Do you have an online business you could owe tax on?

Do you owe tax?

If you rented out your property through Airbnb, made money through your blog, sold handmade or second-hand goods on sites such as eBay or Facebook in the 2016/17 tax year, you could be hit with a £100 fine if you fail to declare your earnings.

Consumers who take part in the ‘sharing’ or ‘gig economy’ – where you earn cash on the side – are reminded they may need to submit a self-assessment tax return by 31 January 2018 or risk a £100 fine.

People who run an established business may be used to filing an annual tax return, but those who rent out properties via sites such as Airbnb, or who regularly use eBay and Gumtree to sell goods, may not know whether the extra money pocketed is taxable.

With estimates suggesting the average Airbnb host makes at least £3,000 per year, there’s good reason to check whether you need to declare your earnings.

Ed Molyneux, CEO and co-founder of FreeAgent, an online accounting service, said: “With the rise of the sharing economy and the increase in the number people making regular sales on sites like eBay and Gumtree – as well as renting out property on Airbnb – many people are making money outside their usual work. Therefore, HMRC looks at a range of factors to determine whether a person is ‘trading’ or not and whether they need to pay tax on that income.”

Are you trading?

HMRC expects you to file a self-assessment tax return if you’re:

  • a self-employed sole trader
  • a partner in a business partnership
  • a company director (unless the company is a non-profit organisation and you don’t get any pay or benefits, like travel expenses or a company car)

Emily Coltman, chief accountant and chartered accountant at FreeAgent said it’s the first bullet point where people slip up as they may not realise or understand whether they are actually “trading”.

“If you only sell items occasionally through eBay or via the classified ads in your local paper, for example, then HMRC doesn’t class this as trading, which means you wouldn’t have to pay any tax on the money you receive from what you sell using these methods,” she said.

“However, if you sold goods more frequently than this in the 2016/17 tax year, it will probably count as trading. This means you will need to file a self-assessment tax return by 31 January and pay income tax and class 4 National Insurance on the profits you’ve made. As a self-employed trader you would also have to pay class 2 National Insurance.”

HMRC’s badges of trade

HMRC has a list of nine ‘badges of trade’ that helps it determine whether someone is trading.

The badges of trade are:

  • Aim to make a profit: if you’re aiming to make a profit, this is a strong indication you could be trading – but it’s not conclusive on its own
  • Number of transactions: HMRC is looking for “systematic and repeated” transactions, which could indicate a trade
  • Nature of what you’re selling: if you’re selling something that gave you or someone else personal enjoyment then that’s a pointer away from trade. If you’re selling something that is only likely to make you happy once it’s converted to cash, then that’s a sign of trading
  • Existence of a similar trade: f what you’re selling closely relates to a trade you already have, this sale will be treated as part of the existing trade. A pot plant sold on eBay by an established florist, for example, would be treated as part of the florist’s existing trade
  • Changes to the item: – if you’ve repaired, modified or improved the item to make it more saleable for profit, this could point to trading. For example, if you bought an old car, repaired and kitted it out to sell, this could be an indicator
  • 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? eBay, for example, can be used for either, while Amazon tends to be used by traders
  • Where the money came from to buy the item: if you had to borrow money to buy the asset, and you could only repay that money by selling the item, then this could point to trading.
  • How much time passed between buying and selling the item: the quicker you sold the item after buying it, the more likely you are to be trading
  • How you acquired the item: if you inherited the item or if it was a gift, then selling it is unlikely to mean you’re trading. For example, if your grandma left you her autographed collection of LPs in her will, and you sold them, then that wouldn’t count as a trade.

Coltman said“The crucial point 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. If you’re unsure, you may wish to ask a professional accountant to check for you – and if you discover you are, in fact, trading, make sure you register with HMRC as soon as possible.”

The deadline to register for self-assessment passed – it was 5 October – but as long as you submit your tax return by 31 January, you won’t need to pay the £100 penalty. Last year, 840,000 people failed to submit their tax return before the deadline.

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