Many people sell a few goods or clothes on sites such as eBay and Depop. Or you might have a side-line hobby business. But, what are the tax implications and should you inform HMRC?
Watch our video to find out more information.
WHAT ARE THE BADGES OF TRADE?
You may occasionally sell an unwanted gift or item but, if this becomes frequent or you are running an online business, you must consider whether you are trading.
There are some key indicators that help to provide an understanding as to whether a trade exists. These are 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 you are trading
- The number of transactions – systematic and repeated transactions indicate trading rather than a “one-off”
- 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 that you are 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 than if you bought it yourself.
The above help provide an overall picture of trading, but no single factor provides conclusive proof.
WHAT IS THE TRADING ALLOWANCE?
To avoid unnecessary admin for small traders, there is an annual Trading Allowance of £1,000.
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 or pay any tax.
However, if you are already self-employed and sell goods on eBay as a side-line, there will be tax to pay. This is because you can’t use the Trading Allowance if you already have a self-employment with income more than £1,000. You must report both to HMRC.
WHAT DO I 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.
HOW MUCH TAX WILL I PAY?
Any profits you make will be taxed at 20% if you are a Basic Rate Taxpayer, or 40% if you are a Higher Rate Taxpayer.
You may also need to pay Class 2 and Class 4 National Insurance contributions.
For 21-22, 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’d like to know more, please get in touch with us.