SELLING ONLINE? DON'T FORGET THE TAXMAN

Do you sell on Ebay or another online auction site? Are you running a small internet-based business?

If the answer to either of these questions is ‘yes’ – have you thought about the taxman? You may owe income tax, National Insurance, VAT and/or other taxes or duties.

This article focuses on the tax issues raised by selling online – but many of the points also apply to other sorts of selling, from market stalls and car boot sales to traditional shops and stores.

Just a one-off?

You normally don’t have to worry about tax if you sell unwanted Christmas presents, your old clothes or the family car.  These are the sort of one-off transactions which don’t attract tax or VAT.

But some one-off sales are taxable. For instance, if you bought 100 T-shirts when a local shopkeeper closed down, and then sold them online in a single deal, this would be ‘trading’ – and bring you into the tax net even though you had made only one sale.

Are you trading?

The key question for income tax is whether you are ‘trading’. If you are trading you will be self-employed and must register with HMRC.

Although there are always borderline cases, you are likely to be trading if:

• You make and sell goods – jam from hedgerow blackberries, curries cooked in your kitchen, jumpers knitted while watching TV: if you are advertising these online and selling them, you are likely to be trading.
• You repair broken things, such as books, watches, bicycles, electronic equipment or model railways – and sell the refurbished items online.
• You buy goods from someone else and resell them. For example, if you purchase cheap jewellery, repackage it and mark up the prices, this is trading; if you import trinkets from Thailand and sell them online, this is a trade – and because the goods have come from the Far East, it is a trade with customs duty and possibly VAT implications.

Capital gains tax

Even if you are not trading, an online sale may mean you have to pay capital gains tax (‘CGT’). This might apply if, for instance, you sold a picture or an antique through an online auction site.

There are lots of exemptions and reliefs in CGT, but you should check out the rules if you are unsure of your position. HMRC give some guidance at http://www.hmrc.gov.uk/cgt/intro/basics.htm.

VAT

If your supplies are more than £73,000 a year, you must register for VAT.  Note that this is £73,000 of sales, not profit, see the example below.

You may also need to register for VAT if you think your turnover will soon reach £73,000: check the HMRC guidance at http://www.hmrc.gov.uk/vat/forms-rates/rates/rates-thresholds.htm#2

If you are using the Internet to sell goods overseas, the rules are much more complicated.  For example, if you sell to a customer in the EU who isn’t VAT registered, and you are responsible for delivery of the goods, you may have to register for VAT in your customer’s country. HMRC provide help on their website, see for example their guidance on cross-border issues at www.hmrc.gov.uk/vat/managing/international/exports/goods.htm.

Better safe than sorry

Remember, the taxman has computers too, and regularly checks online sellers. If you hadn’t realised you were trading, were above the VAT threshold, or liable for CGT, you could end up with a nasty penalty on top of the tax.

See, for example, the results of this prosecution.

Anne Redston

Anne is a visiting professor at King’s College, London and a barrister at Temple Tax Chambers