The difference between a company and a hobby is not clear to everybody. But a company without turnover is a hobby.
Company without turnover is a hobby
We experience over the years persons running what they think is a company, which in fact is a hobby. For instance the Reiki therapist we met that filed her own tax returns. A rather low turnover was made, near to nothing. But all the costs of the house were deducted, as the therapy was in their home. With all the costs I mean all the costs. Water, electricity, rent, furniture, food.
We was amazed there had not been an audit. We quickly informed the lady that was not a source of income subject to tax, it was a hobby. Now the lady was amazed and relieved, as she was glad no longer to be completing Value Added Tax returns and entrepreneur income tax returns.
Company without entrepreneur
The other group you have is the one that start a company with the money of investors, whoever that may be. Often it is the partner who is converted into investor. Nothing more fun than run risks with somebody else his or her money. Often the same decisions would not have been made if it was the persons own money. People burning money of others rather recklessly are not considered entrepreneurs either.
The clever non entrepreneur – court case
A person registered a company in 2007 with the Chambers of Commerce trading in bicycles and bicycle parts. Over the period of 2016 to 2019 the total turnover shown in the Value Added Tax return was EUR 190. The reclaimable VAT amounted over this period EUR 2.899.
The Dutch tax office denied the reclaimable VAT. The charged VAT over EUR 190 is to be paid, regardless. The tax office also issued a 10% penalty. A bit of a losers penalty. Penalties start at 25% normally.
The person went to court. The court asked him to substantiate the activities, the advertisement made. There was no reply to any of these questions, other than that extensive courses were followed paid by the company.
The court ruled that nothing was done or invested to make the company part of the economic traffic, hence the tax office was correct to rule the company as an hobby.
Tax is exciting
We think tax is exciting! How do you know if your company is actually a hobby? First the activity needs to be source of income. Ofcourse you could have some difficult starting years, but if in a period of three years you do no manage to get an income, it will not work.
If you do manage to get an income, but it is roughly EUR 2000 per year, it is a hobby. Often such “companies” remain alive next to an employment. The employment is funding the hobby, the hobby is then a tax deduction and that is the moment the tax office steps in.
That said, your hobby can become your company! Look at us!