid off (my situation) they make sure you pay taxes!

Edited by jon- on Thursday 14th May 14:58

ShadownINja

80,170 posts

313 months

Thursday 14th May 2009
quotequote all
What's considered losses? One of my businesses is just about breaking even (or it might be a £100 loss a year) because as long as it covers basic costs I'm not that bothered about it (my focus is elsewhere).

Eric Mc

125,920 posts

296 months

Thursday 14th May 2009
quotequote all
The profit or a loss has to be computed using Generally Accepted Accounting Practices (GAAP), adjusted where appropriate where tax rules differ from accounting rules.

ShadownINja

80,170 posts

313 months

Thursday 14th May 2009
quotequote all
Well, it's all appearing on the CT600 with a tax computation, P&L and Balance Sheet.

Amused2death

2,526 posts

227 months

Thursday 14th May 2009
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Can you be an employee and a sole trader at the same time?

jon-

Original Poster:

16,534 posts

247 months

Thursday 14th May 2009
quotequote all
Amused2death said:
Can you be an employee and a sole trader at the same time?
Yep, and write off PAYE tax against sole trader losses if you're legit, hence the question. If done cleverly it could mean someone could, in part reclaim 40% of their wage to fund a hobby.

Amused2death

2,526 posts

227 months

Thursday 14th May 2009
quotequote all
jon- said:
Amused2death said:
Can you be an employee and a sole trader at the same time?
Yep, and write off PAYE tax against sole trader losses if you're legit, hence the question. If done cleverly it could mean someone could, in part reclaim 40% of their wage to fund a hobby.
I learn something new everyday smile

(Goes off to see if watching lapdancers can be classed as a business) biggrin

groomi

9,331 posts

274 months

Thursday 14th May 2009
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Amused2death said:
(Goes off to see if watching lapdancers can be classed as a business) biggrin
Sure it is. Market researcher...