Thousands of people in the UK regularly buy and sell goods online these days, using sites such as eBay, Amazon, Etsy or Gumtree. This can be anything from periodically finding a home for unwanted stuff – today’s equivalent of the car boot sale – to an extension of a hobby collecting or making things and through to fully-fledged, substantial businesses.
However, whatever the motivation, if you regularly buy and sell online and you sell things you have either made or purchased and have only held for a short period of time before selling them on, the chances are you should be paying tax on any profits you make, as this activity is likely to be classed as a ‘trade’.
If you sell regularly online, just because this is done from the comfort of your own home, in terms of the tax implications, it is no different to making money from running a shop. If you sell for more than you buy and your activity is classed as a trade, then the profit that you make will be taxable as trading income. There’s no minimum amount either – you can earn up to £10,600 a year without paying tax but this relates to your total earnings, i.e. including any earned income from employment or any rental, savings or investment income, so unless your total earnings from all sources are less than this, you’ll be liable to pay tax on the profit at standard income tax rates – 20%, 40% or 45%, depending on the level of your earnings.
HMRC is actively focusing on this area and is currently targeting thousands of e-retailers that it believes should be declaring the profit from these activities and paying tax on them. Around 14,000 individuals have so far been sent letters from HMRC, stating that it believes they should have declared trading income and profits on their self-assessment tax return.
Using new powers granted to the taxman last year, HMRC can force the website companies to hand over customer account data or they can download account information themselves. Users who register themselves as a “business seller” are particularly likely to be targeted and if you are identified but fail to respond, HMRC can simply calculate its own assessment of the tax due and demand that it be paid within 3 months. Where it is found that tax should have been paid but hasn’t, depending on the circumstances, interest and penalties may also be charged and ultimately criminal prosecution can follow in cases where significant funds and levels of unpaid tax over a long period of time are involved – at least one eBay trader has been given a 2-year prison sentence.
Another potentially serious tax consequence for those undertaking larger volumes of online selling is that if you sell goods worth more than £82,000 in any 12-month period, you are legally required to register for VAT. You will then need to charge VAT on any sales that are not of ‘exempt’ goods (most goods are not exempt), to file a quarterly VAT return and to pay the VAT you collect from your buyers over to HMRC.
In short, it is much better to face up to the fact that you need to pay the tax and to get all of your affairs properly in order, whether it be making a self-assessment declaration or registering for VAT. If the trading results in a reasonable and regular profit, it may be more tax-efficient (and completely legitimate) to run the business as a limited company.
As a general guide, things that indicate whether your online activity would be classed as a trade and become taxable include:
- Whether your main motivation was to make a profit
- The number of transactions and the length of time you hold items for before selling – in general a higher number of transactions and a short period of time that you hold the items for, indicate a trade
- Whether there was another genuine reason for you to own the items, other than to resell them
- How you came by the items you sell – e.g. if they were received as a gift or inheritance the sale may be less likely to be deemed as a trade
- Whether you charge a fixed price for the items, as a normal business would
- Whether you alter, improve, enhance or repair the items before selling them on, to increase their value
- Whether there are other businesses operating that sell the same goods