The Revenue has sent 14,000 letters to traders suspected of running a business and failing to declare this on their tax returns.
Of these, 1,000 letters are being sent to people where the taxman has already identified a shortfall on their self-assessment forms.
Some of those targeted make as little as £100 profit online.
It was reported in the Telegraph that eBay, Etsy, Amazon and Gumtree are being forced to hand over customer account details, including their selling activity, as part of the taxman’s legal powers that were extended last year.
The criteria used to assess if an activity is a hobby or a business are:
- The size and commerciality of the activity.
- The frequency of the activity and transactions
- The application of business principles.
- Whether there is a genuine profit motive.
- The amount of time devoted to the activities.
- The existence of arm’s-length customers (as opposed to just selling your wares to family and friends).
HMRC have some great examples to help you decided, for example
Gail is a full-time employee working for a stationery company. She pays her PAYE tax on this employment every month.
In her free time Gail makes cushions and uses most of them in her home. Occasionally she sells them to friends and work colleagues for an amount that just covers the cost of materials of £15. Sometimes she makes a loss. Any money she does make goes towards her holiday fund.
She decides to make extra cash by selling cushions on an Internet auction site and starts auctioning three or four to see how they go. They all sell for more than £50, a profit of at least £35 each.
She uses this money to buy more materials and within a month she is selling around ten cushions a week, always at a profit, and is considering setting up her own website.
Gail’s initial sales of cushions to friends are not classed as trading. It lacks commerciality and she does not set out to make a profit. The occasional sales are a by-product of her hobby. Once she begins to auction her cushions, she has moved into the realms of commerciality.
She is systematically selling her goods to make a profit. She will need to inform HMRC about her trade, and keep records of all her transactions. On the level of sales shown in the example the potential turnover of around £26,000 is well below the VAT annual threshold so Gail does not need to register for VAT.
Many traders start off in a small way and don’t realise that they need to register with HMRC, they assume their activity will be treated as a hobby, but things can grow quickly.
You should register as Self Employed as soon as your hobby becomes a commercial venture, even if you are losing money!
If you don’t register, HMRC will be looking for you and if you have an online business it won’t be hard for them to find you.