Writing an article to define the difference between a hobby and a business is like trying to eat soup with a knife.
Ultimately, there can be no single statement that states the dividing line. But there are some key principles, which can be applied to activities that might otherwise be caught by the Mini One Stop Shop (MOSS). These principles enable the tax(non-)payer to make an informed decision.
The Principle VAT Directive (PVD) provides that supplies of goods and services for consideration by a taxable person acting as such are subject to VAT. It goes on to define a taxable person as any person who carries out any 'economic activity' (Articles 2, 9). HMRC suggest that 'economic activity' must mean the same as 'business' in UK legislation (VBNB13000).
In contrast, HMRC indicates that a hobby is an activity where supplies are made 'only on a minimal or occasional basis.'
So, where is the line to be drawn between hobby and business?
Lord Fisher invited friends and relations to contribute to a pheasant shoot on his private estate. This activity had previously been provided free of charge. Lord Fisher was already registered for VAT in respect of other activities. However, the High Court agreed with the Lord that this activity was not a business activity.
The case is at [1981] STC 238, and HMRC provide a summary at VBNB72050.
In coming to its decision in Lord Fisher, the Court approved of the six tests. These are:
The application of the predominant concern test is that it allows the person's intention and motivation to be taken into consideration in determining whether the activity is being made in the course or furtherance of a business. Interestingly, this seems to contradict Art 9(1) of the PVD, which refers to a person being a taxable person in respect of an activity 'whatever the purpose or results of that activity.'
Therefore, if the person intends to make a living, or develop a substantial business, then the activity is certainly a business. This must be true even if, in its early days, sales are minimal or occasional.
In contrast, if a person intends simply to enjoy what he designs or makes, and wishes to share that with others, then it may be possible to argue that the activity is not a business. In Lord Fisher, the Court decided that any activity carried on for pleasure and social enjoyment did not turn itself into a business simply by the sharing of the costs of that activity.
They will not generally have to prove his case. The obligation will be on the hobbyist to demonstrate that his activity is not in the course or furtherance of a business. The obvious difficulty faced by the hobbyist is that of resources; he most likely will not have substantial funds available to engage a lawyer to fight this argument on his behalf.
The Tribunal decided the case on a different point, so never reached a decision on the 'business' issue (M V Gauntlett, Decision 13921).
Do include the words 'predominant concern' in your letter.
The Mini One Stop Shop is a voluntary scheme. There is no penalty for a failure to register. There has been some comment on this site before on this point. Your decision not to register under MOSS means that you become, in principle, liable to be registered for VAT in another Member State, or in several.
Worst case scenario is being pursued by other Member States' revenue authorities for failing to register there - I think there is little indication that this has happened (perhaps someone will contradict me on this point!). Evidence seems to indicate that other Member States will route their enquiries through HMRC in respect of UK-based persons.
Decide which side of the hobby:business line you fall. And be aware that this may change in time; so review your decision periodically.
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Ultimately, there can be no single statement that states the dividing line. But there are some key principles, which can be applied to activities that might otherwise be caught by the Mini One Stop Shop (MOSS). These principles enable the tax(non-)payer to make an informed decision.
HMRC material
At the start of 2016, HMRC released their Brief 4. They stated that MOSS only applies where supplies are made in the course or furtherance of a business. This is nothing new, of course. Indeed, it applies to any person and whether he/she needs to be registered for VAT in the UK or anywhere in the EU.The Principle VAT Directive (PVD) provides that supplies of goods and services for consideration by a taxable person acting as such are subject to VAT. It goes on to define a taxable person as any person who carries out any 'economic activity' (Articles 2, 9). HMRC suggest that 'economic activity' must mean the same as 'business' in UK legislation (VBNB13000).
In contrast, HMRC indicates that a hobby is an activity where supplies are made 'only on a minimal or occasional basis.'
So, where is the line to be drawn between hobby and business?
The Lord Fisher tests
Although not the final word on the matter, a key starting point is the set of six Lord Fisher tests. These tests were coined, actually by Counsel for HMRC, in an early VAT test case.Lord Fisher invited friends and relations to contribute to a pheasant shoot on his private estate. This activity had previously been provided free of charge. Lord Fisher was already registered for VAT in respect of other activities. However, the High Court agreed with the Lord that this activity was not a business activity.
The case is at [1981] STC 238, and HMRC provide a summary at VBNB72050.
In coming to its decision in Lord Fisher, the Court approved of the six tests. These are:
- Whether the activity is a 'serious undertaking earnestly pursued' or 'a serious occupation not necessarily confined to commercial or profit-making undertakings'
- Whether the activity is an occupation or function actively pursued with reasonable or recognisable continuity
- Whether the activity has a certain measure of substance as measured by quarterly or annual value of taxable supplies made
- Whether the activity is conducted in a regular manner on sound and recognised business principles
- Whether the activity is predominantly concerned with the making of taxable supplies to consumers for a consideration
- Whether the taxable supplies are of a kind which, subject to differences of detail, are commonly made by those who seek to profit by them
One test to trump all others
As case law developed, the fifth test became the most important. Thus, where an activity is not predominantly concerned with the making of taxable supplies for a consideration, it is not a business activity. This follows the ECJ case of Apple & Pear Development Council (1988 [STC] 221), and the UK cases of Yarburgh Children's Trust and St Paul's Community Project Ltd.The application of the predominant concern test is that it allows the person's intention and motivation to be taken into consideration in determining whether the activity is being made in the course or furtherance of a business. Interestingly, this seems to contradict Art 9(1) of the PVD, which refers to a person being a taxable person in respect of an activity 'whatever the purpose or results of that activity.'
Therefore, if the person intends to make a living, or develop a substantial business, then the activity is certainly a business. This must be true even if, in its early days, sales are minimal or occasional.
In contrast, if a person intends simply to enjoy what he designs or makes, and wishes to share that with others, then it may be possible to argue that the activity is not a business. In Lord Fisher, the Court decided that any activity carried on for pleasure and social enjoyment did not turn itself into a business simply by the sharing of the costs of that activity.
HMRC approach
The hobbyist, making low value or occasional sales, must appreciate that HMRC have a responsibility to the Treasury to raise revenue. An officer, enquiring into the hobbyist's affairs will therefore default to the 'business activity' conclusion.They will not generally have to prove his case. The obligation will be on the hobbyist to demonstrate that his activity is not in the course or furtherance of a business. The obvious difficulty faced by the hobbyist is that of resources; he most likely will not have substantial funds available to engage a lawyer to fight this argument on his behalf.
Value of supplies
The value of the transactions in question is only one factor to be taken into account. In one case, the Tribunal heard argument that the disposal of cars by a car collector was not in the course of a business. Over a 12 year period, the person made a gross profit of £2.9m.The Tribunal decided the case on a different point, so never reached a decision on the 'business' issue (M V Gauntlett, Decision 13921).
'I am registered under MOSS. Can I deregister?'
You could wait for HMRC to contact you, to invite you to deregister. But, if you can demonstrate the 'predominant concern' of your activity is essentially a hobby, not a business, then write to them immediately, and apply for deregistration.Do include the words 'predominant concern' in your letter.
'What if I fail to register for MOSS?'
Having decided that your activity is a hobby, not a business; what happens if HMRC, or other EU revenue authorities disagree?The Mini One Stop Shop is a voluntary scheme. There is no penalty for a failure to register. There has been some comment on this site before on this point. Your decision not to register under MOSS means that you become, in principle, liable to be registered for VAT in another Member State, or in several.
Worst case scenario is being pursued by other Member States' revenue authorities for failing to register there - I think there is little indication that this has happened (perhaps someone will contradict me on this point!). Evidence seems to indicate that other Member States will route their enquiries through HMRC in respect of UK-based persons.
Conclusion
Take the initiative. Do not let HMRC control the discussion. Write robustly, quoting their material as well as relevant case law.Decide which side of the hobby:business line you fall. And be aware that this may change in time; so review your decision periodically.
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