The FreeAgent Blog

This New Year, are you hankering for a whole new take on your business? We’ve rounded up our favourite examples of businesses that have made awesome comebacks, or completely reinvented themselves to become big successes.

Are there any examples of great business reinventions that you think we’ve missed? Hit us up in the comments or on Twitter. And have a great weekend!

It’s Christmas Eve, which means that - in the words of the classic Christmas song - “Santa Claus is coming to town”.

But even as good old St Nicholas gets ready to harness Rudolph and all the rest of the reindeer for his annual midnight ride, are there any tax issues that he will have to think of?

Mileage for the sleigh

When you’re travelling on business in your own vehicle, you can usually claim tax relief on the cost of that travel, at HMRC’s approved rates.

But those rates only apply to cars and vans, motorcycles, or bicycles, and HMRC specifically excludes any other kind of vehicle, such as a horse-drawn cart or reindeer-drawn sleigh, from the rules about claiming business mileage.

So if Santa Claus wants to try and claim his mileage, he should probably use the rate for a bicycle because it is the nearest equivalent - a vehicle propelled by a human rather than by fuel - and be prepared to discuss this with a HMRC inspector.

Food and shelter for the reindeer

The reindeer who pull the sleigh are very definitely working animals rather than pet animals, so the cost of buying them would go into Santa’s accounts as assets. This would also mean that their food, drink, shelter and any vets’ fees would be tax-deductible.

The reindeer aren’t being kept for what they produce, either for their meat, skins or as a breeding herd. They’re kept to do a job of work and their work is pulling the sleigh. So the question of whether they should go into Santa’s books as stock or assets doesn’t arise - as working rather than potentially production animals, they are definitely assets.

Wages for the elves

Santa Claus would be lost without all those elves making the toys he delivers! So he must make sure that he pays them the minimum wage at least, and ensure that he also files all the relevant forms with HMRC.

This Christmas is also the last that he won’t have to think about filing his payroll forms in real time - as from April 1st HMRC is changing the rules so employers will be legally required to report PAYE in this way. Let’s hope there’s a good Internet connection at the North Pole - and yes, Santa would be able to claim the cost of that when he uses it for business!

Would he register for VAT?

Santa Claus is not making sales, he’s giving gifts! So he would never have to register for VAT because he doesn’t actually earn any money.

But as he would need to buy materials to make the gifts, it might be beneficial for him to register voluntarily for VAT so that he can reclaim the VAT he pays on the materials.

If he did register, he wouldn’t then have to charge VAT on the presents he brings, so long as they cost under £50 per person in a 12-month period. Santa Claus only gives his gifts once a year, so the second condition is fulfilled - but he’d need to prepare his accounts carefully and make sure he isn’t giving gifts worth more than £50 to any one child if he wants to avoid charging VAT on them!

What about the mince pies?

Lots of families have a tradition to leave out a mince pie for Santa and a carrot for Rudolph. Would these be a taxable benefit?

Santa would actually have to be an employee of all the families he delivers to for this to affect him, but if he were, then yes, these would be a taxable benefit and the families would have to pay National Insurance on the value of the mince pie and carrot.

But, with all this a very important query arises, which is whether Santa Claus is actually in business and trading at all!

He’s never going to make a profit, because he doesn’t take money for the gifts he delivers. After all, nobody pays him. He will always make a loss, because he has to feed and shelter the reindeer, pay the elves, buy materials to make the toys... but he will never earn anything. If he’s lucky, HMRC will look upon him as a very kind philanthropist but not a businessman, and he won’t be subject to tax rules.

How many important things are you putting off until the new year? The holidays give us a great excuse to procrastinate, so this week, we’re looking at the science of why we procrastinate and sharing some tips that should help you stay on track.

Do you have a sure-fire method of avoiding procrastination that you’d like to share? Hit us up on twitter or leave a comment and tell us about it.

And just to let you know, rather than procrastinating about what Christmas cards we should send this year, we’ve decided to donate our festive card budget to charity. So if you were disappointed not to receive a card from us, please be reassured that the Royal Hospital for Sick Children in Edinburgh is benefitting instead.

If you’re occasionally selling items on eBay, HMRC might consider that you’re trading and expect you to pay some tax on the profits of your sales - and fine you if you don’t!

So we thought we'd take a look at the “badges of trade” that HMRC look for when they’re identifying whether or not an individual is carrying on a trade. 

Why is this important?

Income tax and class 4 National Insurance must be paid to HMRC on the profits of a trade, and also self-employed traders have to pay class 2 National Insurance.

If you’re not trading - but are just selling items occasionally through eBay or via the classified ads in your local paper - then you wouldn’t have to pay any tax on the money you receive from your sales.

But when would you be considered to be officially “trading”?

HMRC have a list of nine “badges of trade” that they’ll look for to determine whether or not an individual is trading. They will look at the whole picture and consider each badge as part of the whole.

The badges of trade are:

1. Aim to make a profit

If you’re aiming to make more selling the goods than you spent buying them, this is a strong indication that you could be trading, but it’s not conclusive on its own.

2. Number of transactions

HMRC are looking for “systematic and repeated” transactions, which could indicate a trade.

3. Nature of what you’re selling

If you’re selling something that in itself gave personal enjoyment, either to you or to someone else, then that’s a pointer away from trade. If you’re selling something that’ll only make you happy when it’s converted to cash, then you could be trading.

4. Do you already have another similar trade

If what you’re selling closely relates to a trade you already have, this sale will be treated as part of the trade.

5. Changes to the item

If you’ve repaired, modified or improved to make the item more easily saleable or saleable for a greater profit, this could point to trading.

6. How you made the sale

Did you make the sale to raise cash for an emergency, or in a way that’s typical of a trading business?

7. Where the money came from to buy the item

If you had to borrow money to buy the asset, which you could only repay by selling it, then this could point to trading.

8. How long went by between you buying and selling the item

The quicker you sold the item after buying it, the more likely you are to be trading.

9. How you acquired the item

If you inherited the item, or if it was a personal gift, then selling it is unlikely to mean you’re trading.

Examples

Let’s look at some real-life examples.

Laura, web designer

Laura is a self-employed web designer. Her youngest child has just started school. She decides to sell all the clothes her children have grown out of through eBay, over a period of several weeks. Is she trading?

• She does want to make some cash but not as much as she spent buying the clothes initially.
• There are quite a lot of transactions.
• She’s selling clothes that did give personal enjoyment to her children.
• Her existing trade is not similar to what she’s doing now.
• She hasn’t changed the items except to wash them.
• Selling through eBay can be used by traders but also by non-trading individuals.
• Laura didn’t have to borrow money to buy the clothes which could only be repaid by selling them.
• She’s selling the clothes years after buying them - a long time.
• She bought some of the clothes and others would have been given to her by grandparents, godparents, friends, etc.

On balance of all the badges, Laura is not trading in children’s clothes and does not have to register with HMRC.

Elizabeth, saleswoman

Elizabeth is a cosmetics saleswoman. She receives a lot of samples from potential suppliers, not all of which she can either use or sell to her customers, so she sells these on eBay. Is she trading?

• She did not pay for the goods so any money she makes on selling them is a profit.
• She makes sales regularly.
• The samples didn’t give her personal enjoyment because she didn’t use them herself.
• Elizabeth is a cosmetics saleswoman so her existing trade is similar to selling the samples.
• She doesn’t adapt the samples before selling them.
• Selling through eBay can be used by traders but also by non-trading individuals.
• Elizabeth didn’t have to borrow money to buy the samples which could only be repaid by selling them.
• She’s selling the samples soon after receiving them.
• Although the samples were gifts, they were given in the course of business, not personally.

On balance of all the badges, Elizabeth is trading in samples and should register with HMRC as a sole trader.

The crucial point here is whether on balance the badges point to whether or not you are trading, not whether more of them suggest you are trading than suggest you are not. You need to look at the whole picture.

Make sure you consider all the badges and think holistically about what you’re doing, to see if you are trading or not - and if you are, make sure you register with HMRC!