One immediate point is the protection of the State Retirement Pension, and the payment of National Insurance contributions. The Class 2 National Insurance contribution for self-employed individuals is still only £2.50 per week whereas should somebody retire early but still want to make National Insurance contributions then a voluntary contribution is £12.60 per week.
In addition, Class 4 National Insurance comes in at 9% above profits of £7,225 up to profits of £42,475 and there is a 2% excess thereafter. For small enterprises with relatively low earnings, turning a hobby into a business can be an efficient way of ensuring that the National Insurance position is protected through Class 2 contributions.
A point that must be considered is exactly when did the business start, and registration must be looked at with HMRC. There is no longer a £100 fine if the registration is not made within 3 months, but it is obviously important to ensure that the business is registered promptly as part of the contemporaneous evidence as to the fact that it is a genuine business and not a hobby nor a weak conversion of a hobby.
The case of John Agnew (TC 566) focused on the claiming of losses and whether a business could be commercial within that structure. That case related to a beautician’s business and this is the type of operation that might be approached in a self-employed capacity in a recession to try and contribute to household funds. In this case, the business was in the name of the husband with high earnings, and a wage was paid to the wife, and the two questions asked were: whose business was it actually, and could it make a profit within that structure?
Another factor that must be considered is correct books and records. Again these must be a contemporaneous record of the business activity once the start date has been considered. The definition of the start date could be quite difficult. If there is a hobby with some activity and this is then turned into a commercial business generating a profit, the question has to be asked at what point did the business start? The answer has to be that for anyone with a desire to start up a commercial business either as a substitute for employment or as an additional income stream, there must be professional advice to look at all the angles of notifying HMRC, commerciality, business plans, the exact starting date and correct books and records. A lot of help in this regard can be obtained from banks, accountants and Government advice resources, and is something that should be looked at sooner rather than later.
Practical Tip
Review the whole matter of self-employment carefully, and take professional advice.
Julie Butler F.C.A.
