Tax implications for selling online – An unwelcome surprise for some

It is fair to say that “online marketplaces” such as eBay, Elance and Gumtree have seen very significant growth in the last few years. Most people buy and sell items for personal use, while other well-established businesses use them as just another route to sell their products.

People who use online marketplaces to sell goods for a profit, are running a business. Recent reports suggest that there could be as many as 8 million people in the UK who are running their own businesses online!

While such an industry in the face of austerity is heartening, it is also particularly interesting to HM Revenue & Customs, who will look to charge tax on any profits made from selling online.

Tax “Traps” for Online Businesses

It is important to recognise that merely selling items that were acquired for private use is NOT taxable, even on the odd occasion when a profit is made – essentially there has to be a commercial motive behind the buying and selling for there to be a taxable activity. If you sell on a commercial basis you should be aware:

  • Any profits will usually be taxed at the highest rate applicable to your earnings
  • People selling services, such as tuition or website development, will ALWAYS be treated as trading for profit
  • This may be treated as a self-employed activity, meaning:
    • Class 2 National Insurance Contributions (currently about £3 per week) are automatically due at any level of profit, although it is sometimes possible to claim the “Small Earnings Exception”
    • Class 4 National Insurance Contributions at 9% are also charged if and when profits are sufficiently high. (Currently, profits over £7,755 will be caught)
  • VAT may be due in some cases. While the turnover threshold for VAT is currently £79,000, (remember, this is a sales threshold, not just profits), self-employed people in particular need to be aware that business profits from all sources are aggregated for VAT purposes:
    • If you’re self-employed and already trading above the VAT threshold then VAT will probably also be due on your online sales – even if your businesses are otherwise completely separate
    • If your main business is trading just below the VAT threshold and your side-line takes you over the threshold in aggregate, you may then have to charge VAT on everything
    • It can become more complicated when buying from, or selling to, outside the UK
  • Selling online may also affect entitlement to state benefits.

 

Since HM Revenue & Customs launched a targeted campaign last year, it has written to over 30,000 people who they think may be running an online business, and has plans to contact more people in the coming months.  Remember it is YOUR responsibility to work out if you have to account for tax, National Insurance or VAT, and there can be substantial penalties for failing to do so.

At Leonherman, we have a great deal of experience in helping small businesses with their tax affairs – including helping them to make sure that they claim all the reliefs and deductions to which they are entitled.

If you want to discuss how your business will be affected more specifically, please contact our Tax team on
0161 249 5040 or lees@leonherman.co.uk