Could selling on eBay land you in prison?

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Experts are warning of stiff penalties if you earn money online without paying tax on your profits after an eBay trader was sentenced to two years in prison.

John Woolfenden, 52, evaded payment of taxes of nearly £300,000 on CDs, DVDs and games he sold through his online business, Globalworldentertainments. He was caught in a crackdown on online tax evasion by HM Revenue & Customs (HMRC) inspectors and jailed last week.

The number of people at risk of a similar breach of the law is on the rise as the popularity of selling on eBay has skyrocketed. Since it launched in the UK 15 years ago Britons have sold items worth £65 billion, about 200,000 small businesses use it to sell their products and just over 19 million Britons visit the site each month – more than a third of the adult population.

Arslan Khan, fraud prosecutor at the Crown Prosecution Service, says: “Those who choose to stay under the radar, operating in a cashless economy but leaving behind a paper trail of transactions, may be in for an unpleasant surprise. When some law-abiding taxpayers are suffering real hardship, the need to demonstrate that we will deter, detect and prosecute those who evade tax is greater than ever.”

HMRC has stepped up its pursuit of tax evaders and last year brought 915 prosecutions resulting in 716 convictions – more than double the number recorded four years ago, according to the accountancy company Baker Tilly. Mike Down, head of tax investigations, says: “It looks as if the Revenue are getting tough on online traders and the outcome of this case very clearly highlights the dangers of failing to declare the correct income.”

Woolfenden sold more than 500,000 items over six years, but even if you have a far smaller operation you may have to pay tax if you regularly make a profit on sites such as eBay, Airbnb or Etsy. It is the responsibility of private sellers to disclose their earnings and pay the correct amounts of tax, not the websites.

So could you be breaking the rules? The answer depends largely on how often you sell, how the items came into your possession and whether you are considered to be “trading”. This includes selling goods you have bought for resale, making items and selling them at a profit and providing a service for which you receive payment. HMRC uses a number of criteria, or “badges of trade”, that determine whether sales count as trading.

If you are found to be trading you may have to pay income tax, national insurance and VAT, and the tax authorities will treat you as self-employed.

However, those selling the odd unwanted item are unlikely to need to pay tax, according to HMRC. You are only considered to be trading if the goods are purchased with the intention of selling for capital gain. If you sell old DVDs occasionally the taxman will not be interested, but if you trade regularly with the intention of making a profit you will need to register and pay tax.

Patrick O’Brien of HMRC says: “It would be extremely unlikely that anyone selling their old property on the internet or at a car boot sale would be seen as running a business – they would not therefore need to register with us.

“Internet trading may be a relatively recent development but the same tax rules apply as to any other form and our approach to ensuring the right tax is paid remains the same irrespective of the trading environment. There is no new approach or special rules for internet traders – consequently you can happily sell personal possessions online without notifying HMRC.”

The only other tax to consider when selling online is capital gains, which would kick in were you fortunate enough to make a profit exceeding the current allowance of £11,000 whether you’re a trader or not.

When it comes to property rental websites such as Airbnb if you make a modest profit you don’t have to pay tax. You can earn up to £4,250 without being liable for income tax under the rent-a-room scheme, as long as the property is furnished and it’s your only or main home. This tax relief is applied automatically for those earning less than the threshold but if you exceed it you need to complete a tax return and opt-in to get the allowance.