“Handmade” is en vogue and crafters everywhere are turning hobbies/addictions into businesses and selling their handmade crafts, but some are finding the making-money part a bit tricky. Competition is fierce, and while most consumers love the one-of-a-kind, you-can-see-the-fingerprints look, they don’t always love the price-tag. Luckily, whether you sell the odd candle to workmates, or have been picked off Etsy to design a Habitat range, you could be wealthier if you made friends with the taxman.
Who can claim back taxes?
Professional crafters with concession stands in John Lewis and features in Ideal Home can claim back tax on all kinds of expenses, but even some small-time crafters could too. Many people see their craft as a hobby, and don’t declare income to HMRC. However, if you’re making a profit it’s often a legal requirement, and with or without profit it might be beneficial to do so.
The key to understanding if you’re eligible or not is honesty, and if in doubt a quick chat with an accountant should clarify things. Selling goods at markets or online sites like Folksy are good, though not always definitive, signs of commerciality. Generally, you have to make a profit (sell your goods for more than you spend on materials) for HMRC to consider your activity as trading.
However, plenty of businesses use loss-leaders to grow their customer base, sell early models at cost-price to test the market, and offer discounts to friends. If you do plan to make a profit, selling just one mug or birthday card or crocheted dog jerkin could be enough for you to consider yourself a professional, and start claiming back tax on business expenses.
Crafters’ Allowable Expenses
When calculating allowable expenses, honestly weigh up your percentage personal against business usage. To claim back tax, you must be a taxpayer, which means having an income over the annual personal tax allowance (£10,600 in 2015). However, even if you aren’t currently a taxpayer, keep records as in future you could declare previous ‘trading losses’ and lessen your tax bill.
Materials, stationery and equipment may seem obvious, but crafters often forget items which fall between personal and business. They’ll declare their new sewing machine or pottery wheel, but forget using their dental floss as bead wire, their personal computer to manage their business, or the household oven to bake Fimo.
You can claim back for rent and rates on a studio, but if you work from home you can also claim for the percentage you use for your business in terms of rent/mortgage, gas, electricity, water and general maintenance. If you use your phone to call suppliers, organise bookings, or make sales, a proportion of your phone bill can be offset too, as can business postage, or the cost of transporting your goods to a fair.
Marketing expenses are allowable, and these include advertising, PR, and website costs. There’s plenty of advice on how to do it yourself on this very blog, but sometimes it’s a good idea hire a professional. Journal and membership organisation subscriptions are allowable, such as Ceramic Review, Let’s Knit! or The British Sugarcraft Guild.
Travel costs to craft fairs, trade fairs, courses, talks and so on are allowable, and this extends to research trips. Research and development tends to be the most neglected section of small businesses, especially in the creative sector, partially because creative R&D doesn’t feel much like work. Courses, related books like The Tomb of the Unknown Craftsmen or Hilary Pullen’s very own Online Marketing for Your Craft Business, competitor’s products, and even a proportion of costs incurred conducting research into Chilean basket weaving, involving a return flight and a four star hotel, can all be considered business expenses.
How do I do it?
One call to HMRC is all it takes to register as self-employed. People often find the idea of a self-assessment tax return incredibly daunting, but HMRC keep making it easier. While you must keep records of all of your costs and income, when it comes to filling in the form, so long as you aren’t earning over the VAT threshold (£82,000 in 2015), you can enter these as lump sums, so it really isn’t a huge administrative burden.
HMRC likes to nurture entrepreneurial endeavour, but they don’t like fraud. The most important thing is to be meticulously honest about what you spend on your business. If in doubt, always consult an accountant.
This guest post was written by secret potter Natalie Butlin from Accounts and Legal, small business accountants in London offering a full range of tax and accounting services. With everything from self-assessment and VAT returns, to business plans and financial forecasting, Accounts and Legal is a one-stop-shop for your craft business.