Is your activity a business or hobby?
Albert makes (and sells) wooden toys from his home. He is running a business. Jill also makes (and sells) wooden toys from her home – but she does it as a hobby. This article explains the approach used by Inland Revenue (and the courts) when they are deciding if an activity is a business or a hobby.
It’s important to be able to tell the difference. If you’re running a business, your income is taxable and your business expenses are deductible. But if it’s a hobby, you don’t pay tax on your income and your expenses are not deductible. The “business or hobby” issue can be complex. This article gives you general information only. Each case must be decided on the facts, so if you have any questions about your own situation, please contact your tax advisor or Inland Revenue.
WHAT IS A BUSINESS?
The law says that a business: “includes any profession, trade, manufacture, or undertaking carried on for pecuniary profit…”
The courts have held that a person is probably running a business if:
- The activity is carried out in an organised and coherent way, and
- The person is intending to make a profit.
Note that “intending to make a profit” doesn’t mean you must make a profit – an activity can make a loss and still be a business – but the intention must be there. Establishing intention involves considering the person’s words and conduct.