Selling on eBay - Do I Need to Pay Tax?

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. 

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).

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 registrationthreshold in any 12 month period. 

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

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 to make sure that you are trading in the most tax efficient way. 

Hope you enjoyed. 

(Reference - Bayside Journal

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