So Where do Most People Fit In – When are They Exposed to Tax?
The easiest answer to this question is to step back and ask yourself “Have I made a profit?”
If you bought a book or a CD some time ago for personal enjoyment and you are now selling it second hand, then it is extremely unlikely that you will be able to sell it for more than you paid for it in the first place; most people will not make a profit when they sell used items.
Of course, you may have received that book or CD (or Christmas jumper) by way of a gift so actually you paid nothing for it; in most cases you are nevertheless deemed to have acquired the item for the market value which prevailed at the time of the gift, so again, a return in excess of that original value – a profit – is unlikely.
Having said that, things like paintings or memorabilia may well have appreciated in value since they were acquired, and there could be a net profit or gain on the sale – and this could be taxable – see later.
Profit Motive and Other Factors
So far, we have assumed that the items being sold were acquired (or inherited, etc.) for personal use or enjoyment, with no thought of subsequent re-sale at the time. However, some people move on from selling unwanted bric-à-brac, to buying items specifically to sell them online for a profit.
Understandably, HMRC looks at this in the same way as buying and selling items generally: where there is a profit motive then they will usually consider this a business trading activity, and want to tax any profit as if it arose from a normal trade. Other factors which HMRC frequently consider when trying to determine if there’s a taxable trading activity include:
• Buying items ‘in bulk’ – i.e., clearly more than one person/family might need or use privately;
• Buying items and then selling them on quickly - this indicates that there was no intention to make use of them yourself;
• The goods themselves – a classic tax case involved a few tons of toilet rolls where, one presumes, there was no risk of their being used personally!
• Volume of transactions – if people spend all day buying and selling things online, HMRC may assume they are trying to make a living out of it.
Does ‘Taxable’ Actually Mean Tax is Due?
Not necessarily – although it might still need to be disclosed to HMRC.
Where an item sold has been used personally beforehand, it probably falls under the Capital Gains Tax regime: the vast majority of online items are tangible movable property (you can touch it and send it to the lucky winner).
This may mean that they are eligible for the ‘chattels exemption’ which applies to anything sold for £6,000 or less. Even where that doesn’t apply, individuals enjoy an annual Capital Gains Tax exemption, so that profits or gains (up to £10,600 in aggregate for the current tax year) can also be ignored.
Even where there’s a taxable trading activity, don’t forget that there’s the personal Income Tax allowance (£7,475 for most individuals in 2011/12) so people who aren’t working, etc., can still make a trading profit without a tax bill – although they should consider implications for benefits or Tax Credits.
HMRC is using special software to look at online auction websites and people who use them, to target people who are potentially trading. Millions of people buy and sell online and there are bound to be some who have fallen into the ‘taxable activity’ category without realising it. HMRC will have a campaign involving an ‘amnesty’ of sorts – keep any eye out for that when it becomes public later this tax year.
Some people use ‘bartering’ websites, where favours are ‘traded’ – e.g., gardening in return for French lessons. These are also potentially taxable, even if money doesn’t actually change hands.
Finally, HMRC is also looking at people trading at or just above the VAT registration threshold (currently £73,000). If self-employed traders are also dabbling in online auctions ‘on the side’, they need to be very careful about the possible VAT implications, as VAT could be due on both activities.
By Lee Sharpe