Enter Your E-mail

Tolley's Practical Tax by Sarah Deeks LLB FCA

Sarah Deeks LLB FCA outlines the pitfalls awaiting the unwary operating in a new market placeEveryone seems to be doing it these days - selling items on the internet auction site e-Bay. The company has been trading in the UK for five years and from students to celebs, ‘e-Baying’ has become a favourite hobby. A successful sale or purchase can quickly become an addiction leading to regular buying and selling.

Most of the people selling on auction sites have never considered the tax consequences of their ‘hobby.’ Practitioners need to distinguish between taxable and non-taxable transactions when preparing tax returns because sooner or later the Revenue will take a greater interest in the casual profits that can be earned by internet trading. Questions such as ‘Have you made a profit by selling items on e-Bay?’ could soon be a regular feature of enquiry meetings.

e-Bay transactions are not part of the cash economy as sales are paid for by cheque, postal order or one of the virtual credit card payment methods such as Paypal or Escrow. A record therefore exists of the transaction either in the taxpayer’s bank account, or on their Paypal account. Whilst this secure account is accessible over the internet only by the registered user, the Revenue could request a list of registered users from e-Bay. It is also possible for the Revenue, during the course of an enquiry, to ask a taxpayer for details of the transactions going through their Paypal account, much as they would do with any other bank or credit card account. If the account is used to make both sales and purchases, this evidence could be used to prove that the taxpayer is trading.

Sale of own property

Not all auction site sales are taxable. Many people simply use e-Bay to sell unwanted items such as clothes and household goods. As with any disposal of personal property, such sales are usually subject to the capital gains tax rules for chattels. They will either be completely exempt from capital gains tax (for example equipment with a life of less than 50 years), or exempt because the item was bought and sold for a gross consideration of £6,000 or less. As most auction site sales are for less than £6,000, no capital gains tax will arise on the vast majority of them. Exceptions include sets or collections (only one £6,000 limit applies where a set is sold to the same or a connected person even if it is sold in individual lots) and personalised numberplates (these are intangible assets, not chattels, and any profit is fully chargeable to capital gains tax). For further information about the tax treatment of chattels see TPT 2003 page 173.

Example 1

Janine is a full-time mother. She sells 10 items of secondhand children’s clothing and a pair of designer shoes on e-Bay for £180. Inspired by her daughter’s success, Janine’s mother gives her six evening dresses which she sells on the same site for £400. Janine gives her mother £100 of the sale proceeds.

The sale of Janine’s own property is exempt from capital gains tax and she does not appear to be trading. The sale of evening dresses for her mother would also appear not to be taxable as long as it is a domestic rather than a commercial arrangement. Janine is simply acting as her mother’s agent in respect of the sale of her own chattels.

Hobby

Many people who buy and sell on e-Bay consider what they are doing to be a hobby. They may purchase an item, keep it for a while and then resell it at a later date for a profit. Some people will purchase items from jumble sales, car boot fairs and charity shops specifically to resell them on an auction site. Occasional sales for small sums may be considered to be a hobby but in many situations such transactions could amount to trading or constitute a one-off trading venture. There is a misconception amongst members of the public that there is a deminimis limit below which there is no trade. This is not so but, if a taxpayer is employed, it may be easier to prove that infrequent sales and purchases are simply a hobby rather than a significant source of income. If there are losses, the Revenue is unlikely to consider that there is a trade.

In determining whether there is a trade or an adventure in the nature of a trade, the Revenue will consider the facts in each case and in some situations the relevant case law. The history, frequency and nature of the transactions and the taxpayer’s intentions when the goods were initially purchased will be taken into account. If there is a trade there may also be implications for tax credit and benefit claims.

Example 2

Stuart, who is studying PE at university is a keen footballer and interested in the history of the game. He acquires strips, boots and memorabilia from a variety of sources (including newspaper advertisements and garage sales). Some items he holds onto but eventually he sells most of them on e-Bay. In one tax year he makes a profit of £4,000 which he uses to finance his education. He has vacation earnings of £2,000 in the same tax year.

Stuart would appear to be trading. He has taxable earnings in excess of his personal allowance. He may be liable to a penalty for failing to notify the Revenue about his trading activities.

Example 3

Tony is a history of art graduate working in a gallery. He purchases a painting by an unrecognised twentieth century artist on e-Bay for £120. He believes that the artist was a pupil of a more famous painter. He cleans the frame and advertises the work on e-Bay one month later referring to the artist’s background. The picture sells for £600.

Tony has undertaken an adventure in the nature of a trade and the profit will be taxable. It is irrelevant that this is the only transaction that he undertakes as he purchases the painting solely to make a profit and he works on the item (cleaning and research) to enhance his profit. If Tony buys and sells further paintings he may be considered to be trading.

Trading

Some people actively trade on e-Bay. Traders with an established business may use the website to market their goods and such sales and purchases should be included in their accounts in the usual way. Even if the e-Bay transaction is unrelated to the established business’ usual trading activities, the profit will still be taxable. The VAT implications should not be overlooked.

The plethora of books on trading on e-Bay has resulted in many people trying to make an easy living from home by purchasing wholesale or ‘job lots’ from auction sites and then remarketing them at a later date. These transactions constitute a trading activity and the profits will be taxable. Failure to notify the Revenue about the business within three months will attract a £100 penalty.

Example 4

Lisa works part-time earning £10,000 a year. She buys a necklace on e-Bay for £15 intending to wear it herself. When she receives it she does not like it but thinks that she can resell it at a profit. She sells the item on e-Bay one month later for £35. Inspired by her success she purchases a job lot of earrings which she packages individually in pretty boxes. She opens a Paypal account and over the remainder of the tax year makes a profit buying and selling jewellery of £1,500. The purchase of the necklace is probably the sale of a chattel as she bought the item intending to wear it. Lisa’s subsequent sales and purchases, however, amount to trading. She is clearly motivated to make a profit and £1,500 amounts to a significant part of her total income. She should have notified the Revenue about her business within three months of commencement.

Postage and packing

e-Bay purchasers have to pay for postage and packing on top of the cost of the goods purchased. Most sellers do not consider that postage charges are taxable even if they exceed the cost of the packing materials and delivery costs on the basis that the excess is simply to cover the ‘cost’ of taking the item to the post office. Proprietor’s time is not a valid trading deduction and advisors should ensure that accounts reflect the trader’s total income including postage and packing charges less a deduction for the actual delivery costs incurred.

Internet trading by ordinary taxpayers is now endemic. Practitioners should review their tax return information request systems to make sure that they ask their clients about any additional sources of income they may have - including e-Bay trading.

Sarah Deeks LLB FCA is a Freelance Writer

This article was first published in ‘Tolley’s Practical Tax’ on 17 December 2004, and is reproduced with the kind permission of Lexis Nexis.