HMRC have recently announced they will be focusing a new disclosure opportunity at people who use e-marketplaces such as eBay to buy and sell goods as a trade or business but fail to declare the income earned. This announcement will no doubt leave thousands of people in the UK wondering if in fact they have an obligation to disclose to HMRC income from selling goods on the internet.
First things first, how do you determine whether you are trading or carrying on a business? ‘Trade’ is defined in UK statute as including ‘any venture in the nature of trade’ with no further guidance given. Obviously, this is not very useful and gives little clarity on the subject!
As a result, a number of ‘badges of trade’, have developed from UK case law, which provide useful indicators of situations where HMRC can be expected to suggest that a trade is being carried on. There are nine badges, which we will discuss in a little more detail here. It must be stressed the badges of trade can only be relied upon for guidance and are not a definitive checklist. It is always neccessary to consider the whole picture and facts of a particular case.
Let us put this into context with two case studies and consider them alongside the nine badges of trade.
Mr Smith regularly uses an online auction site to sell items such as unwanted computer games and IT equipment. This keeps him busy when he is not at work and, on average, he sells 5 items a week generating an annual income of around £5,000. The income generated is used to buy new computer software for his personal use.
Mr Jones also uses an online auction site but sells computer hardware he buys from other online auction sellers, which he has refurbished. On average he sells 5 items a week and generating an annual income of around £10,000. The income generated is used to buy new stock to refurbish and sell.
| ‘BADGE’ |
Broad definition |
Mr Smith |
Mr Jones |
| 1.Profit seeking |
An intention to make |
Yes |
Yes |
| 2.The number of |
Systematic and |
Yes |
Yes |
| 3.The nature of the |
Does the asset need |
No |
Yes |
| 4.Existence of |
Transactions that |
No |
No |
| 5.Changes to the |
Was the asset |
No |
Yes |
| 6.The way the sale |
Were the goods sold |
Yes |
Yes |
| 7.The source of finance |
Was money borrowed |
No |
No |
| 8.Interval of time |
Assets that are the |
No |
Yes |
| 9.Method of acquisition |
Was the item |
Yes |
Yes |
Based on the facts available, it appears that Mr Smith is not carrying on a trade, despite potentially meeting the criteria for 4 of the ‘badges’. In Mr Smith’s case, despite the volume of transactions and profits being earned it is quite clear he is selling personal assets originally acquired to give some personal enjoyment and is very unlikely he is making a true ‘profit’ over and above the original cost of those items. This shows that you cannot rely on the badges in isolation; a common sense approach is always required to consider the bigger picture.
In Mr Jones’ case it would appear he meets at least seven of the badge. It is fair to conclude he is buying and selling items with a sole purpose of making a profit and is therefore carrying on a trade and needs to declare her income and profits to HMRC.
If on reflection you feel you do have a trading business, our team of advisers can assist you in bringing your affairs up to date. Alternatively, if you would like some guidance on whether or not you are trading please contact us.
The HMRC disclosure amnesty is expected to begin in Spring 2012. However, people who are in doubt about their status should take action now to bring their affairs up to date and should not wait for the amnesty as this may have additional penalty implications.
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