| Is it a Hobby or are you Trading? | | | | The point of this article is to give you some basic |
| If you regularly sell things on internet auction sites, | | | | background information regarding selling online and |
| such as EBay, you may need to consider the | | | | it’s by no means exhaustive. You should, |
| questions “Do I need to pay tax?” and | | | | after reading this, have a fairly good idea whether |
| “Am I trading?” | | | | you are simply selling a few unwanted items or if |
| What might have started as a hobby may have | | | | you have moved up the ladder and could now be |
| quickly grown into a much more profitable | | | | classed as a “trader”. If you have made |
| venture and this article has been written to try | | | | that move up the ladder it’s important that |
| and help you to understand at what point HM | | | | you do things correctly. The argument of “I |
| Revenue and Customs (HMRC) would become | | | | didn’t realise” holds little water with HMRC |
| interested in your online activities. | | | | and penalties and interest charges can soon add |
| If you have had a clear out, found a few | | | | up, negating any profit you have made. Our |
| unwanted items and decided to sell them then | | | | advice would be to employ an accountant such as |
| you probably will not need to pay tax. In order to | | | | net-accounting to make sure that you are trading |
| pay tax on any goods you sell you either have to | | | | in the most tax efficient way. |
| be trading or make a capital gain. | | | | Am I trading? |
| So your next question should be “Am I | | | | Example 1: |
| trading?” | | | | Susie is on maternity leave and has decided to |
| Basically a trade is a two way relationship | | | | have a clear out of the cupboards. She has found |
| between a trader and a customer. The trader | | | | some old records and a few other bits and pieces |
| provides goods or a service and the customer | | | | that she no longer wants. She decides to put |
| generally pays for these goods or services. In | | | | them on an auction site. Susie makes £125 and |
| addition to this HMRC provide a list of nine | | | | enthused by this she clears out some more |
| indicators that have been identified by the courts | | | | cupboards and finds other unwanted items. Over |
| to help decide whether a trade exists or not. For | | | | the course of the next few weeks Susie makes |
| a basic rule of thumb test HMRC would deem you | | | | a further £230. |
| to be trading under the following circumstances: | | | | Susie is not trading. There is nothing commercial |
| You are trading if you: | | | | about this. Her original purchases were for |
| - sell goods you have bought for resale | | | | personal use and she is selling items that she has |
| - make items yourself and sell them, intending to | | | | owned for some time. None of her personal items |
| make a profit | | | | were individually worth more than £6,000 when |
| - sell (or buy) goods on behalf of others for | | | | sold. These are exempt from CGT as |
| financial gain (for example on commission) | | | | ‘chattels’. |
| - provide a service and receive payment | | | | Example 2: |
| (whether in cash or in kind). | | | | Katie enjoys making jewellery in her spare time. |
| If you can say yes to any of these statements | | | | She makes items and uses them as birthday and |
| then you should be thinking about seeking the | | | | Christmas presents for her friends and family. |
| services of an accountant to ensure that you do | | | | Sometimes a friend will ask her to make a piece |
| not fall foul of HMRC, because if you are trading | | | | and Katie will just charge for the materials. One of |
| you may have to pay Income Tax and National | | | | Katie’s friends suggests that she should make |
| Insurance Contributions (NICs) and Value added | | | | some pieces and try selling them on an internet |
| Tax (VAT). | | | | auction site. Katie makes a dozen pieces and puts |
| HMRC would not consider you to be a trader if | | | | them up for auction. Each piece cost her around |
| you: | | | | £5 to make and they all sell for between £20 |
| - sell occasional, unwanted personal items through | | | | and £40 each. Katie takes the money she has |
| Internet auctions or classified advertisements | | | | made and buys more materials and within a few |
| - attend a car boot sale once a year to sell | | | | weeks she is selling between 5 and 10 pieces of |
| unwanted household items. | | | | jewellery a week, making at least a 50% profit |
| You should, however, consider that even though | | | | on each item. |
| you may not be classed as a trader and | | | | Katie’s initial sales of jewellery to friends are |
| therefore not liable to Income Tax on any income | | | | not classed as trading. It lacks commerciality and |
| derived from your sales, you may still be liable to | | | | she does not set out to make a profit. The |
| other taxes. If you are in any doubt you should | | | | occasional sales are a by-product of her hobby. |
| speak to an accountant or contact the HMRC | | | | Once she begins to auction her jewellery, she has |
| helpline. | | | | moved into the realms of commerciality. |
| If you decide that you are in fact trading and you | | | | She is systematically selling her goods to make a |
| are liable to pay Income Tax, National Insurance | | | | profit. She will need to inform HMRC about her |
| Contributions or VAT then you must inform | | | | trade, and keep records of all her transactions. |
| HMRC within certain time limits. | | | | Her current levels of sales would indicate that the |
| The first time limit will be for your National | | | | potential turnover will be well below the VAT |
| Insurance Contributions (NIC’s) and you must | | | | annual threshold of £68,000 so Katie does not |
| inform HMRC no later than 3 months from the | | | | need to register for VAT at the moment. |
| date you started trading. With regard to Income | | | | Example 3 |
| Tax, unless you receive a Tax Return, you have | | | | John has bought a new house and has been |
| until the 5th October following the end of the tax | | | | visiting car boot sales and auction houses to |
| year (a tax year runs from the 6th April to the | | | | purchase some furnishings. Whilst he was at a car |
| 5th April the following year). | | | | boot sale he spotted a piece of pottery that he |
| For example; you started trading on the 20th | | | | thought might be valuable. John bought it for £3 |
| June 2009. You would then have until the 20th | | | | and then put it on an auction site where it sold for |
| September 2009 to tell HMRC so that you can | | | | £75. Encouraged by this John thought he might |
| begin to pay your NIC’s. You will then have | | | | be able to make some extra money buying things |
| until the 5th October 2010 to declare your income | | | | at car boot sales and then selling then on. Over |
| for taxation purposes. | | | | the next 12 months John finds a number of |
| HMRC impose penalties for not registering within | | | | items, including pottery, some first edition books |
| the correct timescales and for not paying your | | | | and antiques. John pays a total of £55 for all the |
| taxes. If you are in any doubt about your liabilities | | | | items but sells them for £425. |
| then you should contact your accountant. | | | | John is clearly trading. The whole enterprise has |
| If your business is supplying goods within the UK | | | | an air of commerciality. He needs to inform HMRC |
| you have to register for VAT if the value of | | | | of his activities, and he should be keeping a record |
| taxable goods will exceed the annual VAT | | | | of all his income and expenses to help him |
| registration threshold in any 12 month period. | | | | complete his first tax return. The level of sales will |
| The current registration threshold 2009/2010 is | | | | not exceed the VAT threshold of £68,000 so |
| £68,000. | | | | John does not need to register for VAT. |
| Businesses can also choose to register on a | | | | Example 4: |
| voluntary basis, however, before making this | | | | Sarah has inherited a gold pocket watch from her |
| decision it is wise to discuss it with either your | | | | grandfather. It is valued at £25,000. Sarah keeps |
| accountant or HMRC so that you fully understand | | | | the watch for 10 months but then decides to sell |
| the implications of such an action. | | | | it to fund her university course. The pocket |
| After reading this you may have decided that | | | | watch is sold by a reputable specialist auction |
| you are not trading but you should still consider if | | | | house (during the 09/10 tax year) and fetches |
| you are making a Capital Gain and therefore | | | | £48,000. |
| whether you will be liable for Capital Gains Tax | | | | Sarah did not purchase the watch for resale at a |
| (CGT) | | | | profit and is not trading. There is no commerciality |
| You might make a gain when you sell, or give | | | | to this transaction. However, the watch was |
| away, an asset for more than it cost. If you are | | | | worth more than £6,000 when sold, and is not |
| liable for CGT it is the gain that is taxed, not the | | | | exempt from Capital Gains Tax (CGT). |
| amount you receive. Assets that most often give | | | | Because Sarah sold the watch for more than its |
| rise to CGT are land, shares and antiques. | | | | value at the time she inherited it, and made a |
| There are certain types of assets that are | | | | chargeable gain of more than £10,100 she will be |
| exempt from CGT, for example: | | | | liable to CGT. |
| - personal effects or goods (known as | | | | Disclaimer |
| ‘chattels’) which are individually worth less | | | | The content and advice is for information only. |
| than £6,000 when you dispose of them | | | | Last updated 14/10/2009 For up to date |
| - private cars | | | | information and advice, based on your specific |
| And you only have to pay CGT if: | | | | circumstances, please contact us. We cannot be |
| - your total chargeable gains for the year are | | | | held responsible for actions taken with reference |
| more than £10,100 2009/2010. | | | | to the content contained on this website. |