Are you wearing the badges of trade?

If you’re occasionally selling items on eBay, HMRC might consider that you’re trading and expect you to pay some tax on the profits of your sales - and fine you if you don’t!

So we thought we'd take a look at the “badges of trade” that HMRC look for when they’re identifying whether or not an individual is carrying on a trade. 

Why is this important?

Income tax and class 4 National Insurance must be paid to HMRC on the profits of a trade, and also self-employed traders have to pay class 2 National Insurance.

If you’re not trading - but are just selling items occasionally through eBay or via the classified ads in your local paper - then you wouldn’t have to pay any tax on the money you receive from your sales.

But when would you be considered to be officially “trading”?

HMRC have a list of nine “badges of trade” that they’ll look for to determine whether or not an individual is trading. They will look at the whole picture and consider each badge as part of the whole.

The badges of trade are:

1. Aim to make a profit

If you’re aiming to make more selling the goods than you spent buying them, this is a strong indication that you could be trading, but it’s not conclusive on its own.

2. Number of transactions

HMRC are looking for “systematic and repeated” transactions, which could indicate a trade.

3. Nature of what you’re selling

If you’re selling something that in itself gave personal enjoyment, either to you or to someone else, then that’s a pointer away from trade. If you’re selling something that’ll only make you happy when it’s converted to cash, then you could be trading.

4. Do you already have another similar trade

If what you’re selling closely relates to a trade you already have, this sale will be treated as part of the trade.

5. Changes to the item

If you’ve repaired, modified or improved to make the item more easily saleable or saleable for a greater profit, this could point to trading.

6. How you made the sale

Did you make the sale to raise cash for an emergency, or in a way that’s typical of a trading business?

7. Where the money came from to buy the item

If you had to borrow money to buy the asset, which you could only repay by selling it, then this could point to trading.

8. How long went by between you buying and selling the item

The quicker you sold the item after buying it, the more likely you are to be trading.

9. How you acquired the item

If you inherited the item, or if it was a personal gift, then selling it is unlikely to mean you’re trading.

Examples

Let’s look at some real-life examples.

Laura, web designer

Laura is a self-employed web designer. Her youngest child has just started school. She decides to sell all the clothes her children have grown out of through eBay, over a period of several weeks. Is she trading?

  • She does want to make some cash but not as much as she spent buying the clothes initially.
  • There are quite a lot of transactions.
  • She’s selling clothes that did give personal enjoyment to her children.
  • Her existing trade is not similar to what she’s doing now.
  • She hasn’t changed the items except to wash them.
  • Selling through eBay can be used by traders but also by non-trading individuals.
  • Laura didn’t have to borrow money to buy the clothes which could only be repaid by selling them.
  • She’s selling the clothes years after buying them - a long time.
  • She bought some of the clothes and others would have been given to her by grandparents, godparents, friends, etc.

On balance of all the badges, Laura is not trading in children’s clothes and does not have to register with HMRC.

Elizabeth, saleswoman

Elizabeth is a cosmetics saleswoman. She receives a lot of samples from potential suppliers, not all of which she can either use or sell to her customers, so she sells these on eBay. Is she trading?

  • She did not pay for the goods so any money she makes on selling them is a profit.
  • She makes sales regularly.
  • The samples didn’t give her personal enjoyment because she didn’t use them herself.
  • Elizabeth is a cosmetics saleswoman so her existing trade is similar to selling the samples.
  • She doesn’t adapt the samples before selling them.
  • Selling through eBay can be used by traders but also by non-trading individuals.
  • Elizabeth didn’t have to borrow money to buy the samples which could only be repaid by selling them.
  • She’s selling the samples soon after receiving them.
  • Although the samples were gifts, they were given in the course of business, not personally.

On balance of all the badges, Elizabeth is trading in samples and should register with HMRC as a sole trader.

The crucial point here is whether on balance the badges point to whether or not you are trading, not whether more of them suggest you are trading than suggest you are not. You need to look at the whole picture.

Make sure you consider all the badges and think holistically about what you’re doing, to see if you are trading or not - and if you are, make sure you register with HMRC!

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