Am I trading or not?
eBay... love it or loathe it, it's a feature of modern life.
Hands up those who have NEVER bought or sold anything on eBay... thought as much, not very many at all.
If you regularly sell things on eBay, one point to consider is whether or not that counts as a "trade". Because if it does, you'll have to keep track of your sales on eBay and pay tax on the profit you make on those sales.
How do you know if your eBay sales are a "trade"?
1) Whether you meant to make a profit.
This isn't the same as meaning to raise some cash for an emergency (see point 6). Are you selling because you want to make a profit out of the sale, or because you don't need/want the items any more and you'd rather make a bit of cash than throw them away or give them to a charity shop? Selling to make a profit is a big pointer to trading - but HMRC say that's not conclusive!
2) Repeated transactions.
Are you selling the same sort of stock over several months (e.g. an eBay shop selling furniture)? That's likely to mean you're trading.
3) Nature of what you're selling.
Is it something that you've had personal enjoyment from, e.g. a painting you had hanging on the wall, your old CDs, your wedding dress? If what you're selling is something that didn't give you personal enjoyment (e.g. a bag of loo rolls) then you're far more likely to be trading.
Watch out though, if the item that gave you personal enjoyment is an expensive item (i.e. value over £6,000) like a picture, then there could be capital gains tax to pay on the sale.
4) Similar transactions to an existing trade.
If you have an online flower shop, and you sell a potted plant on eBay, the sale of the potted plant would count as part of your trade because your business sells similar goods.
5) Changes to the item.
Did you "repair, modify or improve" the item to make it sell more easily, or for a greater profit? If you did, that could point to trading.
6) How the sale was made.
Did you sell the item as a trading organisation would do, or did you sell it to raise some cash for an emergency? Selling on eBay through an eBay shop would be trading. Selling something through the classified columns of your local paper is less likely to be trading.
7) How the item was bought.
Did you have to borrow money in order to buy the item? Could you only repay that money back by selling it? If yes, you could be trading.
8) How quickly the item was sold.
Selling items very soon after they were bought could indicate a trade (e.g. buying wholesale stock to sell on a market stall). The longer you've kept the goods, the less likely you are to be trading - but that depends on the nature of the items. A trader selling antique furniture would keep his stock for longer than a greengrocer selling fresh fruit and veg.
9) How you acquired the item.
Did you inherit it or receive it as a gift? Selling items you've inherited, or been given, points away from trading.
That's what HMRC are looking for...
BUT what happens if you can see several badges in your situation, and some say you're trading and some say you're not?
You are a web designer. Your grandad bequeaths you his collection of vinyl LPs. You don't have a LP player so you decide to sell them. It's a large collection, so you sell a few at a time on eBay. Do you have to put the money you make from them on your tax return? Are you trading in LPs?
1) Are you selling them to make a profit? No, you're selling them because you don't have an LP player.
2) Are you selling the same sort of items repeatedly over time? Yes, you are.
3) Are you selling something that didn't give personal enjoyment? No, because they did give personal enjoyment to your grandad while he was alive.
4) Are you selling something that's similar to your own business? No, websites are not similar to LPs.
5) Did you repair, modify or improve the items before you sold them? No, you didn't (apart perhaps from dusting them, but that's cleaning, not repairing).
6) Did you sell the items as a trader might? Difficult one. Traders do use eBay but then so do people who aren't trading.
7) Did you have to borrow money to buy the item, that could only be repaid by selling it? No, you didn't.
8) Did you sell the item quickly? Difficult one again. Yes to some LPs and no to others. But for the collection as a whole, the answer would be No.
9) Did you buy the item? No, you inherited it from your grandad.
So are you trading in LPs?
I make that seven No's, one Yes and one "could be either".
On balance, my answer would be "No, you're not". Not necessarily because you've got more No's than Yes's, but because there are some really compelling No's - in particular, you're not selling the LPs to make a profit, they gave personal enjoyment to the person who gave them to you, and you inherited them, you didn't buy them.
So you're not trading in LPs. That means there's no income tax to pay on the sale of the LPs.
So because the issue of whether or not you're trading is such a grey area, and because there might be other taxes involved, I'd recommend you always take professional advice.
- Pre-election Finance Bill adds to MTD uncertainty
- How MTD will work for businesses with an accounting year that doesn't match the tax year
- Important news for contractors - changes to IR35
- New tax year: what has changed?
- New VAT flat rate scheme rate for certain businesses