Should eBay sellers and Airbnb hosts pay tax?
Many Brits like to make some extra income by selling items on eBay or renting out a room on Airbnb, but many are unsure whether they have to pay tax on these earnings.
Now, cloud accountancy software company FreeAgent has warned these online sellers and room sharers that they could face a £100 fine if they don’t submit a tax return and risk further penalties for any outstanding tax.
HMRC is getting more sophisticated at tracking these kinds of online transactions and, as always, ignorance is not an excuse that washes with the taxman.
Ed Molyneux, CEO and co-founder of FreeAgent, suggests that it can be confusing knowing whether or not you need to pay tax.
He said: “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 outside 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.”
For business owners, the rules are fairly straight forward. They know they need to pay tax on what they earn through that business.
But if you are selling on eBay or renting out a room on a site like Airbnb, the rules can be blurry.
There are, however, some clear tax breaks that you may be able to take advantage of.
From April this year, all ‘micro-entrepreneurs’ will benefit from the introduction of a £1,000 trading allowance and £1,000 property income allowance. This means Airbnb hosts, eBay sellers and a whole range of people running small online businesses or ‘side hustles’ can earn up to £1,000 without paying tax on those activities or submitting a tax return.
Anything that is earned over this threshold will be taxed as normal income, but only under certain circumstances.
Rent a room relief for Airbnb hosts
If you rent a furnished room in your main or only residence then you can claim ‘rent a room relief’ and not pay tax on gross rents of less than £7,500 per year. This applies to Airbnb hosts who rent a room in their home, but not those who rent an entire home on the website.
If you earn less than £7,500 from this kind of arrangement, you don’t need to submit a self-assessments tax return.
Research shows that the average Airbnb host earns around £3,000 per year from renting out a room. This means that few of them will pay any tax at all.
At present, this rule applies to short-term rents and long term rents, which means that Airbnb hosts can take advantage of it. But the government has launched a consultation on the rules and could withdraw the relief on short-term holiday lets.
HMRC’s badges of trade
On eBay and other online selling sites you can earn more than £1,000 without paying tax if, in HMRC’s eyes, you are not deemed to be ‘trading.’
Someone who sells the odd pair of shoes when they have finished with them wouldn’t be considered a ‘trader’ in the same way that someone who regularly purchases goods to sell on would be considered one.
To help distinguish traders from non-traders and people who are not liable to pay tax from someone who is liable, HMRC have nine ‘badges of trade’.
You would not have to meet all of these badges to be considered a trader, but HMRC would take a balanced view based on these areas.
The nine badges are as follows:
Aim to make a profit
If someone was trying to make a profit above everything else (instead of say, trying to clean out an old wardrobe) then this would be a strong indication that they were trading.
Number of transactions
HMRC would look at whether transactions are systematic and repeated.
Nature of what you’re selling
If you are selling brand new boxed goods then you are more likely to be trading than if you sold old bric-a-brac.
If online sales were connected to another business you run (possibly offline), then you would be expected to pay tax on it.
Changes to the item
If you have repaired or modified items to add value to them before a sale then this would be a good indicator that you are a trader.
How you made the sale
Was it sold in a business-like way, for example in a large eBay shop, or just a one off item sold to raise some cash.
Where did the money come from to buy the item
If you borrowed money to buy an item and sold it at a profit to repay the debt then this would point towards trading.
How much time passed between buying and selling the item
Was it a fast turnaround or did the item clutter up your attic for ten years before you sold it on?
How you acquired the item
Items that were inherited or gifted are unlikely to point towards trading.
Speak to a member of our team if you are still unsure whether you would be considered a trader. Be quick though, you need to make sure you register and file a self-assessment before the end of January 2018. Email firstname.lastname@example.org or visit www.cloudaccountant.co.uk