Is it a Hobby or are you Trading?
If you regularly sell things on internet auction sites, such as eBay, you may need to consider the questions “Do I need to pay tax?” and “Am I trading?”
What might have started as a hobby may have quickly grown into a much more profitable venture and this article has been written to try and help you to understand at what point HM Revenue and Customs (HMRC) would become interested in your online activities.
If you have had a clear out, found a few unwanted items and decided to sell them then you probably will not need to pay tax. In order to pay tax on any goods, you sell you either have to be trading or make a capital gain.
So your next question should be “Am I trading?”
Basically, a trade is a two-way relationship between a trader and a customer. The trader provides goods or a service and the customer generally pays for these goods or services. In addition to this HMRC provide a list of nine indicators that have been identified by the courts to help decide whether a trade exists or not. For a basic rule of thumb test HMRC would deem you to be trading under the following circumstances:
You are trading if you:
- sell goods you have bought for resale
- make items yourself and sell them, intending to make a profit
- sell (or buy) goods on behalf of others for financial gain (for example on commission)
- provide a service and receive payment (whether in cash or in kind).
If you can say yes to any of these statements then you should be thinking about seeking the services of an accountant to ensure that you do not fall foul of HMRC, because if you are trading you may have to pay Income Tax and National Insurance Contributions (NICs) and Value added Tax (VAT).
HMRC would not consider you to be a trader if you:
- sell occasional, unwanted personal items through Internet auctions or classified advertisements
- attend a car boot sale once a year to sell unwanted household items.
You should, however, consider that even though you may not be classed as a trader and therefore not liable to Income Tax on any income derived from your sales, you may still be liable to other taxes. If you are in any doubt you should speak to an accountant or contact the HMRC helpline.
If you decide that you are in fact trading and you are liable to pay Income Tax, National Insurance Contributions or VAT then you must inform HMRC within certain time limits.
The first time limit will be for your National Insurance Contributions (NIC’s) and you must inform HMRC no later than 3 months from the date you started trading. With regard to Income Tax, unless you receive a Tax Return, you have until the 5th October following the end of the tax year (a tax year runs from the 6th April to the 5th April the following year).
For example; you started trading on the 20th June 2009. You would then have until the 20th September 2009 to tell HMRC so that you can begin to pay your NIC’s. You will then have until the 5th October 2010 to declare your income for taxation purposes.
HMRC impose penalties for not registering within the correct timescales and for not paying your taxes. If you are in any doubt about your liabilities then you should contact your accountant.
If your business is supplying goods within the UK you have to register for VAT if the value of taxable goods will exceed the annual VAT registration threshold in any 12 month period.
The current registration threshold 2009/2010 is £68,000.
Businesses can also choose to register on a voluntary basis, however, before making this decision it is wise to discuss it with either your accountant or HMRC so that you fully understand the implications of such an action.
After reading this you may have decided that you are not trading but you should still consider if you are making a Capital Gain and therefore whether you will be liable for Capital Gains Tax (CGT)
You might make a gain when you sell, or give away, an asset for more than it cost. If you are liable for CGT it is the gain that is taxed, not the amount you receive. Assets that most often give rise to CGT are land, shares and antiques.
There are certain types of assets that are exempt from CGT, for example:
- personal effects or goods (known as ‘chattels’) which are individually worth less than £6,000 when you dispose of them
- private cars
And you only have to pay CGT if:
- your total chargeable gains for the year are more than £10,100 2009/2010.
The point of this article is to give you some basic background information regarding selling online and it’s by no means exhaustive. You should, after reading this, have a fairly good idea whether you are simply selling a few unwanted items or if you have moved up the ladder and could now be classed as a “trader”. If you have made that move up the ladder it’s important that you do things correctly. The argument of “I didn’t realise” holds little water with HMRC and penalties and interest charges can soon add up, negating any profit you have made. Our advice would be to employ an accountant such as net-accounting to make sure that you are trading in the most tax efficient way.
Am I trading?
Susie is on maternity leave and has decided to have a clear out of the cupboards. She has found some old records and a few other bits and pieces that she no longer wants. She decides to put them on an auction site. Susie makes £125 and enthused by this she clears out some more cupboards and finds other unwanted items. Over the course of the next few weeks Susie makes a further £230.
Susie is not trading. There is nothing commercial about this. Her original purchases were for personal use and she is selling items that she has owned for some time. None of her personal items were individually worth more than £6,000 when sold. These are exempt from CGT as ‘chattels’.
Katie enjoys making jewellery in her spare time. She makes items and uses them as birthday and Christmas presents for her friends and family. Sometimes a friend will ask her to make a piece and Katie will just charge for the materials. One of Katie’s friends suggests that she should make some pieces and try selling them on an internet auction site. Katie makes a dozen pieces and puts them up for auction. Each piece cost her around £5 to make and they all sell for between £20 and £40 each. Katie takes the money she has made and buys more materials and within a few weeks she is selling between 5 and 10 pieces of jewellery a week, making at least a 50% profit on each item.
Katie’s initial sales of jewellery to friends are not classed as trading. It lacks commerciality and she does not set out to make a profit. The occasional sales are a by-product of her hobby. Once she begins to auction her jewellery, she has moved into the realms of commerciality.
She is systematically selling her goods to make a profit. She will need to inform HMRC about her trade, and keep records of all her transactions. Her current levels of sales would indicate that the potential turnover will be well below the VAT annual threshold of £68,000 so Katie does not need to register for VAT at the moment.
John has bought a new house and has been visiting car boot sales and auction houses to purchase some furnishings. Whilst he was at a car boot sale he spotted a piece of pottery that he thought might be valuable. John bought it for £3 and then put it on an auction site where it sold for £75. Encouraged by this John thought he might be able to make some extra money buying things at car boot sales and then selling them on. Over the next 12 months John finds a number of items, including pottery, some first edition books, and antiques. John pays a total of £55 for all the items but sells them for £425.
John is clearly trading. The whole enterprise has an air of commerciality. He needs to inform HMRC of his activities, and he should be keeping a record of all his income and expenses to help him complete his first tax return. The level of sales will not exceed the VAT threshold of £68,000 so John does not need to register for VAT.
Sarah has inherited a gold pocket watch from her grandfather. It is valued at £25,000. Sarah keeps the watch for 10 months but then decides to sell it to fund her university course. The pocket watch is sold by a reputable specialist auction house (during the 09/10 tax year) and fetches £48,000.
Sarah did not purchase the watch for resale at a profit and is not trading. There is no commerciality to this transaction. However, the watch was worth more than £6,000 when sold, and is not exempt from Capital Gains Tax (CGT).
Because Sarah sold the watch for more than its value at the time she inherited it and made a chargeable gain of more than £10,100 she will be liable to CGT.
The content and advice is for information only. Last updated 14/10/2009 For up to date information and advice, based on your specific circumstances, please contact us. We cannot be held responsible for actions taken with reference to the content contained on this website.