Opinion

Who's at risk from HMRC pursuing tax-evading sellers at eBay and Etsy?

7 min read

01 June 2015

The tax authority is making use of its increased powers by following up with thousands of individuals – but many online users are unsure as to whether they're at risk.

The Telegraph disclosed that the websites – including Amazon, Etsy, eBay and Gumtree, are being forced to hand over customer account details, with 14,000 individuals targeted so far. They are suspected of failing to declare profits on their self-assessment tax returns.

HMRC’s powers were beefed up last year, so it can now download people’s account information, including names, emails and details of what they’ve sold, and potentially force sellers to pay tax that is disputed or subject to an inquiry.

The organisation previously tried to alert online users with a campaign in 2012, drawing attention to the fact that many people’s “hobby” may well now count as “trade”, which could mean they owe tax. It raised over £9m in tax following that campaign – and in perhaps the most extreme result, one eBay seller turned over an undeclared £1.4m in six years and was sentenced to two years imprisonment for tax evasion.

John Woolfenden had failed to declare tax on over 500,000 items sold on the auction site and should have paid almost £300,000 worth of tax from the trades. He ran an online DVD, music and games business and pleaded guilty to two counts of cheating the public revenue and one count of concealing or transferring criminal property.

With the responsibility on private traders to disclose their earnings and ensure they pay the correct amounts of tax, some may be concerned at where the divide falls. Woolfenden is a rare extreme, but of the 14,000 people targeted with letters from HMRC since 2012, some had made profits of just £100.

Many UK internet users sell homemade goods and unwanted items online, but collectors buying and selling frequently as well as those who make and sell crafts, could find themselves deemed a business and should be aware of what counts them as such.

Image: Shutterstock

Dawn Register, tax specialist at accountancy firm BDO, said: “Few people consider the tax implications of selling items online, and may think it is just a hobby.”

While it’s up to individuals to make sure they’re paying the correct amount of tax, it doesn’t hurt for HMRC to raise awareness – particularly when many may not consider their actions trading in the first place.

HMRC told The Telegraph it was investigating suspected avoidance cases where “risks have been identified” or where those involved need to be “educated” about their tax liability.

Ticking your account as a “business seller” is a quick route to being checked on by the tax authority – so users best think about the implications of selecting that title when signing up. 

Some 1,000 of the letters mentioned were sent to people where the taxman had already identified a shortfall on their self-assessment forms.

Read more on tax evasion:

While this could be someone making as little as £100 profit from their selling, the key is if it’s considered a business profit, which would then obviously make it taxable. Any earnings over an individual’s tax-free personal allowance, which stands at £10,600 for the 2015-2016 tax year would be taxable if considered a business profit.

The letters themselves lay out the issue quite clearly – one seen by The Telegraph announced: “HMRC receives information about fees paid by you from the e-marketplaces you use and is aware you were registered as a business seller. HMRC thinks you should have declared more on your taxes than you did.”

It is also a signal that HMRC is becoming savvier in assessing different forms of tax evasion. Those failing to reply will be dealt with an automatic tax charge to be paid within three months – calculated by HMRC.

“Getting it wrong could involve paying back taxes, late payment interest and penalties to HMRC,” Register added.

It should certainly catch the attention of those online who may think they’re just indulging in a hobby, like selling homemade jewellery. If HMRC can prove you are doing “anything in the nature of trade” you’ll be classed as a business. Of the “badges of trade” that the taxman will consult before proceeding, just one could be enough to display that someone is trading.

Here is the criteria to keep in mind if you are selling online, or intend to in the future:

  • A profit-seeking motive – the intention supports trading, though in itself isn’t conclusive
  • The number of transactions – frequent and systematic transactions are a signal
  • The nature of the asset – is it of such a type that it can only be turned to advantage by sale, or did it yield an income?
  • Existence of similar trading transactions or interests – those that are similar to an existing trade may be an indication of trading
  • Changes to the asset – considering whether the asset involved was adjusted or improved to make it easier to sell or to yield a greater profit
  • The way the sale was carried out – whether it was sold to raise money for emergency circumstances or in a manner typical of trading organisations
  • The source of finance – was money borrow to buy the asset?
  • Interval of time between purchase and sale – those trading assets will normally be sold quickly, so intending to resell shortly after purchase supports trading
  • Method of acquisition – something inherited or received as a gift is less likely to be the subject of trade

Image: Shutterstock