Many businesses have been forced to close temporarily due to the pandemic. In some cases, individuals have found alternative ways to raise some much-needed funds during these turbulent times by selling goods or clothes on sites such as eBay and Depop or creating side-line hobby businesses.
But, what are the tax implications and should you inform HMRC?
Badges of trade
You may occasionally sell an unwanted gift or item but, if this becomes frequent or you are running an online business, it is essential to consider if you are trading.
There are some key indicators that help to provide an understanding as to whether a trade exists. These are is called ‘badges of trade’ and are something that the courts have used to answer this question.
The badges of trade include:
- Profit-seeking motive — an intention to make a profit indicates trading
- The number of transactions – systematic and repeated transactions indicate trading
- The nature of the asset – an asset that can only be turned to an advantage by sale suggest trading
- Existence of similar trading transactions or interests – transactions that are similar to those of an existing trade may themselves be trading
- Changes to the asset – repairing, modifying or improving the asset to make it more easily saleable, or saleable at a greater profit, indicates trading
- The way the sale was carried out – selling the asset in a manner typical of trading organisations suggests trading
- Source of finance – selling the asset to repay funds borrowed to purchase it may indicate trading
- Interval of time between purchase and sale – a short interval of time between purchase and sale may indicate trading
- Method of acquisition – assets acquired by inheritance or as a gift are less likely to suggest trading.
The above help provide an overall picture of trading but no single factor provides conclusive proof.
What is the trading allowance?
If your gross income from these sales is £1,000 or less for the tax year, then there is no legal obligation to tell HMRC as you have not exceeded the £1,000 allowance.
You must inform HMRC if you are self-employed and sell goods on eBay as a side-line. This is because you cannot use the trading allowance if your main trade is more than £1,000. You must report both to HMRC.
What do you need to tell HMRC?
You must inform HMRC about your income and expenses on a Self-Assessment Tax Return if your gross income from all trades is more than £1,000. If you are not already registered for Self-Assessment, you’ll need to do this first before you can submit a return.
When working out your profit, you can deduct expenses wholly and exclusively incurred in connection with the trade. It may be more beneficial to deduct the £1,000 trading allowance if any costs incurred are less than £1,000.
It’s important to keep in mind that the deduction of an allowance cannot create a loss. If there is a loss after deducting expenses, it will be better to deduct the actual expenses rather than the allowance. This is because you would benefit from the associated loss relief.
If you’ve had a successful side-line business and this is reflected in your profits, you may also need to pay Class 2 and Class 4 National Insurance contributions. For 2021-22, you will need to make payments for Class 2 National Insurance if your profits from self-employment are more than £6,240 and Class 4 National Insurance If your profits are more than £9,568.
If you need help registering for self-assessment, follow the below link.
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