HM Revenue and Customs (HMRC) is reviewing the selling activity of thousands of online sellers who use websites such as Amazon, Etsy and eBay to earn a living, as part of a fresh crack down on tax evasion.
According to The Telegraph, these websites are being forced to hand over customer account details – including their selling activity – as part of HMRC’s new legal powers that were extended last year.
HMRC now has the capability to download people’s account information and even force sellers to pay disputed tax or outstanding tax subject to an inquiry.
These powers have enabled the tax authority to target 14,000 individuals it suspects of failing to declare profits on their self-assessment tax returns.
HMRC recouped over £9m in unpaid tax following a previous campaign targeting online sellers in 2012. In one particular case, one eBayer was hit with a two-year prison sentence after HMRC discovered £1.4m in undeclared tax during six years of trading online.
It’s therefore important that online sellers are aware tax may even be due on something they class as a hobby if the activity is perceived as “trade” in the eyes of the Revenue.
HMRC has written to all 14,000 traders suspected of running a business and failing to declare this on their tax returns.
It is not only investigating suspected avoidance cases where “risks have been identified”, but also where traders simply need to be “educated” about their tax liabilities.
A Revenue spokesman said: “Where people choose not to set the record straight, we conduct follow-up work. This includes investigations and prosecutions.”
Anyone who fails to reply to HMRC’s notice will face an automatic tax charge – known as an Accelerated Payment Notice (APN) – where HMRC makes its own calculations on tax due and demands full repayment within a three month window.
When is a hobby perceived as a business?
Even if you’re selling second-hand items or homemade crafts as a hobby, HMRC will view this as a commercial venture if it can prove you are doing “anything in the nature of trade”.
HMRC uses nine separate indicators to find business traders online, known as ‘badges of trade’:
If HMRC believes a seller intended to make a profit rather than sell items for fun.
If HMRC views a repeat number of similar transactions in a short period of time.
If a seller cannot prove the goods gave them “pride of possession” before being sold on.
If online transactions replicate an existing type of business such as a clothing retailer.
If items are modified by the seller before selling them to achieve a greater profit.
If items are sold at a fixed price in the same way as a shop or auction house.
If money was borrowed to buy an item that could only be repaid upon selling the item on.
If assets that are the subject of trade are often sold on quickly after acquisition.
If sold items were bought to sell rather than received as a gift or an inheritance.
Self-assessment and VAT
If your hobby is considered a business you must declare any profits within a self-assessment tax return.
The deadline for tax returns for the 2014-15 financial year is January 31 2016.
If your taxable turnover exceeds £82,000 within any 12-month period you will also be required to submit a VAT return.
Image: Jurgen Appelo