HMRC News: E-traders beware!

HMRC have announced yesterday that another new campaign will be launched in the next year to target private tutors and e-marketplaces such as Ebay.

The understanding is that HMRC believes that these two sectors knowingly (or unknowingly) are evading paying taxes. What’s more, it looks like HMRC will be using some sophisticated tools to target these businesses…

‘…cutting-edge tools such as “web robot” software to search the internet and find targeted information about specified people and companies. Using the software, the department can pinpoint more accurately people who have failed to pay the right tax. The “web robot”, used with the department’s Connect computer system, also helps find people who are trading without telling HMRC….’

There are ten’s of thousands of us who dabble in ebay, buying and selling items. There are also equally as many who use ebay as a means of making a profit to earn a living or supplement an existing income.

What are the rules?
The rules are pretty clear when it comes to online selling, especially through ebay. In general, if you are purchasing products to sell at a profit you should be registered as a business and declare self-employed status with HMRC. It does not make a difference whether you have another job or this is your sole income, you must still register.

However, let’s not confuse this with the large portion of ebayer’s who are selling their own possessions and are looking for the maximum possible return, even if that involves making a profit. If you sell the odd item on ebay like this then you will not be classed as self employed.

However, to check what your status could be, HMRC uses a number of tests to identify possible businesses:

  • Is there a profit seeking motive
  • A systematic number of transactions
  • Transaction similar to another trader the person undertakes
  • Short turnaround of purchases and sales of the item
  • The item is purchased solely to be sold

Tax Consequences
If trading through ebay is your only source of income then you are entitled to make up to £7,475 in profit a year before you pay taxes. Where profit is the sale price of the item less all business trading expenses such as cost of item, selling fees and admin. So depending on the margin of the item, sales could well be significantly higher than this.

However, if this income is supplementing other income then you will more than likely have to pay taxes on the profit you make. The level of tax charged will be based upon the level of your other income.

It is the latter of these scenario’s where the problem occurs. Many traders simply do not realise that they should be self-employed – whether they think it doesn’t count or the taxes paid elsewhere should be sufficient! However, using ebay as a second source of income can have a significant impact on the additional tax liability that is incurred and hence why HMRC could gather a significant amount of tax revenues from this new campaign.

If you are using any income generated for living then you are more than likely running a business and should be registered.

Posted by Chris Mollan