Selling items on online platforms like eBay is a convenient way to move some of those old belongings and unwanted gifts that are cluttering your space.
But when does selling on eBay become a taxable trade?
You need to get this right, because failing to report your sales and pay your tax can get you into legal trouble.
Do I have to report my eBay sales to HMRC?
The answer to this question depends on the nature of your eBay sales.
Selling a few personal items, unwanted gifts or inherited items on an ad hoc basis? HMRC probably won’t pry into that activity.
But buying items and reselling them on eBay to make a profit? You’ll probably have to report your sales to HMRC, given how you’re effectively engaged in a trade.
There are nine badges of trade that HMRC uses to determine whether economic activity constitutes a taxable trade that must be reported or a personal transaction, the profit-seeking motive being one of the top ones.
Actions that give away a profit-seeking motive are also included as badges of trade. For instance, modifying or improving an item or purchasing something with borrowed money before selling it will result in a tax charge from HMRC.
If your transactions are repetitive and systematic, your sales will also be classed as a taxable trade, while selling products in the same way as a regular business will classify your sales as business trades.
That’s just a flavour of the badges of trade – there’s a lot more that goes into whether or not you have to pay tax, so make sure you read through all the badges of trade to know if you need to report your sales to HMRC.
A basic rule of thumb, though, is that if you’re making over £1,000 from eBay sales, you need to inform HMRC about them.
How to report your eBay sales to HMRC
You can inform HMRC about your sales by completing a self-assessment form, where you’ll include details about your income from your online sales, and the expenses you incur.
The income you include is the gross selling price that an item is sold for, which eBay will have deducted their selling fees from.
You might think you would technically report the net figure of your sales, including the selling fees, but you should in fact report those fees as an expense.
The income you report will be subject to income tax, either at 20%, 40% or 45%, depending on your tax bracket.
You can either send a paper self-assessment form or file your tax return online after registering, which you can do here. These days, the majority of self-assessment returns are sent online – and with new reporting rules set to apply to many businesses from 2023 under Making Tax Digital, it’s worth getting used to digital filing sooner rather than later.
HMRC must receive your tax return and any money you owe by the deadline. For the 2020/21 tax year, the deadlines are as follows:
- register for self-assessment: 5 October 2021
- paper tax returns: midnight 31 October 2021
- online tax returns: midnight 31 January 2022
- pay the tax you owe: midnight 31 January 2022.
Expenses for running an eBay business
As we mentioned earlier, you should include your eBay selling fees as a business expense in your self-assessment return – that’s because the fees were unavoidable for your business operations.
This means you can deduct those costs from your taxable profit, saving you money in the long run.
PayPal fees, postage, courier costs and stationary supplies including packaging and parcel tape are some of the other common expenses eBay sellers can claim for.
You can also claim for motor expenses if you deliver goods yourself or for when you drive to the post office to drop off a package. To do that, you can either claim for simplified expenses or work out the proportion of time you use your vehicle for work.
Similarly, you can use the same two methods to deduct the costs of using your home as an office.
The principle of dual-purpose expenses – expenses that are incurred for more than one reason, including business – extends to other things like printing costs and phone bills.
You must keep records of your expenses to prove you are entitled to deduct them from your profits, though, but doing so could save you hundreds if not thousands of pounds over time.
Get in touch with us for assistance with your self-assessment and business expenses.