Severn Accounting
Tax & Accounting

Is your business an adventure in the nature of trade

By Ali Jaw ·

Is your business an adventure in the nature of trade? It’s a question that might sound whimsical, but for HMRC, the answer carries serious tax implications. Whether your activities constitute a “trade” under UK tax law determines whether you’re liable for Income Tax or Corporation Tax, how you report your income, and which allowances you can claim. If you’re running a business from Worcester or anywhere else in the UK, understanding this distinction could save you considerable money—and headaches with the taxman.

What Makes an Activity a “Trade”?

The term “trade” isn’t defined precisely in UK tax legislation, which means HMRC and the courts have developed a set of principles over decades. Broadly, a trade involves the continuous supply of goods or services for profit. It’s not a one-off transaction or a hobby, no matter how profitable.

HMRC considers several factors when determining whether your activity is a trade:

  • Frequency and scale: Are you doing this regularly and on a meaningful scale, or is it occasional?
  • Profit motive: Are you genuinely attempting to make a profit?
  • Time and effort: Do you invest substantial time and effort into the activity?
  • Badges of trade: The courts have identified nine “badges” that indicate trading activity. These include whether you’ve purchased items with the intention of resale, whether you’ve undertaken similar activities before, and whether the activity represents your ordinary business.

If HMRC disagrees with your assessment—perhaps they think you’re trading when you claim you’re not, or vice versa—the burden of proof often falls on you. This is why clarity from the outset matters enormously.

The Tax Consequences of Being “In Trade”

If HMRC determines you’re trading, your tax obligations change significantly. As a sole trader or partnership, you’ll register for Self Assessment and report your trading income on a Self Assessment tax return. You’ll pay Income Tax at 20%, 40%, or 45% depending on your profit level, plus National Insurance contributions at 8% (2024/25 tax year) on profits between £12,570 and £50,270.

If you operate through a limited company, you’ll pay Corporation Tax at 19% (the main rate for 2024/25), and dividends to shareholders are taxed at 8.75% for basic-rate taxpayers. You’ll also need to comply with Companies House filing requirements, maintaining proper records and submitting annual accounts.

Crucially, trading status allows you to claim business expenses against your income—everything from materials and utilities to professional fees and motor expenses. The broader your trading status, the more generous your tax relief. Non-traders face much tighter restrictions.

When You Might Not Be “In Trade”

Not every money-making activity constitutes a trade. Property lettings, for example, are specifically treated as a separate source of income under Case V rules, not as trading income. Investment activities—buying and selling shares, for instance—typically aren’t trades either, even if you do it frequently. Personal service companies face additional rules under IR35, which can affect how you’re taxed.

There’s also a grey area with hobbies and side projects. If you enjoy photography and occasionally sell prints, are you trading? If you’ve never made a profit and don’t seriously intend to, HMRC is unlikely to view it as a trade. However, once you start operating with genuine profit intent, regularly taking on commissions and reinvesting income, the picture changes.

The key is demonstrating your genuinely commercial intent through your actions: keeping proper records, marketing yourself, learning the craft professionally, and pursuing profit systematically rather than haphazardly.

Getting It Right From the Start

The most sensible approach is to consider your position carefully before registering for Self Assessment or setting up a limited company. Ask yourself honestly: am I engaging in this activity with a view to profit? Will I be doing this continuously? Are there clear badges of trade present?

If you’re uncertain, it’s worth seeking professional advice. Many accountants, including ourselves, can review your specific situation and provide clarity. HMRC also publishes guidance on trading status, though it can be dense.

Getting this determination right from the outset prevents costly disputes later and ensures you’re claiming all the relief you’re entitled to whilst remaining compliant with tax law.

For tailored advice, contact Severn Accounting — we’re here to help.