Research released by RBS in January claimed that 1 in 5 UK adults are ‘hidden entrepreneurs’. These are defined as people who are running small businesses in their spare time or who are using their spare time to plan a new business venture. 38% of these people reported that they earned extra money from their hobby.
HM Revenue & Customs have launched a new campaign today aimed at people with this kind of ‘Second Income’. They define ‘Second Incomes’ as people who are employed and are paid wages through PAYE for their main job but who earn extra money from activities such as:
- consultancy or other services such as public speaking or providing training
- organising parties and events or providing entertainment
- activities such as taxi driving, hairdressing, providing fitness training or landscape gardening
- making and selling craft items
- buying and selling goods, for example regular market stalls, boot sales etc
What to do if you have this kind of Second Income?
The ‘Second Income’ campaign is one of the regular campaigns that HMRC run targeting different groups (recent ones have targeted eBay sellers and electrician). With these campaigns HMRC offer a kind of amnesty. If you have a second income which you have not been telling HMRC about you can declare it now. You will still have to pay any tax you owe but any potential fines will be reduced (or waived) and HMRC are less likely to take criminal action against you.
If you declare your second income voluntarily they will normally limit the declaration to 6 years. If they find out about your second income without you declaring it then HMRC can go through all of your tax affairs for the last 20 years.
You can notify HMRC of your second income by filling out a form online. If you want to find out more about how the scheme works there is a dedicated Second Incomes page on the main government website.
What to do if you plan to have a ‘Second Income’ in the future?
If you are planning to start a business in your spare time, or earn some money from your hobby, then you need to tell HMRC. The two most common ways to do this are:
Register as a sole trader – this tells HMRC you will be earning some extra money. They will then send you a Self Assessment Tax return to complete at the end of the year where you declare any income and profits. This is a very simple and cheap way to do things but it does mean that you are personally liable for any losses or problems with the business. You can register as a sole trader for free on our website.
Register a company – this is a more complicated option which will involve a lot more paperwork. However it can be a good option if you are starting a business with other people as it gives a formal structure through which you can share ownership and responsibilities. It can also be a good idea if you will be doing large deals or running big events as a limited company will offer some liability protection. If you form a company HMRC will be told automatically and will expect you to complete tax returns each year. You can register a company for free on our website.
Keeping track of your earnings
If you are earning extra money then you need to make sure you are keeping accurate records of your incomings and outgoings. HMRC will expect you to accurately complete tax returns at the end of each year using the records you have kept and can ask to see your information at any point.
If you are only doing a few transactions per month then a simple spreadsheet will be enough to get you going. As you start to get busier then it is worth investing in some specialist bookkeeping software which will let you manage your business finances more smoothly. You can get a free 1 month trial of specialist bookkeeping software by registering on The Company Warehouse website.
Not sure what you need to do?
Our team of business consultants can help. Simply give them a call on 01245 492777 or contact us through our website.