The hidden economy becoming less hidden
The so-called hidden economy is becoming less hidden as HM Revenue & Customs (HMRC) is increasingly monitoring online activity with a view to identifying individuals who may be evading tax when selling items on the internet.
While selling unwanted Christmas presents or other personal items is not a business activity and should not result in a tax liability, it could still attract the attention of HMRC. User activity is being monitored from websites such as eBay and AirBnb.
It is understood that HMRC will be seeking to identify a pattern in an individual’s activities. If for example, there is a pattern of buying and selling online, which may be on different websites, or regularly selling online items that may have been purchased offline, for example at car boot sales, it may be difficult to persuade HMRC that tax is not due. HMRC can argue that whether an activity is a business activity is decided on the facts rather than whether an individual considers it to be a business activity. An important point is that HMRC is usually more interested in the income rather than the costs. If an individual has not kept a record of their costs they could lose out on the tax relief they would otherwise have been entitled to.
As well as looking for individuals who may be failing to pay income tax on profit from online, HMRC is also interested in VAT evasion. Even if the income from online sales is less than the VAT registration threshold, HMRC could raise a VAT assessment if the individual has other business income. Important points about the VAT registration threshold (£83,000 from 1 April 2016) is that it applies at an income level rather than at a profit level and there is only one threshold for each person, regardless of the number and variety of business activities they carry on.
If, for example, an individual carries on a sole trader hairdressing business with income of £80,000 it would not take much in the way of income from online trading to result in an obligation to register for VAT. The VAT registration would affect all of the individual’s business income and if the VAT registration threshold was exceeded in previous years when the threshold was lower the assessment could be significant. If a sole trader is already registered for VAT in relation to another business activity HMRC will be able to use that VAT registration to issue an assessment in relation to their online business income.
In summary, if you are selling anything online or offline you could be contacted by HMRC. Before making the sale you should consider if what you are selling is an unwanted gift or an unwanted item that you originally bought for your own or your family’s use, otherwise it could be difficult to persuade HMRC that the activity is not a business activity. If HMRC can identify that the activity is a business activity and income tax and/or VAT has not been paid on time, the assessments, penalties and interest charges could be significant.
For more advice on this topic, please contact our VAT team at firstname.lastname@example.org – 01904 464 100. Or fill out our contact form below: