eBay pops up on Revenue radar

Online traders eyeing eBay for quick cash over the Christmas period should click carefully as the Inland Revenue gears up for its seasonal scrutiny of the internet auction site.

Experts at Chiltern, the tax advisors, warn that many loft clearers may not realise that their so-called ‘hobby’ is actually deemed a ‘trade’, and that potentially there will be tax, interest and penalties to pay.

According to the firm, the festive season entices ebay sellers to stock up on gadgets like iPods and Playstations, prompting the Revenue to scrutinise the number of ‘feedbacks’ a user has to determine which individuals are ‘traders,’ and therefore “ripe for investigation.”

Andrew Watt, its director of tax investigations, said: “Once these and other traders have been identified by Her Majesty’s Revenue & Customs there is likely to be a sudden surge of investigations.”

Angela Brooks Wong, director of Tax Relief UK, recommends that anyone selling on eBay should keep careful records of their costs so that their profits “can be accurately gauged” if the Revenue comes calling.

“Everyone trading through eBay should consider carefully whether their transactions constitute a small-scale hobby or a proper business,” Ms Wong told Freelance UK.

“The Revenue will know how much you sell and at which prices from tracking your activities on ebay and will target those with the highest number of transactions, or the highest value transactions - or both.”

HMRC refused to comment on how ‘feedbacks’ would indicate whether a trader was ‘ripe for investigation,’ but conceded it would be alert to “any kind of [tax] risk.”

“The Revenue looks at the entire UK trader population and taxpaying population, and in there, we will identify certain ongoing risks,” a Revenue spokesman said.

“If we identify any kind of risk, be it associated with the particular time of year, or type of trader, then we will obviously carry out compliance checks as far as possible.”

Yet the Revenue rejected claims it was specifically clamping down on eBay, citing the scrutiny of the auctioneer as “part of our normal compliance management.” It also dismissed reports the scrutiny was unprecedented.

“Just because a firm of accountants says we are specifically clamping down is simply not the case - a clampdown implies we are only doing this just now, and no, this is not the first year we have scrutinised eBay.”

Instead, the Revenue urged all internet traders to be aware of their tax obligations, spelt under the same rules that govern high street shop owners and market stall traders.

In a statement, HMRC said: “Self-Assessment as it clearly states means the taxpayer is legally obliged to declare any gains beyond the individual capital gains tax threshold (£8500 for 2005/2006) and all taxable business profits. If an individual or business is making taxable supplies over £60,000, they must also be registered for VAT.”

One former tax inspector supported the Revenue’s claim that contrary to media reports, targeting eBay to catch people dodging their tax payments did not represent a sudden clampdown.

“This targeting exercise is not new – it’s just that eBay is a new market place,” said Kate Cottrell, senior partner at IR35 specialists, Bauer & Cottrell.

“Local town markets have always been targeted by many Government departments including Trading Standards. Local newspapers are scrutinised for apparent “traders”, auctions are monitored and no doubt, there will have been some sort of exercise focused on car boot fairs.”

Ms Cottrell told Freelance UK that these types of sellers are being lured to eBay because the auction site is a comparatively cheap way to trade.

“You do not have to rent a stall and overheads are minimal. I fully expect to see a large increase in interest [for these types of traders] from all Government departments.

“The onus is always on the taxpayer to prove that they are not operating a trade as opposed to the Revenue proving that they are trading,” she said.

“The Revenue can simply raise an estimated assessment that the taxpayer would have to disprove. For the majority, it’s a case of look out all you traders.”

Concerned eBay sellers should heed advice from top chartered accountant, SJD Accountancy, which told CUK “there is no fixed monetary cut off” to determine whether an individual’s eBay sales are taxable.

“The eBay element makes no difference to the tax treatment,” SJD said in e-mailed statement.

“Instead, the question is one of ‘income’ (trading) or capital. Trading generates income, which must be taxed at the taxpayers’ highest rate of tax. Capital items can also be taxable, however each individual has an annual exemption for capital gains of £8,500 per tax year. Gains of less than £8,500 in total for the year will therefore not attract tax.”

The firm added that the question of ‘income or capital’ is a simple one for advisors, and potentially Revenue staff, to answer.

“One off, large items purchased as an investment and ultimately sold are capital,” said David Wilsdon, technical director . “On the other hand, buying in bulk and selling the individual items as quickly as possible on a regular basis is trading income.”

Mr Wilsdon believes reports that loft clearances might be taxable are tantamount to “scare mongering”, but said claims suggesting what people once thought was a hobby is in fact a trade, “are completely correct.”

Like their offline counterparts, market place traders on eBay fall under the taxman’s shadow, he said, but detecting them is made easy by the auctioneer’s feedback section.

“The problem for sellers on eBay is that Revenue officers can sit and check thousands of eBay users far more quickly than trawling around playing fields across the country.

“Overall, the Revenue must be finding searching out eBay users a good use of their time,” Wilsdon said.

SJD added that when accountants are in doubt over their client’s potential tax liability, a nine-point “badges of trade” test is carried out, with two or more ‘yes’ answers pointing to a liability.

The test effectively separates the traders from the one-time seller or ‘loft clearers,’ by considering a range of factors like whether there was a profit-selling motive; a series of repeat transactions; where the goods were obtained, how the product is sold (beyond an eBay ad is trade) and the time between transactions.

“Clearly any report declaring ‘loft clearers beware’ is wrong,” Wilsdon told FUK. “However, if you gain more than £8,500 by selling old items then you must pay capital gains tax on the excess.

“Now, if my neighbour regularly fills his loft with items bought on eBay or car boot sales, and then sells them the following week, he will be trading. In fact, he could be the first ‘loft clearance trader’ I’ve come across in fifteen years of advising small to medium-sized businesses!”

Meanwhile, a spokesman for HM Revenue and Customs said :“The same tax rules apply to internet trading as to any other form of trading and our compliance approach remains the same.

“Our enquiries cover all areas and it would not be correct to identify one as requiring more attention than any other,” he said.


6th September 2005

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