I’ve done it myself – got rid of items (mainly clothes) that I no longer fit into in order to declutter the wardrobe, garage, loft and other hiding places for this stuff. I could spend a week doing it – no, maybe a month. I’m then left with what am I going to do with it all so I turn to eBay to get something out of my investment. Would I consider it a business – nope, not at all. Would I declare it on my tax return? No as it’s not a business and just a sale of personal property.
But HMRC have been looking at the online marketplaces such as Amazon, Gumtree, eBay, Itsy, Music Magpie, Preloved and have used their extended powers in order to obtain user information as they are looking for traders suspected of running a business selling via these routes and looking for undeclared income on self-assessment.
This then brings up the question of when does a seller become a business or online trader? The only guidance we are given is in BIM20205 (and others in the same number range) which talks about the badges of trade. These determine if something is of a hobby or personal use, or a business. These are:
- Profit seeking motive – do you intend to make a profit;
- The number of transactions – if they are systematic & repeated, then that is likely to be a trade;
- Are there similar transactions outside online trade – do you have an existing trade that is sold in the traditional way therefore online activity is just a new route to market;
- Interval of time between purchase and sale – this implies the purchase or resale processes
- Amount of time dedicated to these activities;
- Method of acquisition – if acquired by inheritance or gifts, then the sale is not likely to be a trade.
It is possible that something starts off as a hobby but after a while can turn into a business. When it turns into a business using the badges of trade assumptions above, then that is when the business needs to be registered with HMRC as a sole trader. It’s best to use an example here:
Sally works as a hotel receptionist and pays PAYE on this employment. In her spare time, she makes blankets for the elderly and occasional sells them when completed to friends and work colleagues for an amount that just about covers her costs, although sometimes not. Any money that comes in goes towards her holiday pot.
She then decides that the holiday pot was not growing fast enough to get to her holiday in Malta, so in order to get extra cash, she starts to sell online via an auction site and the initial experiment produces £30 profit per sale. Spurred on by this, she then buys materials and within a month is selling 10 to 15 a month all at a profit. It starts to get to the stage that she wants her own website to advertise her blankets and maybe take special orders.
The tax implication then is that the initial sale of blankets would not be considered as a trade as it was a few sales to friends and lacked commerciality therefore just a hobby. Once the blankets entered the auction state and materials being purchased to turn into the final product to sell at a profit, then commerciality begins. That is when Sally should have registered with a self-employed business.
The result then is the sale of personal items to clear clutter of unwanted goods etc. is not considered a trade unless several of the badges can be identified. Once those can be proved, you must register with HMRC (https://www.gov.uk/new-business-register-for-tax) as a business. It’s easier than you think, but if you need help, get in touch with us.
Right – must put in my calendar which month to declutter the house.
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