A guide for people who sell things online and whether or not they may be affected by HMRC's latest tax campaign, by TaxationWeb.
Many people will have already heard that HM Revenue & Customs (HMRC) is targeting “eBay traders” and is encouraging people to come forwards and to pay any tax that they owe, with a promise of more stringent penalties (or worse) for those who don’t take up the current offer. One of the problems HMRC faces is that they’ve had to call it “e-marketplaces” so as to appear unbiased but as eBay is so well known, we will use eBay trading throughout to mean ‘online market trading’.
There’s more detail on HMRC’s terms towards the end of this article – and, importantly, why to be careful about their guidance as to when you might be trading but first, the main point to get across to the vast majority of people who buy and sell goods on eBay and similar online markets must be:
It is extremely important to distinguish between most people who sell items on eBay, and the relatively very small minority of people who buy and sell on eBay to make a profit – it is this much smaller second category that should sit up and take notice of the HMRC initiative.
We have set out some common examples/scenarios below; also some issues with HMRC’s guidance and why it’s not always helpful.
What is “eBay Trading?”
In the world of tax, “trading” has a quite specific meaning. Sometimes this can be hard to pin down but the simplest explanation is someone who does something to make a profit. For instance, generally shops that sell goods are trading, as are solicitors, accountants and banks that sell services. In contrast, schools, hospitals or charities are ‘doing’ something but they are not normally “trading” because they don’t set out to make a profit. Also, hobbies are generally not trading – but see the examples below for more information.
In terms of buying and/or selling things on eBay, selling old items that were acquired for personal use is not – cannot be – trading, even if you make some money out of it.
Example – How Most People use eBay and Why it’s NOT “Trading”
Jane has just had a baby boy and already has a girl of 4. She kept all of her daughter’s old clothes in case the second child was a girl but now she doesn’t need them. So she starts to sell the old clothes to help to pay for new boys’ clothes. And, because she has absolutely no intention whatsoever (at least so she tells her husband) of having any more children, she will keep selling clothes on eBay, as soon as the children grow out of them.
Jane is NOT trading. She bought (or was kindly given) the clothes for her or her family’s use. When she sells them, she won’t be trading. The money that she makes on selling those clothes is less than what they cost her to buy in the first place, so she hasn’t actually made a ‘profit’ anyway.
Even if Jane was given the clothes, and she has had more money back than she paid in the first place, this still isn’t trading. She has nothing to worry about and there is no need for her to contact HMRC.
The same basically applies to any items originally bought for personal use. So it might be a pile of old records, or books, or children’s toys – the answer will still be the same: NOT trading.
Example – When Some People Could be “Trading”
Let’s say Bill is a plumber. Someone in the trade offers to sell him 20 shower units for a bargain price – say £25 each. Bill knows that he can sell them for a lot more money as they sell in shops for around £100 each, and he buys them so that he can sell them on for a profit. He puts them up on eBay and sells them for anywhere between £60 and £80 a unit.
Bill is trading. He only bought those items so that he could sell them on, and make more money. In fact it doesn’t matter if he actually sells any shower units or not: the main issue is that he bought the items to sell them on, and he is trading even if he doesn’t manage to sell the shower units, and even if he doesn’t sell any other shower units after this lot. It also doesn’t matter that he’s a plumber in his ‘main job’: he could be a rocket scientist. He should be telling HMRC about this new activity and should take advantage of the HMRC initiative, if appropriate - if he's done it before and not paid tax on any profits.
But if Bill sells other stuff on eBay that he originally bought for private purposes – such as some old computer games – then the fact that he’s sold some shower units to make a profit does not mean that the ‘other stuff’ has to be trading as well. He only needs to worry about the shower units. Likewise if he’s married to Jane and they both share the same eBay account: Jane’s old baby clothes would also be outside the scope of eBay trading.
Example – Selling Services – and Why it’s Usually Trading
Charlotte is a French teacher at her local school. She decides that she wants to supplement her income by offering firstly to teach French by private tuition, and secondly providing ‘proof-reading services’ for translations of English into French. She advertises her services on the Internet.
Selling services is generally going to be trading: Charlotte’s only motivation for offering her services is to make money, there are very few costs associated with the provision of most services and in particular, she is not selling something that she acquired for personal use. It wouldn’t make any difference if Charlotte were a bricklayer by day and offered French lessons by night: the service would be taxable. If Charlotte’s costs exceeded her income – perhaps she had to buy some expensive proof-reading software, or incur significant travelling costs to go out to visit pupils – then she might make a loss and have no tax to pay. But even then as a trading activity it should ordinarily be reported to HMRC.
Example – Borderline Case – Hobbies
Unfortunately, this is not a straight forward area. As a very simple rule, if someone is trying to make money out of their hobby then they are trading but if they’re just trying to recover some of their costs then they are not: if you know that you’ll never get all of your money back, then it’s not a ‘commercial venture’ and it’s not trading. (But someone who just happens to make losses one year, or someone who expects to make losses at first but then to be profitable once established, is usually trading).
For instance, let's say that Bill's wife Jane has a terminal addiction to making cards. She’s currently in remission but there have been times when cards have been strewn all around the house in various stages of construction. Bill's better half has spent small fortunes on paper, card, stamps, inks, dies and other equipment. She does it because it’s a hobby she enjoys. If she were to try to sell any of these cards on eBay, (or more likely if Bill were to try to sell them whilst she wasn’t looking), she probably wouldn’t make a profit because they just don’t sell for much money: they can take hours to make but still only sell for less than £5 each. Factoring in how much they cost to make, she would probably make a small profit on some but a loss on others. It’s not a commercial venture as there’d be no expectation that she’d make any money out of it.
However, if she suddenly found that people were paying up to £20 each for one of her cards and she could realistically expect to make a profit on the majority of her cards after costs of fabrication, advertising and delivery, etc., then she’d be trading – even if she hadn’t started off with that intention.
In other words, if you’re making money – even out of a hobby – then HMRC will want to tax it. They don’t want people who make losses from hobby sales to be trading (hence the ‘commerciality’ test) otherwise they’d have to give some tax back!
Example – Borderline Case – Collectors
Let’s say that Bill’s brother, Ben, collects Smurf memorabilia. He’s been a lifelong fan and over the years, he’s amassed a collection worth several thousands of pounds. So far, if he sold things that he’d originally bought for his collection, he cannot be trading. But let’s say that he’s developed an eye for Smurf collectibles – he knows what sells and what doesn’t – and occasionally he spots something that he knows he can sell on immediately through eBay for a better price. Where he buys items with no intention of keeping them but to sell on for a profit, then he is trading, just like Bill in the earlier example. Of course it might be harder for Ben to keep track of what he’s bought to sell on, and what he’s bought for his personal collection. But he needs to keep records of the things he buys to make a profit, as he may need to pay tax on those items.
... But Look out for Capital Gains Tax
Capital Gains Tax (CGT) is a completely different tax and nothing to do with trading, eBay or otherwise. It’s the tax that is paid by someone who buys a painting for £5,000 to hang on the wall and then a couple of years later, manages to sell it for £50,000 after finding out it’s an original painting by a famous artist.
But it could also catch Ben out. Let’s say that Ben has grown tired of his Smurf collection (or more likely, he’s grown tired of Charlotte’s incessant nagging about the house being full of old junk and there’s no space – particularly now that they’ve got young children...allegedly). Ben’s treasured Smurf albums are now worth tens of pounds each, and as he tots up the value of his collection (probably with a tear in his eye, I should imagine) he realises his ‘old junk’ is worth at least £1,000 if he sells it all as a single lot. It may only have cost a few pounds over the years, but it’s now worth very much more.
This is where Capital Gains Tax can apply, and to add to Ben’s woes, he MIGHT have to pay tax on some of the net proceeds of selling his collection, after deducting the original costs. HMRC’s eBay trading initiative isn’t meant to cover this type of situation, as it’s not trading. And Ben simply might not be thinking of tax seeing as he’s so cut up about saying goodbye to Papa Smurf. But there is an Annual Exemption of £10,600, which means that Ben would have to make a net gain of almost £11,000 before having to worry about Capital Gains Tax. Which is a lot of Smurf, in anyone’s book.
HMRC Advice Links – But Be Careful About Their Guidance!!
The main advice section on their ‘e-marketplaces’ campaign is at e-Marketplaces Campaign and the key points are:
If you feel that you have been trading online but haven’t accounted properly for tax, you should
- Notify HMRC by 14 June that you intend to provide the relevant information in due course, and
- Provide that information (“make a disclosure”) AND pay any outstanding tax by 14 September.
HMRC’s guidance How to Work Out if You are Trading is, perhaps, a well-intentioned attempt to fit what tax advisers call the “badges of trade” into the context of selling items online. But looking at the Questions in that section, it could be very easy to conclude that you are trading, when you are not. Here are a few observations:
Question 2 – How Often Do You Sell Things? Suggests that you may well be trading if you make regular sales, but not trading if you only ever made one sale and don’t expect to make any more. This is potentially very misleading: my wife will sell anything on eBay that isn’t bolted to the floor and she’d happily sell something every day if she could. But she’s not trading: it’s all stuff used by the family that kids have outgrown. Or she thinks I should have outgrown. To suggest that you are only ‘not trading’ if you make just one sale a year is also potentially misleading – in fact, as with the example of Bill’s showers above – if it’s an item that you’ve bought in order to sell at a profit, then just the one sale is a trade.
Question 4 – Do You Change or Improve the Things You’re Selling? Here again, repairing holes in clothes, cleaning or polishing (or soldering loose connections on a Peppa Pig laptop – kudos to my better half, not me) does not make it a trade. It does if you only bought the items to make money in the first place but in that case you’d probably be trading anyway.
Question 7 – How Did You Pay for the Things You’re Selling? Suggests that if you had to borrow money to pay for the items in the first place, then you’re probably trading. But again, in the context of a family with household items, borrowing money to buy a washing machine and then selling it on eBay two years later is not trading! So again, a note of caution.
Question 8 – If You Make the Things You Sell, Do You Charge More Than They Cost to Make? This is more for people selling from a hobby, and as we've already mentioned above, this is potentially a difficult area. Here, you need to take care that you include ALL of the costs to see if you're actually making a profit.
In the context of making cards in one of the previous examples, the associated costs extend well beyond the obvious paper and ink. For instance, there are:
- postage costs (both to buy materials and to sell the finished cards)
- costs of travelling to trade fairs to look at new materials or designs
- training costs or course fees - to maintain existing skills
- subscriptions to magazines, or memberships of clubs, that are relevant to the activity
- commission from eBay and Paypal, or similar.
- capital costs incurred in respect of equipment, stamps, dies and such like. (Generally these items last for a while but in most circumstances you are now entitled to claim the full cost “up front”).
- There could also be an apportionment of the costs of the home – what tax advisers call “use of home as office” - if you have given over a room to making cards, then if HMRC says it’s a trade, you’re entitled to deduct the cost of heating and lighting that room, etc., etc.
- A reasonable apportionment of Internet and telephone bills
For many genuine hobbyists, if they totted up all of the costs involved, they’d find they broke even at best: there are so many people who sell their cards at just enough to cover their costs, (or less), it’s arguably impossible to sell at a price high enough (and in sufficient volume) to make a profit.
We hope that this article has proved a useful guide to the issue of online trading – primarily that it should allay the concerns of a majority of people who really shouldn’t have anything to worry about, in terms of HMRC’s tax campaign.
Tax experts can argue all day and all night about the finer points of whether an activity is trading or not, but in the vast majority of cases, the points made in this article should hold good. If having read this and the information on HMRC’s website you are still concerned, then you can always contact HMRC’s helpline – 0845 601 2944 – or alternatively, you are welcome to post a question on TaxationWeb's forum.