Converting a hobby into a business

[Praktica]

As a long time amateur photographer, tax year 2008/09 I started part time self employed submitting photos to Stock Agencies, a little writing of illustrated articles for magazines and am soon to do my first paid wedding. There is a long lead time between putting pictures with agencies and making sales so my first year's income will be well under the threshold for getting a refund of my self employed NI contributions. I also have a full time PAYE job.

Before going pro I amassed a large amount of digital photography and computing equipment and I'm interested in transferring it to the business to take advantage of the Annual Investment Allowance. The HRMC help line explained that any items not bought in 08/09 should be valued at market value and that any excess of my AIA total over my turnover could be set against my full time job's PAYE. (sounded too good to be true)

As an alternative to this would I be better to keep some equipment "personal" and transfer it as next year's AIA when hopefully my turnover will have increased? My personal use of photo equipment is effectively zero as even family photos are put up for sale (and have sold


The costs of running the business are otherwise quite low as most photography piggy backs on family holidays, a little mileage and part time use of the home study/office room.

Thanks
Tony

 

[elaine@cheapaccounting]

Tony

It is true that you can offset the loss from the self employed business to the paye income - so a tax refund could be due.

IMO I would put the equipment through this year and get the refund - why delay until next year?

You might want to get an accountant on board for 2008 - 2009 to ensure that everything is claimed and the loss claimed. Then you will have a template to use in other years - just a thought.

 

[David Griffiths]

HMRC are correct in saying that any items purchased before 2008/09 should be introduced at market value. However, you cannot claim AIA on these items - they must be added to what is known as the general pool of expenditure, and you will get a writing down allowance of 20% each year, calculated on the reducing balance.

It follows that if you can't get AIA on the equipment this year, you can't defer introducing it and claim AIA next year either

 

[Praktica]

Thanks Both, My conversation with HMRC led me to believe that equipment could be transferred from "Personal" to "Business" and qualify for AIA if correctly valued, presumably if I had sold all my kit and the business bought replacements there would be no question on this? With the subsequent depreciation of this asset I have to watch out as if I use the maximum % allowance as some camera equipment deprecialtes more slowly (and it's starting out secondhand anyway) so I could make a taxable profit when I sell it to upgrade.

Tony

 

[Dawg]

Hi,
First, welcome, (altho' I did see the Intro post too.)
Second: I would strongly advise getting an accountant now. Let them sort it out for you while you make money taking pictures; division of labour and all that.
Even in the medium term, let alone the long term, you will save time, money and effort.

That's my 2p worth, (made into 3p by my accountant...)

 

[David Griffiths]

Thanks Both, My conversation with HMRC led me to believe that equipment could be transferred from "Personal" to "Business" and qualify for AIA if correctly valued, presumably if I had sold all my kit and the business bought replacements there would be no question on this? With the subsequent depreciation of this asset I have to watch out as if I use the maximum % allowance as some camera equipment deprecialtes more slowly (and it's starting out secondhand anyway) so I could make a taxable profit when I sell it to upgrade.

Tony

The chances of getting accurate information from telephoning HMRC are tiny. To qualify for AIA the expenditure must have been incurred on or after 6 April 2008.

Pre-trading expenditure is normally deemed to have been incurred on the first day of trade. This rule is expressly over-ridden for the purposes of AIA, and the initial allowance, if any, is governed by the actual date of expenditure. Set out here in HMRC manual.

However, that in my opinion applies to expenditure that is incurred speficially in contemplation of the start of the trade. Your situation is different in that you are contemplating transferring a collection of assets that you have acquired over a period of years to a newly established business. Provided this is done at a fair market value, then there is no problem with claiming annual writing down allowances on the expenditure but you are not entitled to First Year Allowances or to Annual Investment Allowance on it.

 

[yorkshirejames]

Will this eventually become your full time job? If so, and if your turnover will exceed the VAT registration threshold of £68,000 (or if there is an advantage to registering voluntarily) and if you happen to have kept all your receipts, you may be able to claim the VAT back on any items you have purchased within the past six years - your accountant will either be able to help, or to contract specialist VAT resource to do this on your behalf.

Returning to your original question, HMRC would only allow a PAYE refund if they are convinced that the photography is a serious business and not a hobby business. By the sounds of it, you may be able to show this - but they will argue that if you still have a full time job that photography is a hobby - again, getting an accountant on board here would help.