Are you obliged to pay tax as an eBay seller?

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The issue of tax isn’t something that fills any business person with joy, but its importance cannot be stressed enough. The HMRC is the last organisation you want to tangle with. However, with so many people selling online using sites like AirB&B, eBay, Esty and even Facebook, many people are in the dark when it comes to whether they should be paying tax on their earnings.

eBay trader jailed last week after failing to pay tax

This important issue was highlighted last week when it came to light that an eBay seller had failed to pay tax on over 500,000 items he’d sold on eBay through his online business Globalworldentertainments. His business sold games and DVDs. This kind of practice is very much frowned upon by Her Majesty’s Revenue and Customs (HMRC) and the business owner received a two year jail sentence for failing to pay his taxes.

Clear cut cases vs. grey areas

Now, this particular eBay seller was clearly operating a business and should have been paying taxes. So, that’s clear cut, but in other cases the waters have been a little muddier.

However, financial advisors and accountants are warning all people who trade online to exercise caution and to make sure they understand what their obligations are regarding their tax circumstances.

Advice from an expert

Geraint Jones, principal at taxation consultancy BKL Tax, has some advice on how you can gauge whether or not you should be paying tax. He advised that there is a ‘tipping point’ and this is generally determined by the frequency at which you sell items and how they were acquired.

For example, eBay is a great way to get rid of your unwanted personal items on an ad hoc basis, be it an old lawnmower or that dress that has sat at the back of your wardrobe for the past year and has never seen the light of day. Geraint Jones’ advice is that you wouldn’t usually be expected to pay income tax in this kind of scenario.

However, once you start to sell items on a repetitive basis, or you are buying items to sell at a profit, or modifying them to sell at a profit, you then enter the world of trade. So, at that stage, you are expected to pay tax on your earnings.

According to Mr Jones, you can test yourself to see if you qualify as a ‘trader’ with the ‘nine badges of trade’, which can also be found on the HMRC website here. This will help you determine whether you need to declare your income.

The ‘nine badges’ of trade:

If you follow the link to the HMRC website’s guide to the nine badges of trade, it’s pretty clear cut, but we have broken it down into plain no-nonsense English for you!

  1. Are you seeking to make a profit?

Well, if you intend to make a profit, this suggests and supports trading, but is not conclusive by itself.

  1. How many transactions are you making?

Repeated and systematic transactions do support trade.

  1. What is the nature of the goods you are selling?

This is a little trickier. Is the asset of a type or amount that would only become an advantage by selling it? Did the goods yield an income or provide ‘pride of possession’ or enjoyment through ownership?

  1. Existing trading transactions or interests

Was this a one off sale, or is it part of a pattern of repeated sales which would suggest trading?

  1. Were the goods changed in any way?

Did you improve, repair or modify the item/items to make them more saleable or to enable you to sell them at a higher price in order to increase your profits?

  1. How was the sale carried out?

Was the item sold to raise cash for an emergency situation, or was it sold in a way that would be typical of trading organisations?

  1. What was the source of the finance?

Did you borrow money to purchase your items, and have you used profits to repay that loan?

  1. The duration of time between the purchase and sale

The HMRC advises that assets (your items) that are being traded are usually bought and then sold on quickly.

  1. By what method were the goods acquired?

Assets that are acquired as gifts or through an inheritance are less likely to be the subject of trade.

So, we hope that you have taken a look at the HMRC website’s guide to the nine badges of trade to make sure you’re in the clear. However, if you are still in doubt, eBay has plenty of resources for sellers including guides on tax and registering as a business.