The tax authorities are said to have sent thousands of push letters this year to sellers on online marketplaces who, according to him, may not have declared taxes.
HMRC has access to a vast amount of information and data and is cracking down on online traders who use platforms such as eBay and have failed to file tax returns for annual sales in excess of £1,000.
One of the easiest ways to make money is by selling unwanted items online that collect dust. In addition to eBay, apps and websites such as Depop, Facebook Marketplace, and Vinted have exploded in popularity since the pandemic.
In turn, millions of us have used online marketplaces to make some extra money or even start a business. So, could you face a shocking tax bill if you don’t declare the income you earn online?
Shock tax bill: Online sellers may have to pay tax on their items if they sell more than £1,000 worth of goods
Do I really have to pay taxes on my old junk?
It’s easier than ever to sell online and it can be an easy way to earn extra money to help with bills or build a piggy bank.
Most sellers will only sell a few items here and there instead of becoming a professional seller. But you should be aware of the tax implications.
HMRC is cracking down on online merchants who have failed to declare tax on sales over £1,000. In January, it stepped up its efforts by sending a series of letters to sellers warning them of unpaid taxes.
A spokesman for HMRC said: ‘Individuals who regularly sell goods or services through online marketplaces may need to declare this income.
‘We believe that our customers want to pay the right amount of tax and our online guidance can help customers with that.
“This is routine work. Every year we send thousands of reminder letters in various tax areas.’
If you regularly sell online to make a profit or if you buy large amounts of shares, HMRC is more likely to consider you a business and sell to make a profit.
If you’re selling online, it’s your responsibility to find out if you need to declare taxes.
Ebay’s website states that sellers “are responsible for complying with all applicable tax laws. Sellers must follow all tax rules that apply to eBay sales.”
HMRC’s trade allowance means you can earn up to £1,000 a year without paying tax. This should not be confused with your personal allowance, currently £12,570, which is the tax-free portion of your full-time income.
You may also have to pay capital gains tax if you make a profit when you sell a personal asset for £6,000 or more. These possessions include jewellery, paintings, coins and antiques.
As everything is conducted online, details of your transactions are easily accessible, so it won’t be too difficult to calculate whether you’re going over the £1,000 allowance.
How does HMRC know if I am trading or clearing?
What matters is whether or not the tax authorities regard you as a ‘trader’. It is likely that the taxpayer is looking for sellers who make a regular profit or run a full-time business, rather than casual sellers who unload unloved items.
For example, if you clean up and sell the unwanted items online, you probably won’t have to pay taxes. This is because it is a one-off and the items sold are likely to be picked up below the original price.
It gets more complicated if you’re a collector.
For example, if you buy and sell model cars, but also want to trade part of your collection to make complete sets, HMRC will classify this as trade.
This is because you trade and sell things to make a profit. In this case, HMRC recommends that you register for self-assessment and pay tax on the profit made on the sale.
Marketplaces like Etsy have become a popular place to start a sideline selling handmade goods, but you may receive a letter from HMRC if you are selling with the intention of making a profit.
Online sellers who use marketplaces like Etsy to make money should consider becoming self-employed
How much tax do I have to pay if I am a full-time seller?
If your sideline is starting to make some serious money, or if you want to establish yourself as a full-time trader, you’ll need to register as self-employed.
UWM accountants say that while you may need to register for self-assessment if you earn more than £1,000 from online sales, simply registering as self-employed does not mean you have to pay tax on your online sales.
For full-time online traders, this means you’ll only be taxed on the annual gross profit over the personal deduction of £12,570. You will have to pay tax on profits between £12,570 and £50,270, which will rise to 40 per cent up to £150,000.
Stuart Miller, Head of Product Compliance in the UK at Xero says: ‘If you need to register as self-employed you must do so before 5 October in your company’s second tax year via the HMRC website or you risk fines.
‘It is also worth noting that if you want to pay class 2 national insurance, you must be registered as a self-employed person.
“Even if your winnings are not taxable, some people may choose to register so they can pay these contributions to maintain their entitlement to benefits.”
If you are self-employed, HMRC also allows you to declare expenses relevant to your business.
UWM accountants say this includes PayPal fees, shipping and courier fees, packaging and stationery fees, and eBay seller fees.
Miller adds, “Traders often forget that business expenses such as web hosting costs, advertising costs, use of a home office, shipping costs or even mileage can be recovered when they deliver the sold items to the customer.”
HMRC’S BADGES OF TRADE
HMRC has ‘badges of trade’ that allow them to determine between casual and full-time sellers.
These badges don’t apply in every situation, activating some of them can alert tax officials to a ‘trader’, meaning you may need to register for self-assessment.
Some examples are below:
Profit-seeking motive – intention to make a profit from your online sales
Number of transactions – if you sell a lot of the same type of product, it may indicate merchant status
Changes to the asset – if the asset has been repaired or slightly modified to make it more profitable, you can be considered a trader
Time interval between purchase and sale – usually in commercial transactions, the time between the purchase of an asset and its sale online is minimal. If you hold a little longer, it suggests that you are a loose seller.
For more information see HMRC website.
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