If challenged by HMRC about the profits made from a smallholding, saying ‘it is only a hobby’ is no defence.
Richard Hall, a partner at Walter Dawson and Son, chartered accountants and statutory auditors, Bradford, says earnings may be regarded as trading income and be subject to tax and the requirement to complete a self-assessment tax return.
He says: “HMRC is targeting hobby businesses, from individuals making profits trading online to tax evading puppy farmers [and] action netted more than £5 million earlier this year.
“If you regularly sell produce or livestock with the intention of making a profit, you are likely to be regarded as trading. You will need to register for self-assessment with HMRC and keep records of your income and expenditure, along with supporting invoices and receipts.
“There are no rules on how you keep receipts. You can keep them on paper, digitally, or as part of a software programme, but HMRC can charge you a penalty if your records are not accurate, complete and readable.”
Records must be kept for at least five years after the submission deadline for the relevant tax year. For example, the tax return for the year to April 5, 2019, must be filed with HMRC by January 31, 2020, if filing online, so books and records must be kept until at least January 31, 2025.
For the smallest businesses, there is an exemption to record keeping called the trading allowance.
Mr Hall explains: “If you are a sole trader with income of less than £1,000 per year, you do not have to register for self-assessment or pay tax on your business income. However, the allowance of £1,000 is very limited.
"If you are selling eggs from more than 50 hens or lambs from 20 ewes, for example, you will probably be over the £1,000 allowance.”
If your income is greater than £1,000 and you are registered with HMRC, you can still use the trading allowance to simplify your record keeping.
You are required to keep a record of all sales and income in the normal way, but rather than keeping all expense receipts you can just claim a flat deduction of £1,000 off your income and pay tax on the difference.
Mr Hall says: “Registering with HMRC is not all bad news. If you trade as a smallholder you will be entitled to register voluntarily for VAT. Most, if not all of your sales, will be zero rated for VAT, which means you will be able to reclaim the VAT incurred on your purchases through the completion of quarterly VAT returns.
“Secondly, even hobby farming can require investment in capital equipment. Claiming capital allowances on this equipment can create a tax allowable loss which you can offset against other income and possibly obtain a tax refund. This is a more complex area and, if in doubt, you should always seek professional advice.”