The ‘badges of trade’ tests whilst not conclusive are used by HMRC to help determine whether an activity is a proper economic trade / business activity or merely a money-making by-product of a hobby.
They are useful when careful consideration needs to be given to deciding whether a hobby has become a taxable activity. The approach by the courts in using the badges of trade has been to decide questions of trade on the basis of the overall impression gained from a review of all the badges.
HMRC will consider the following nine badges of trade as part of their overall investigation as to whether a hobby is actually a trade:
- Profit-seeking motive
- The number of transactions
- The nature of the asset
- Existence of similar trading transactions or interests
- Changes to the asset
- The way the sale was carried out
- The source of finance
- Interval of time between purchase and sale
- Method of acquisition
Even if HMRC consider that the activities in question are a trade, taxpayers can make up to £1,000 per year from their hobby using the trading allowance that was introduced in 2017.