Do you like to trade online? Perhaps you like to dabble on eBay or Amazon in your spare time?
Do you consider this to be a hobby or a harmless pastime, rather than a trade per se? The chances are this is the type of activity you wouldn’t mention to your accountant. Well, you may just have to think again, as it seems HMRC is now becoming increasingly interested in such harmless pastimes.
It appears that HM Revenue and Customs is currently reviewing the selling activity of thousands of online sellers who use websites such as Amazon, Etsy, and eBay to earn a living, as part of a fresh crack down on tax evasion. A report in The Telegraph claims that HMRC has stepped up its activity and is now demanding that these websites hand over customer account details and evidence of their online selling activity.
It is making these demands using new legal powers which were extended last year. As part of these extended powers, HM Revenues and Customs can download people’s account information and even force sellers to pay disputed tax or outstanding tax subject to an inquiry. To date, the new powers have enabled the tax authority to target 14,000 individuals it suspects of failing to declare profits on their self-assessment.
HMRC previously recouped over £9m in unpaid tax in a campaign targeting online trading sellers in 2012.
In that campaign, one particular ‘eBayer’ was hit with a two-year prison sentence after the discovery of £1.4m in undeclared tax during six years of trading online.
HMRC is stressing that it is important for online sellers to be aware that tax may be due on activities that individuals might see as simply a hobby, if the activity is perceived as a “trade” in the eyes of the tax authority. It is also stressing that traders need to be educated about their tax liabilities. A spokesman for the tax authority said:
“Where people choose not to set the record straight, we conduct follow-up work. This includes investigations and prosecutions.”
If online traders receive a notification from HMRC and choose to ignore it, they will face an automatic tax charge – known as an Accelerated Payment Notice (APN) – where HMRC makes its own calculations on tax due and demands full repayment within a three month window.
So is your pastime a hobby or a business?
Well, that is for HMRC to judge. However, to help you out the tax authority has set out a series of 9 tests or ‘badges of trade’ indicators it uses as yardsticks to determine whether or not online trading activities are deemed to be commercial:
- If HMRC believes a seller intended to make a profit rather than sell items as a pastime.
- If HMRC views a repeat number of similar transactions in a short period of time.
- If a seller cannot prove the goods gave them “pride of possession” before being sold on.
- If online transactions replicate an existing type of business – businesses like clothing retailing or handycrafting.
- If items are modified by the seller before selling them in order to make a greater profit.
- If items are sold at a fixed price in the same way as a shop or auction house.
- If money was borrowed to buy an item and could only be repaid once the item was sold on.
- If assets that are the subject of trade are often sold on quickly after acquisition.
- If sold items were bought to sell rather than received as a gift or an inheritance.
What about the self-assessment and VAT tax implications for online trading? Well, these fortunately are relatively straightforward:
- If your ‘hobby’ is considered a business you must declare any profits within a self-assessment tax return.
- The deadline for tax returns for the 2014-15 financial year is January 31 2016.
- If your taxable turnover exceeds £82,000 within any 12-month period you will also be required to submit a VAT return.
If you would like further clarification about HMRC’s position on online trading, or would like further information onand VAT returns, then contact Steven Glicher’s accountants on 0161 485 8007 or email info@ .