You start off with an interest in art, perhaps going to your local evening classes and painting the odd still life or male model. A friend likes some of your work and buys it from you. Your local church runs a fundraiser and a couple of your works sell, so for the first time you cover the costs of your hobby. The local arts centre takes an interest in your work and asks if you would be prepared to put on an exhibition. The local paper picks this up and shows a few of your works in its pages. The pace picks up, as does the price, and suddenly your paintings are selling for a tidy profit.
Bear in mind that you don’t have to be an artist; much the same is true for those who collect art. Maybe after investing for personal pleasure for a while, you start to buy and sell and this becomes a more and more regular occurrence. If you are successful, accumulating profit may enable you to start buying more expensive works and so the profit you can realize per sale is likewise increased. It is also likely that you will start to devote more time end effort to acquiring knowledge useful in the field.
Plenty of different scenarios and many that are repeated day-in and day-out all over the country. The question is:-
When does your hobby become a business with all that entails in terms of keeping records and paying taxes?
The first thing to say is that this is not a precise science and it is important to consider all the facts. It’s all about when you start to ‘trade’, and unfortunately there is no statutory definition of ‘trading’. However, it is likely that you will know when your hobby becomes something more than just that and there will be a point from which you actively intend to make a profit, rather than simply enjoying what you do and seeing if you can get something out of it financially. What is absolutely clear is that the onus is on you, the taxpayer, to notify HM Revenue & Customs when you have started a trade.
It is also important to remember that you can have several employments and self-employments at the same time, so just because you have a full-time job and are paid under PAYE does not mean that you have not started a separate trade as an artist or art dealer. Indeed, it is not unusual for HM Revenue & Customs to first hear of activities such as these when an individual’s expenses exceed his income, so he makes a claim for the excess to be set against other income which might already have been taxed, for example, under PAYE, giving rise to a repayment.
HM Revenue & Customs, in those circumstances, will want to see if what took place was a one-off event, or exhibits the signs of being more like a business.
The problem is what are those signs? Over the years, a number of tests or indicators have developed, often called ‘badges of trade’ to help determine if there is an intention to trade with a view to profit.
Amongst these indicators are:-
- An intention to purchase stock for trading as opposed to for pleasure or investment. This shows you have a ‘profit motive’.
- An established pattern of buying and selling goods over a period of time.
- The frequency of transactions can indicate trading. For example, you might reasonably buy half a dozen paintings for your home in a year, but buying thirty or forty would suggest something else is going on.
- The length of time you hold a work is another useful indicator. If you buy a painting and immediately sell it for a profit, you are clearly doing something different to buying the painting to have for its own sake.
This is not a black-and-white area so if you are in doubt or if you feel you ought or want to register as a business, you should take professional advice from a suitably-qualified accountant.
HM Revenue & Customs do have ways of finding out whether people are ‘running a business’, for example, they look at the adverts in local papers and bearing in mind that there are time limits in which to register with them, it is safer to take action rather than hope to escape the net.
There are many other important issues for artists and collectors to consider, including VAT, the treatment of patronage and prizes, etc., and these will be the subject of future articles.
In the meantime, if you have any questions, don’t hesitate to contact the author, Keith Graham, directly.
Keith Graham – Managing Partner