Selling things online? HMRC are after you

Published on 2 April 2012

HMRC have announced that they are now on the trail of people who buy and sell things online. They suspect that not everyone is paying the tax they should on their trading profits. Who is trading, and who is not, is often difficult to decide and the results of that decision have wider effects than just income tax or VAT. In this article we seek to shed some light on this complex area.

On 14 March HMRC began a campaign aimed at those who may be trading on the internet, in particular those selling goods or services through e-marketplaces, such as Ebay and other online auction forums.

The primary purpose of HMRC’s campaign is to identify those who are trading on the internet but who have not registered with HMRC as self-employed traders. Millions of UK sales take place every year through online marketplaces, but many sales are not taxable. As HMRC says, “The campaign isn't for people who only sell a few of their personal items. They are unlikely to need to pay tax as they aren't trading.”

So who is trading?

In many cases the tax position will be clear.

An individual who has simply sold off some unwanted personal possessions will not be trading. Someone with an existing mail-order business, who starts selling on the internet, will clearly be trading.

Between these two extremes, there will be numerous situations where it is difficult to decide and unfortunately there is not some easy test to apply when you are in the grey areas of the law.

HMRC tend to ask the following questions if you deal in goods:

  1. When you bought the asset, did you intend to sell it on at a profit?
  2. Have you made a number of sales on a frequent or regular basis?
  3. Is the item sold more a ‘commodity’ (such as toilet rolls) than a possession which offers pleasure and pride of ownership (such as a painting or piece of furniture)?
  4. Do you already carry on a trade selling similar items?
  5. Do you make changes to the asset between buying and selling, such as repairs, improvements or repackaging?
  6. Do you sell in a business-like fashion, for example, have you registered as a business seller with an online marketplace?
  7. Do you borrow to finance purchases and need to sell the items to repay the loan?
  8. Do you plan to sell on goods within a short period after purchasing them?
  9. Did you buy the assets, rather than receive them by way of gift or inheritance?

‘Yes’ answers to these questions would be indicators of trading. Be aware though that, in some cases, a trade or business may exist if just one factor is present but, in different circumstances, two or three may be present but the overall conclusion may be that there is no trade or business.

As part of the current campaign HMRC provide guidance on their website as to their approach to internet trading. They have also produced a YouTube video giving some examples of who they are likely to consider as traders and who not. However, these are short general guides to a complex subject, and some comments made in the video are rather misleading. For example, HMRC imply that someone who makes more than one sale in a year is likely to be trading, but several sales of personal possessions in a year will generally not amount to a trade. You should not make a decision as to your trading status based simply on these guides.

What if I am trading?

If you are trading and have not registered with HMRC as a self-employed person and you wish to get your tax and national insurance affairs straight, HMRC want you to tell them before 14 June 2012. They will then give you another 3 months to get your “disclosure” to them sorted out. The reason for taking up this HMRC “offer” is to ensure that you get a better financial deal than if HMRC catch up with you later.

You may need paid advice and help, especially if you have been trading in a substantial way over several years. The directory of Chartered Tax Advisers may assist you.

Related issues

Learning the ropes

A number of people who are ‘caught’ by this campaign will have no previous experience of self-employment and they will have a lot to learn! Our guidance for the self-employed provides a starting point.

Income tax and national insurance are payable on profits from a self-employed trade, and business expenses and capital allowances on business assets are deductible from sales income. Those running their business from home may be able to claim a tax deduction for an appropriate proportion of home related expenses such as heating, lighting, power, maintenance, cleaning and council tax.

If your total business sales exceed a specified threshold (£77,000 p.a. from April 2012) you will need to register for VAT and charge VAT on your sales. There are special rules for goods and services sold by a UK trader to customers outside the UK.

Tax credits

At the same time as one part of HMRC is trying to convince you that you are trading, another part of HMRC (Benefits and Credits) could be trying to persuade you that your activity is a hobby, or not carried on commercially, so as to deny you tax credits for the hours you put in.

For tax credits purposes you generally need to spend sufficient working hours, for example 16, 24 or 30 hours per week, in order to qualify. Some of the HMRC approaches that we have seen demonstrate a lack of understanding of what it is like to struggle to build a business. We are keen to gather evidence of HMRC treatment of the small self-employed and to establish how many people have been forced back on to benefits following withdrawal of their tax credits awards. Please contact us if you experience such problems.

One of the side issues arising from HMRC’s income tax campaign is the possibility that if you are now found to be trading you may become entitled to tax credits, either because the hours alone reach one of the thresholds or do so when the trading hours are added to other working time.

Housing benefit and council tax benefit

If undeclared trading income is disclosed to HMRC, you should be aware that you may also need to notify this to your local council, if you have been claiming housing or council tax benefit.

Capital gains tax

Even if your internet sales do not amount to trading, they may be subject to capital gains tax. Many sales of personal items will be exempt from capital gains tax, but some items (for example, antiques, jewellery and paintings) sold for more than £6,000 could result in a charge. There is guidance on capital gains tax on our website.

(02-04-2012)

Contact: Robin Williamson (please use form at http://www.litrg.org.uk/ContactUs)