Income Tax: The nine badges of trade

In the UK Income tax is charged on “the profits of a trade, profession or vocation”.  

​You are assessed as trading and therefore must do a tax return if you exhibit one of the nine badges of trade. ​But do you know what these are?  See the box below for an explanation.

First you need to note that a lot of tax law focuses on "the asset”. However there isn’t a lot of tax case law relating to artists - so what follows is my interpretation.

Please note that I’m NOT a tax accountant and if you need professional advice you should pay a professional!
 
For what it's worth, in the case of an artist I read “ the asset” as meaning either your stock of equipment and materials used to generate sales (which has a balance sheet value); or your stock of artwork (which has a balance sheet value) which is exhibited and sold over time via exhibitions, online, art fairs or wherever to generate an income.

The nine badges of 'trade'

One of the reasons why HMRC wants to know whether or not you are trading is because it needs to know what sort of tax to apply to your income. 

For example, money you receive can be a taxable receipt that can arise in a number of ways. These are:

• self-employment income subject to income tax and class 2 and 4 National Insurance contributions (NICs);
• capital subject to capital gains treatment;
• some form of investment income, taxation depends on the taxable status of the individual or organisation that received it

Or it might be a non-taxable receipt.

Below are the Nine Badges of Trade which HMRC have declared to be indications of trade - and my interpretation of how these apply to artists. 

Please also remember that at the end of the day what matters is if you generated trading income or intended to trade - NOT how much profit you've made.

Spitalfields Art Market (Creative Commons: Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0)

1. Profit seeking motive

Does HMRC think your motive is to make profit? If your behaviour indicates it is (e.g. Do you actively market it in exhibitions or online? Do you take commissions?), then your income from art sales will be considered to be business turnover and eligible for taxation.

• Even if you have a full time job doing something else
• Even if you don't actually make a profit. 

(Note: If you sell paintings in a very minor way you can be classed as a hobby painter which means you can't claim any expenses against tax).

From April 2017, HMRC will introduce a £1,000 allowance for “hobby” activities which make money - and you don't have to declare the income for taxation - and neither can you claim any expenses against tax. You might use this now as a benchmark as to whether or not HMRC might consider you to be trading - but note that the allowance only starts from April. Normal rules apply for 2o16/17.

2. Number of transactions

​The number of transactions matter. 

• Buying one item and reselling it or something you make from it after some input from you for may not indicate trade - IF it is not repeated. 
• Repeating the same transaction over and over again matters. If you sell a lot of paintings (or other artwork) this can be considered to be a business.

If you buy large quantities of art materials and attract a trade or other sort of discount (ie get goods for a price not available to the public) then this can be considered a badge of trade.

3. Nature of the asset

The issue is whether you would hold an asset as an ordinary individual. If the asset you own and use to make income/profit is not personal, then this is a badge of trade. 
​
To demonstrate that your selling activity is a hobby, you may need to prove the goods gave you “pride of possession”, for example, you create pictures for personal enjoyment and hang them on your wall at home for a while before selling them.

4. Existence of similar trading transactions or interests

The issue here is whether the transactions you engage in are related to your normal work.

• Selling your car is not trade if you are an art teacher but may well be if you are a car mechanic.
• Selling artwork online if you work full-time as an art teacher, in a gallery or art shop or something else related to art might be taken to indicate you are engaging in trade i.e. they are related activities.

5. Changes to the asset

Ask yourself whether you repair, alter or improve items to make them more marketable at a higher price with a view to generating a profit

If you change an asset you have bought to make it more marketable (e.g oil paint and canvas become an oil painting) and you then sell it for significantly more than the cost of the art materials then you are indicating that this was the purpose of the painting and you are engaging in trade

6. The way the sale was carried out

If it looks like trading then it probably is trading. If people who work professionally as artists take stands at art markets and art fairs then if you do the same you stop being a hobby artist and start engaging in trade.

7. The source of finance

If you needed a loan to buy your asset (eg a printing press) - and you wouldn’t have bought it as an ordinary individual and cannot afford to repay the loan without generating income from it e.g. the sale of fine art prints, then this indicates an intention to engage in trade.

8. Interval of time between purchase and sale

How long you hold an asset for is an important indicator of trade. Typically, people who trade successfully tend not to have a long period between the acquisition of the asset used (eg art materials) to create the asset that they then sell (eg artwork). 

9. Method of acquisition.

If the assets used for your art business are inherited or somebody gave them to you, then your use of them is not an indication of trade.

If you are a hobby printmaker, I guess I can’t think of a better reason for your significant other to give you a gift of a printing press! 

This blog post will be added to my page about Tax Tips for Artists

REFERENCE:

• Taxation: The relevant factors in the badges of trade for self-employment
• ACCA Badges of Trade
• Trading Income and the Badges of Trading