Self Assessment ignorance could land sharing economy users in hot water with the taxman, say accountancy pros
Renting out property on Airbnb or selling second-hand goods on sites such as eBay and Gumtree could land people in hot water with the taxman, unless they check whether they need to register for Self Assessment.
That’s the message from Edinburgh-based accountancy software provider FreeAgent, which is warning that many people across the UK could be risking being fined by HMRC by not realising they should be paying income tax on money they earn “on the side”.
With the 31st January deadline for registering Self Assessment tomorrow, FreeAgent is urging anyone who rents property on websites like Airbnb or regularly sells items in online second-hand marketplaces to check whether they meet HMRC’s “badges of trade” and, therefore, need to pay tax on this income.
If so, they will need to register for Self Assessment as soon as possible, and then file their tax return before the tomorrow’s deadline for submissions – or else receive a £100 fine from HMRC, and risk further penalties for not paying the tax they owe. During the last Self Assessment season, 870,000 people failed to submit their tax return before the January 31st 2016 deadline; leading to automatic £100 fines from HMRC.
Ed Molyneux, CEO and co-founder of FreeAgent, said: “Self Assessment can be an incredibly stressful time for small business owners, so it’s important to get on top of your tax early. That means registering with HMRC, calculating how much tax you need to pay and then filing your tax return in plenty of time to avoid incurring penalties.
“However, it’s important to remember that it’s not just people who run their own established business who need to submit a tax return. With the rise of the sharing economy and the increase in the number people making regular sales on sites like eBay and Gumtree – as well as renting out property on Airbnb – many people are making money outwith their usual work. Therefore, HMRC looks at a range of factors to determine whether a person is ‘trading’ or not and whether they need to pay tax on that income.
“Many people in the UK may be currently unaware that they actually have to file a Self Assessment tax return, so it’s vital that everyone checks whether the money they make is taxable income or not. By reviewing any ‘on the side’ cash you accumulate against HMRC’s badges of trade, you’ll be able to tell whether you need to register for Self Assessment and file a tax return – and avoid any nasty surprises from the taxman in the future.”
How to check whether you need to register for Self Assessment and file a tax return
Emily Coltman, chief accountant and chartered accountant at FreeAgent provides the following advice to check whether you need to register for Self Assessment and file a tax return.
Are you trading?
HMRC expects you to file a Self Assessment tax return if you are one of the following:
a self-employed sole trader
a partner in a business partnership
a company director (unless the company is a non-profit organisation and you don’t get any pay or benefits, like travel expenses or a company car)
It’s the first of these cases where some people slip up, as they may not realise or understand whether they are actually “trading”. If you only sell items occasionally through eBay or via the classified ads in your local paper, for example, then HMRC doesn’t class this as trading, which means you wouldn’t have to pay any tax on the money you receive from what you sell using these methods.
However, if you sold goods more frequently than this in the 2015/16 tax year, it will probably count as trading. This means you will need to file a Self Assessment tax return by 31st January 2017 and pay income tax and class 4 National Insurance on the profits you’ve made. As a self-employed trader you would also have to pay class 2 National Insurance.
Badges of trade
HMRC has produced a list of nine “badges of trade” that they look for to determine whether or not an individual is trading. HMRC will look at the whole picture and consider each badge as part of the whole.
The badges of trade are:
Aim to make a profit – if you’re aiming to make more money by selling the goods than you spent on buying them, this is a strong indication that you could be trading – but it’s not conclusive on its own.
Number of transactions – HMRC is looking for “systematic and repeated” transactions, which could indicate a trade.
Nature of what you’re selling – if you’re selling something that in itself gave personal enjoyment either to you or to someone else (e.g. a relative’s model railway collection), then that’s a pointer away from trade. If you’re selling something that is only likely to make you happy once it’s converted to cash (e.g. a set of dishcloths), then you could be trading.
Existence of a similar trade – if what you’re selling closely relates to a trade you already have, this sale will be treated as part of the existing trade. A pot plant sold on eBay by an established florist, for example, would be treated as part of the florist’s existing trade.
Changes to the item – if you’ve repaired, modified or improved the item to make it either more easily saleable or saleable for a greater profit, this could point to trading. For example, if you bought a beat-up old car, fitted it with a new engine and a new chassis, and sold it as refurbished.
How you made the sale – did you make the sale to raise cash for an emergency, or in a way that’s typical of a trading business? eBay, for example, can be used for either, while Amazon tends to be used by traders.
Where the money came from to buy the item – if you had to borrow money to buy the asset, and you could only repay that money by selling the item, then this could point to trading.
How much time passed between buying and selling the item – the quicker you sold the item after buying it, the more likely you are to be trading.
How you acquired the item – if you inherited the item or if it was a personal gift, then selling it is unlikely to mean you’re trading. For example, if your grandma left you her autographed collection of LPs in her will, and you sold them, then that wouldn’t count as a trade.
The crucial point is whether, on balance, the badges point to whether or not you are trading – not whether more of them suggest you are trading than suggest you are not. You need to look at the whole picture.
Make sure you consider all the badges and think holistically about what you’re doing, to see if you are trading or not. If you’re unsure, you may wish to ask a professional accountant to check for you – and if you discover you are, in fact, trading, you’ll make sure you register with HMRC as soon as possible!