5th May 2023

When does selling a few unwanted household items become a business? HMRC has more sophisticated software to trawl the internet and eventually marry this up to credit and debit card transactions. In 2014 an eBay trader was sentenced to two years in jail after avoiding paying tax of around £300,000 after trading over 500,000 items.

Regular or Occasional Business

There is a fine line when occasional selling becomes an active business. Repeated selling or buying items to modify or restore to sell at a profit would cross this threshold and possibly result in taxes due. This would result in having to file a Self-Assessment tax return with HMRC to report this income and calculate the tax due. National Insurance may also be due, and for those trading in larger quantities (£85,000 turnover), then VAT will have to be considered. Last year, around 600,000 people — including people making small sums online — failed to submit self-assessment returns before the January 31 deadline. The number shows how important it is to understand the rules.

Badges of Trade

These key indicators should be used to establish whether you are a sole trader and engage in an online business. The laws to determine if someone is trading is governed by case law, so a combination of the below can trigger a trade, or just one could be used if enough weight is behind the argument.

• Intent to make a profit would indicate a trade, but it is not conclusive.
• The number of transactions – the more transactions make it harder to argue that it is not a trade.
• Type of asset – selling a one-off painting is allowable, but selling a large quantity of stationary, for example, could constitute a trade.
• Similar or existing trade – transactions similar in nature to an existing business could be considered a trade.
• Changes to the asset – was the item improved, fixed or restored to make it more sellable or make a larger profit?
• Reasons behind transaction – was it sold to raise cash in an emergency? Or was it purchased with the sole intention of making a profit?
• Source of finance – if funds were borrowed short-term to finance the transactions, this could indicate trading.
• The length of time held – an intention to sell the item quickly for a profit would imply a business transaction. An asset held long-term would be less likely to be a trade.
• Manner of acquisition – gifts or inherited items are less likely to be deemed a trade.

How HMRC Checks Information

The Finance Act 2016 saw the introduction of new legislation where HMRC can force sites such as eBay, Etsy or Airbnb to hand over information. This is then collated via the HMRC Connect program – their very own Skynet – which cross-references government records, information from banks and building societies, the Land Registry and DVLA data to weed out anomalies.

Tax-free Allowance

The Finance Act 2016 did, however, provide some good news for online sellers. A tax-free allowance for “micro-entrepreneurs” of £1,000 was introduced. Those receiving income below this allowance from online marketplaces or property will no longer have to declare this to HMRC. Businesses whose gross income exceeds this will be able to use the £1,000 allowance as a deduction to work out their taxable income.

Summary

Freelancing and online selling have become increasingly popular in recent years as technology has made it easier to work remotely and sell products online. However, with this rise in online activity comes a greater need to understand the tax implications of these activities. In the UK, HM Revenue & Customs (HMRC) has become more sophisticated in its approach to identifying those who may owe tax on their online activities.

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