Increasing numbers of people are turning to online selling to make some extra money but when does selling a few items on eBay on Gumtree turn into a business? As we countdown to the 2014/15 tax return filing deadline we provide some guidance for individuals looking to make some money online over the festive period....
What counts as trading
- Selling items regularly with the main purpose being to make a profit
- Making items to sell for profit
- Selling online e.g. through eBay, at car boot sales or through classified adverts on a regular basis
Earning commission from selling goods for other people
Being paid for a service you provide
What doesn’t count as trading
You’re not trading if you sell some unwanted items occasionally or you don’t plan to make a profit from the items you sell.
The difference between business and personal selling is not always clear-cut. In borderline cases, the tax office will look at a combination of factors to decide on your status. The main issues to consider are:
- What was the item, and what was your motivation for buying it?
- What was the item used for before it was sold?
- How much time elapsed between you buying and selling the item?
- What was your motivation for selling the item?
- Was it an isolated transaction, or one of a repeated series of similar transactions?
- How often do you buy and sell items?
- Is your buying and selling organised like a business?
You cannot avoid paying tax on your online activities simply by labeling your buying/selling as a “hobby”, if, in reality it is more like a business.
It is also irrelevant whether you are registered as a private seller or as a business on the eBay website.
REGISTERING AS A BUSINESS
If you are operating your eBay or other online account as a business you will need to register with HMRC. This is easily done online.
If you are self-employed you will usually have to pay Class 2 National Insurance contributions at a rate of £2.75 per week. Read our blog on National Insurance for more information on National Insurance contributions.
HOW TO WORK OUT YOUR TAXABLE INCOME
If you trade online you will be liable to pay tax on the profit you make. This is the money you make once all charges and expenses have been deducted.
To work out your tax liability start with your online sales figure (i.e. the total amount your item sold for) before any charges have been deducted. You then deduct allowable expenses such as costs attributed to the goods you have sold, administration charges e.g. eBay, or Paypal charges, and postage. See our Tax Return Tuesday blog guide to expenses for the full range of expenses you can claim. Once all expenses are removed this will leave your overall profit. Tax is due as a percentage of this total profit.
Things to remember...
If you intend to trade you must register as self-employed with the Inland Revenue within 3 months of trading. It is extremely unwise to delay registering, as HMRC carries out checks on online auction sites to root out members who process a high number of transactions.
You should keep accurate records of any income and expenditure accrued from your trading, this includes receipts, PayPal and eBay records.
Filing your Taxes
If you are trading, or operating a business online you must declare any profits you have made via your self-assessment tax return. In the past year HMRC have cracked down on online trading and have been given new powers to obtain details from millions of online transactions to target those failing to pay tax.
For further advise on whether you are required to complete a tax return for the 2014/15 tax year, or to make a start with your return contact us today.