Many eBay sellers begin small, but once selling becomes more established, there is the danger that they may unknowingly slip into the bracket where they owe tax on the profits they have received.
HM Revenue & Customs (HMRC) has recently ramped up efforts to crack down on this new generation of trader, as well as acquiring new ‘snooping’ powers which enable it to request detailed customer information from eBay and other selling sites, without any particular reason or explanation. This means if you’re selling on eBay, you should have a full understanding of online trading laws in the UK so you can stay on top of taxes.
Last financial year, around 870,000 people, including people making small sums through online sales, failed to submit self-assessment returns before the January 31 deadline. The number for 2017 is expected to exceed a million, and the Treasury has said it hopes to recoup £860m across the next four years in part from eBay traders and what it calls the “hidden economy.”
Here’s an overview of what UK-based eBay sellers need to know to stay on top of their taxes.
At what point does online selling become a business?
How does the HMRC define “business profit”? In a nutshell, the Government considers online selling to be a commercial venture if it can prove an individual is doing “anything in the nature of trade,” which could be defined by evidence of one or more of the following:
- A clear intent to make a profit, which goes beyond selling casually and for fun
- A number of similar transactions over a short period of time
- The inability to prove that the goods gave an individual “pride of possession”, for example, a picture for personal enjoyment
- Items have been repaired or modified before selling, in order to make a profit
- Items are sold at a fixed price, as they would in a shop
- If the period of time between an item being bought and then resold is quick, and not long enough to have been ‘owned’ first
- Money was borrowed to buy an item intended for sale, which could only be repaid once the transaction had cleared
If you feel that you qualify as a trader then you will need to register with HMRC for Self Assessment if your income in a tax year was more than £1,000 – this is called a ‘trading allowance’. You will become essentially self-employed and therefore you will need to submit a tax return. This still applies if you are an employee and at the same time do self-employed work.
The basic rule of thumb is that any earnings above an individual’s tax-free personal allowance of £11,850 are taxable if the money is considered to be business profit. That means there will be income tax liable according to the current tax bands. Such sellers must declare any profits within a self-assessment tax return and, if the taxable turnover exceeds £83,000 within a year, they must also register for VAT and make VAT returns.
Additionally, if your business profit is over £6,205 or more you will pay Class 2 National insurance contributions and if your profit goes over £8,424 you will also pay Class 4 National insurance contributions.
The new "trading allowance"
In a move to support the digital and sharing economy you can get up to £1,000 each tax year in tax-free allowances for property or trading income from 6 April 2017.
Under the new rules, sellers running small businesses online will not be taxed on the first £1,000 profit they make, which means that it does not need to be declared.
The caveat is that if gross trading income exceeds the £1,000, the sellers have to then register for Self-Assessment.
The current law and HMRC powers
The 2016 Finance Act granted the HMRC new powers to collect detailed information from eBay on sellers that it believes are failing to declare income. In addition to personal details like national insurance numbers, HMRC will be able to obtain bank account details, as well as the value and volume of any transactions that have been made.
This information is then fed into HMRC’s new £100m Connect computer system, which already contains billions of pieces of information from government records, banks and building societies, the Land Registry, and DVLA data, to help build a complete picture of an individual’s personal income.
HMRC is able to investigate retrospectively (typically up to six years) if it suspects trading has occurred. It can also obtain account data from eBay-owned PayPal, and from smartphone app stores run by Apple and Google.
While previously, HMRC could only request details if it suspected deliberate tax evasion, officials no longer need any evidence of wrongdoing to request data, nor do they need to ask an individual’s permission first.
In a previous crackdown, one eBay seller received a two-year prison sentence after £1.4m in undeclared tax was discovered during six years’ trading online.
Capital Gains Tax
Larger sales may be liable to Capital Gains Tax, which is a tax on the profit of an ‘asset’ sold that’s increased in value. In this case, it’s the gain made that’s taxed, not the amount of money received.
For example, if a painting was sold on eBay that was originally purchased for £5,000 but later sold for £25,000, it’s the gain of £20,000 that would be taxable. However, the current tax-free allowance is £11,300, and so an individual would only have to pay Capital Gains Tax on overall gains above this.
Sales outside of the UK
eBay sellers trading with anyone outside of the UK may need to consider the VAT rules of their customers’ home countries and possibly register and file for local VAT there. More than 160 countries charge VAT, including China, India, and most of Europe. In these counties, it’s important that sellers add VAT to their prices and pass this expense on to customers, or they will face paying the VAT themselves. How payment is processed in each country is another factor that must be considered.
For further information, this helpful chart details standard and reduced VAT (Values Added Tax) and GST (Goods & Sales Tax) rates across the world for 2018.
Checklist for regular eBay sellers in the UK
- Keep records of all transactions and any expenses e.g. costs incurred through modifying an item to sell
- Keep a running tally of the profit you are making, as it can be easy to lose track
- If you already run your own business as a sole trader, for VAT purposes you will need to treat any eBay sales as additional sales
- If you have been selling for several years and never declared your profits to HMRC, it’s important to get your affairs in order as quickly as possible
- Find out about the specific rules in other countries where you are selling, which may require you to process payments in a particular way, use a specific exchange rate, present invoices in a certain format, etc.
Remember, if your hobby is considered a business, the tax return deadline is January 31 at midnight for the previous financial year, which ends on April 6. Those who fail to do so will be charged an initial £100 fixed penalty, which applies even if there is no tax to pay, or if the tax due is paid on time.
If you miss the deadline and believe you have a valid reason for doing so, such as a failure in the HMRC computer system or your computer crashing around the deadline, you should complete a reasonable excuse form as soon as possible and send it to your HMRC office. If you miss the deadline for no good reason, you should ensure that any tax due is paid immediately, and the return filed as soon as possible thereafter.
If you don’t file a return, HMRC may estimate the tax you owe, which you can only change by filing your tax return, and you will still have to pay any penalties due. Last year, more than 385,000 taxpayers left submitting their tax return until the January 31 deadline, but the sooner you can file it, the better.
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