From Favours to Fees: When Helping a Friend's Business Becomes Taxable Work

The Line Between Goodwill and Trading

Most people who run their own business end up helping others at some point. A neighbour asks you to tidy her café's receipts before the year end. A former colleague, now launching a start-up, wants an hour of your thoughts on payroll. You oblige, partly out of friendship and partly because it is nice to be asked.

There is nothing wrong with this. HMRC does not tax neighbourliness. But there is a point at which regular, skilled assistance — particularly when money changes hands, or when you both privately expect it to — stops being a favour and starts being a trade. Recognising that point early is far easier than untangling it later.

What Makes It a Trade

There is no single test, but HMRC's general approach to trading looks at the whole picture. Relevant indicators include:

• Regularity. A one-off favour is not trading. Doing the books for three local businesses every month probably is.
• Payment or intention to profit. Cash, bank transfers, or even recurring gifts in kind suggest a commercial arrangement. If you are building a reputation with a view to charging later, that points the same way.
• Skill and organisation. If you are applying professional expertise on an organised basis, rather than lending an occasional hand, you look more like a business.

If two or three of these apply, it is sensible to treat the income as taxable from the outset.

Do You Need to Register?

If you are already self-assessed — as most sole traders are — the practical step is straightforward: add the new income to your existing Self Assessment return. There is no separate registration for a second income stream.

A few points are worth noting:

• Trading allowance. You may earn up to £1,000 per tax year from self-employment without declaring it, provided the total stays under that figure. If your informal earnings are genuinely small and occasional, this allowance may cover them. Once you cross it, you must report.
• Two trades, one return. If you already trade, your second activity sits alongside the first. You will complete additional self-employment pages, and the records must be kept separately for each.
• VAT. Registration is assessed per person or entity, not per trade, so your combined turnover counts towards the £90,000 threshold. Most second incomes will not tip you over, but it is worth checking before you commit to a pricing plan.

Pricing Your Expertise

Informal consultants often undercharge, partly out of awkwardness and partly because they never set out to sell anything. Underpricing creates its own problems: it signals that the work has little value, it makes the relationship harder to formalise, and it erodes the margin that justifies the time.

A sensible approach:

1. Benchmark. Look at what local bookkeepers, payroll bureaux or consultants charge for comparable work. Rates vary by region, but the range will give you a floor.
2. Separate friendship from fee. Decide what you would charge a stranger, then decide whether you want to discount for people you know. A deliberate discount is fine; an accidental one is not.
3. Put it in writing. Even a short email setting out what you will do, what it costs and when you will invoice prevents most misunderstandings — including the kind that sour friendships.

Structure: Sole Trader or Something Else?

For modest second incomes, operating as a sole trader alongside your existing business is usually the simplest route. The income flows into your Self Assessment return, and your existing bookkeeping habits extend naturally.

If the consultancy grows — or if the profits push your total income into the higher-rate band — it may be worth revisiting whether a limited company or a formal partnership with your main business makes sense. That is a question best answered with current figures rather than generalisations, and one we regularly advise on at Pomfrey Accountants.

Keeping the Records Straight

Whichever structure you choose, the discipline is the same:

• Keep a separate record of consultancy income and related expenses, even a simple spreadsheet to begin with.
• Invoice formally. It protects you, and it evidences the commercial nature of the work.
• Retain receipts for anything you claim — travel to clients, software, professional subscriptions.
• Diarise the payment dates. Self Assessment deadlines do not move because you were busy elsewhere.

A Quiet Word Before You Begin

Turning word-of-mouth goodwill into a proper second income is one of the more satisfying ways to grow. The skills already exist; the clients have, in effect, already found you. The only requirement is to treat the arrangement with the same seriousness you apply to your main business — declared, priced and recorded.

If you find yourself advising more than one friend's business this year, take an hour to review the position before the tax year ends. It is considerably easier to set the arrangement up correctly than to explain it afterwards.