Tax for Crafters - What you need to know, and how it will change in April 2017

Tax and copyright seem to be the 2 biggest sources of arguments between small craft business owners.

As the rules stand at the moment, you can earn up to £2500 from crafting without needing to fill out a tax return BUT IT IS STILL TAXABLE! you need to telephone HMRC and inform them of how much you have made over the year so they can adjust your tax free allowance. Not needing to fill out a tax return does not mean you don't need to pay tax.

This changes in April 2017.

Here is the information regarding the new tax break for "micro enterprise"

10. New tax allowances for money earned from the sharing economy

From April 2017, there will be two new tax-free £1,000 allowances – one for selling goods or providing services, and one income from property you own.
People who make up to £1,000 from occasional jobs – such as sharing power tools, providing a lift share or selling goods they have made – will no longer need to pay tax on that income.
In the same way, the first £1,000 of income from property – such as renting a driveway or loft storage – will be tax free.

source https://www.gov.uk/government/news/budget-2016-some-of-the-things-weve-announced 2017

We sought some clarification from HMRC as to what this actually means for crafters.

Here's what we found out;

1. This tax break only applies to "irregular, part time and hobby earnings".

This means that if you sell your old bike on ebay then this rule will cover you. If however your income is "regular and advertised" eg you have a FB page selling box frames or bunting, then this is classed as being self employed and you need to fill in a tax return even if your earnings are less than £1000 a year.

2. This is only a tax free allowance. If you are earning over £1000 from your craft business you will not be taxed on the first £1000 regardless of any other income stream you have.

So as of April 2017 the ONLY scenario where you do not need to fill out a tax return is if you are selling sporadically eg a craft de-stash, spare crafting equipment or a one off item you have made.

Effectively if you have a Facebook business page selling ANYTHING, you need to fill out a self assessment tax return.

However all is not lost! New guidance as to how this is going to be implemented has yet to be released. HMRC are keen to make their lives easier by removing a lot of sole traders from the self assessment process altogether. So we may find that the new £1000 rule means that you may only need to fill out a tax return if your income goes over £1000. As soon as I have more information from HMRC I will update this post.

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How to build a Successful Craft Business from the Ground Up. Step 1 - Setting strong foundations with insurance

When running your own small crafting business it's important to be able to wear many hats. Marketing, PR, administration and accountancy are things that we "expect" to be able to do for ourselves. The benefits of this are huge, with the average small business in the US spending on average $7,600 a year on legal expenses alone, the advantage of a little knowhow can go a long way to improving your bottom line.

But where do you start? Say you've made an amazing cushion and sold it on Facebook, Great! Then before you know it you're making 30 a week to fulfil your FB and Etsy orders, you're supplying 5 local shops and you're starting to think that this could be a serious income stream for you.

Congratulations, You have a business!

But with great power comes great responsibility and It's important to ensure that your new business had strong foundations on which to build on.

In this series I will be going through some of the essential requirements that you will need to fulfil in order to protect your fledgling business. And great news, you can do them all yourself.


Step 1 - Setting strong foundations with insurance


This is quite possibly the most important foundation stone for your business.

Insurance is the one thing that YOU MUST HAVE! If something goes wrong it won't be a tap on the knuckles or a small fine. It will be a no holes barred legal frenzy in which a very powerful and very knowledgeable legal firm will be working exceptionally hard to take EVERYTHING FROM YOU. Would you seriously put everything you hold dear at risk for the sake of a 10 minute phone call and £50?

Insurance doesn't need to be scary or expensive. Taking out a simple policy will protect you and your business should anything unexpected happen.

So What sort of insurance do you need?

Here are the 3 main areas of cover that you should be looking for in a policy;

Public Liability Insurance ( PLI)

This protects your company against claims made by your customers for accidental injury and damage to property.
If you plan on selling at craft fairs then you will defiantly need PLI. Some events are happy with you having £2 million in PLI cover, but most council run markets require £5 million.

Some things I have heard people say;

"I don't need PLI because I don't do craft fairs"

PLI would cover you for any claim made as a result of someone injuring themselves due to your not showing "reasonable care". This can be at a craft fair, in your car, at your home/office or anywhere that you may have interaction with your customers.

"I don't need PLI because I work from home and don't see my customers"

You need PLI even if you work from home and never see your customers face to face. What if a customer comes to collect an item as a one off? They may trip on that loose paving slab outside your front door and makes a claim against you?

"PLI isn't a legal requirement"

It is true that your are not legally required to have PLI. But unless you have an emergency £2 million in your back pocket, I would get it anyway.

"I don't need PLI because I only sell to friends and family and they would never make a claim against me"

Lets say a family friend (who is a self employed plumber) buys an item off you. They then injure themselves on that item and can't work. They then make a claim to their OWN business insurance for their lost earnings. Their insurance company then claims against YOU for the lost earnings of their customer. It's not only individuals that can claim against you.

Products Insurance (PI)

This covers the cost of compensation should someone be injured as a result of a faulty or damaged product that is produced, designed or distributed by your business.

Some things I have heard people say;

"I don't need PI because my products are 'safe' "

Never underestimate the stupidity of the general public.
That small button in the centre of your hand stitched lavender bag, can be chewed off by a child in 10 seconds flat.
That bubblegum bath bomb that you made last week was fine for Mrs Miggins, but it gave her sister a horrible allergic reaction.

"I don't need PI because I don't make the items I sell"

You need PI even if you are only distributing items. If you buy Items from other suppliers and sell them on, you are just as liable.

"I don't need PI because I'm only designing items"

As above, even if you are only designing an item (eg a sewing pattern) you are still liable if the finished product develops a fault that results in an injury. The court will probably find in your favour if the injury was a result of the pattern not being followed correctly. But your still going to wish you had legal cover for the £5,000 solicitor fee.

Legal Cover (LC)

As you might guess, this covers you for legal fees that result if a claim is made. You do not necessarily need legal cover. You can represent yourself if an issue should arise, but for the sake of what could be just a couple of pounds if anything on your premium, I would recommend having it.

Like dental work and upholstery, the law is one of those things best left to the professionals.

The way this is paid works slightly differently depending who you are insured with. Some insurance companies expect you to cough up for the legal fees yourself and then re-imbrues you afterwards, and some pay direct. If in doubt, ask you insurance provider.

Insurance providers

There are many providers that can cover your craft business some like Direct line and AXA are large companies that do many kinds of insurance. You are more likely to get low cost and basic packages with these providers.

If your craft is something that is a little more niche them you may wish to consider using a specialised craft insurer. Craftcover.com provides insurance specifically tailored for the craft industry.

My experience

I have my insured through Direct Line. It costs me £55 a year and covers me for;

• Public Liability (£2,000,000)
• Product Liability (£2,000,000)
• Stock away from home (£1,000)
• Money away from home (£3,000)
• Legal cover (£100,000)
• Loss of earnings (£35,000)

Summary

If you don't have insurance, go get it. Like now.

If in doubt, get more cover than you think you need you will never regret having too much protection.

I hope you've found this article helpful Step 2 will cover the financial requirements for your business including accountancy, tax and cash flows.

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