28 June 2022
The most recent HMRC statistics show the total number of taxpayers in the UK has increased 2.5% in 2020/21 and 1.2% in 2021/22, after a relatively quiet period in prior years. More significantly, the number of businesses registered for VAT increased by 4.7% in 2020/21 and 2.9% in 2021/22, again after a period of much lower growth – implying an increase in entrepreneurship in recent years.
An increase in the number of individuals setting up their own business in the last few years seems plausible, given that Covid-19 led many people to re-evaluate their lives and jobs. This, coupled with the huge possibilities that remote or gig working offer, and sales via the internet would have led many people to make the move to self-employment.
Given the current economic climate it is likely this trend will continue. However, now it is likely to be fuelled by people with monetary difficulties seeking to supplement their income with side jobs, perhaps in the gig economy, or turning hobbies into businesses.
People considering making this move need to also check the effects on their financial position. Key considerations to be aware of, include:
- Once a hobby is carried out for profit it potentially becomes a taxable trade.
- If income is over the £1,000 trading allowance in a tax year, traders will be required to register with HMRC for self-assessment.
- HMRC is increasingly good at spotting traders on sites such as eBay or Etsy and will check that tax has been dealt with correctly.
- Eligibility for benefits could be affected.
- There may be national insurance due if profits are higher.
- Individuals with turnover exceeding £85,000 may need to register for VAT.
- Sales or purchases abroad could lead to customs and excise or VAT issues.
- Running a business from home may raise difficulties with council tax or threaten future capital gains tax exemptions on homes.
- Some trades need insurance to cover problems such as customer dissatisfaction.
- Some businesses need to be formally licensed.
In addition, the difference between having your tax dealt with under PAYE and having to make tax returns for self-assessment income is substantial.
Running your own business may be very satisfying, but if you fail to keep proper records and do not carry out legal requirements it could easily turn into a nightmare. Ideally, individuals should be aware of the potential issues that may arise and get the necessary systems in place when setting their trade up, so they won’t have to deal with administration problems later down the line.