If you are asking the question, "should I be declaring tax on the money I make from my hobby?", this blog is for you.
For this month's blog I am unashamedly linking two of my life’s passions, tax and music. For those who don’t know me, I am a tax professional during the week and a musician by weekend. I play keyboards in various bands and freelance as well. There are very few weekends when you won’t find me tinkling the ivories somewhere in London or the home counties. As I write this blog I am printing set lists for the gigs I have in Braintree, Southend and Chelmsford this coming Friday, Saturday and Sunday.
The coverband community in Essex is very close knit. I don’t know absolutely everyone who plays, but I know most of them. Some guys and girls play occasionally and mainly for fun. Others, like myself, work regularly playing functions, weddings, pubs and medium size festivals, and a few guys have chosen to be full time professionals. A few friends have actually cracked the big time and one of my friends was on the main stage at Glastonbury this year as a regular band member with a headline act.
But how does this link into tax? Well, a few weeks ago I was working with a guitarist who I’ll call Gary, who gigs fairly regularly but not every weekend. I’ve known him quite a few years and he’s a lovely guy, a very good player and fun to work with. We had a few hours to kill before starting and I ended up chatting to him about nothing in particular, during which he told me about his day job and he enquired about mine. “I’d never have guessed you were an accountant” he said, “I bet you do a tax return” he said giving me a knowing wink. “I have to really” I told him, and I explained that HMRC wouldn’t be too impressed if they found out I hadn’t put down taxable income on my tax return, me being an accountant and all that. I also told him that I’d been a semi-pro musician for at least 20 of the 23 years when I was working at HMRC, all with the consent of the department. Gary looked nonplussed, “Why would you do that, it’s all a hobby isn’t it”?
I have had the “Hobby” conversation a few times with musician friends over the years and it’s an interesting concept. A hobby is defined as being a regular activity that is done for enjoyment, typically during one's leisure time, but when does a hobby become taxable and what are the rules? And when should you be asking the question, "should I be declaring tax on the money I make from my hobby?" Any tax professionals reading this will immediately respond by saying Badges of Trade, and they would be absolutely right. They may well also refer to the various provisions in the taxes acts which talk about the commerciality off losses and, again, they would be absolutely right. However I would challenge any tax professional to speak to some of the mad, occasionally hairy-backed and heavily tattooed muso’s that I’ve worked with over the years and talk about badges of trade and loss provisions.
I usually start with me as an example. I have a day job and I gig 70 to 80 times a year. All of my gigs are paid so that I cover my expenses and make a profit and I keep records of all my business journeys and expenses. At the end of each year I make a profit with the odd exception when I’ve had to buy some expensive equipment. In my opinion this goes well beyond the bounds of any hobby. I play music for the enjoyment and social side, but I also do it for the money. To me it is a business and I spend time learning new numbers and rehearsing with the pro bands I work with. I certainly wouldn’t hump a car-load of equipment around Essex three times this weekend if I wasn’t going to be paid no matter who I might be working with.
But what about other musicians who don’t work as much and generally gig for less than the regular bands. This is when it becomes more questionable. I’ll give a hypothetical example of Peter the part-time bass player, who is based on quite a few of my musician friends. Peter loves playing and is very popular but he isn’t regarded as one of the best. He doesn’t get asked to join full time working bands simply because there are lots of well known players out there already. He goes to at least one jam-night a week and plays a few numbers with the house band just for fun (which is unpaid). He is in a band with several other friends in the same boat and they get together twice a month to have a chat and rehearse. Very occasionally they get a gig at a friendly pub and clear £30 each, most of which is spent on beer and a kebab on the way home.
In my opinion this is a hobby. If Peter was to keep a record of all his business miles and his rehearsal costs, these would clearly exceed the few hundred pounds he earns each year playing in the local pub. The cost of equipment can be offset, and you could also argue that mileage to the weekly jam nights is allowable as the Jam nights are effectively practising and networking events connected to the musician business. This would increase the loss still further. Why does Peter do it? Because he loves the music and the social side, even though there is no realistic possibility he will ever make a profit.
I have had occasional conversations in the past with people in Peter’s situation who thought it would be a good idea to recognise their loss with HMRC, offset this against their other income and get a tax repayment each year. I have always advised against this. Claiming your losses is fine for a while, on the assumption is that this is a commercial venture and you anticipate making profits in the future. The UK tax system is based on a self assessment of your tax position, so if you believe you have incurred a genuine commercial loss, then you should self assess the loss and claim whatever relief you are entitled. The trouble is that if you keep making a loss, eventually HMRC will ask what it is exactly that you do and consider the likelihood of you making profits. If HMRC reaches the conclusion that this is nothing more than a hobby then you can expect to receive assessments to recover anything that’s already been repaid to you.
Returning to Gary and our pre-gig chat. By now we’ve had the call to stage and we’re heading through various back stage corridors at the venue along with the other band members. Spirits are high. “I’m kind of guessing you don’t do a tax return” I said with a smile as we entered stage right. “I’ll come and see you next week” he said with a grin. It would be a fitting end to the blog to say that the first number was Taxman by George Harrison, but it wasn’t.
If you are uncertain and questioning, "should I be declaring tax on the money I make from my hobby?", contact me at firstname.lastname@example.org.