Taxman targeting eBay sellers - what you need to do

In the latest in its series of industry-specific crackdowns, HMRC has announced that it intends to pursue individuals and organisations who are trading on eBay, but who have not paid enough tax.

The number of individuals making a living on eBay has risen steadily over recent years, and many turned to the marketplace during the recession – either as a way to make some extra cash, or as their main source of income.

The Revenue believes that some traders are underpaying their tax – or are not paying it at all. They have therefore begun a campaign to recover some of that money. As with previous such campaigns, it consists of a short-term amnesty, followed by a concerted crackdown on those who fail to come forward.

How do they intend to catch people?

This is the scary part. In addition to its conventional techniques, HMRC has said that it will use a new ‘web robot’ that is designed to identify inconsistencies between an individual’s stated financial situation and their lifestyle. The new software will gather data from a huge range of sources and compile that information into individual profiles. HMRC hopes it will be able to use this information to identify people who are living in a way that suggests they are not declaring all of their income.

Regardless of what you think about the ethical or privacy-related concerns that this software raises, it looks like HMRC are set to start using it – and those who are trading on eBay without paying enough tax are first in the taxman’s sights.

Do I need to worry?

HMRC has already made clear that it does not intend to target those who sell the odd item on eBay. If you are using the marketplace to get rid of a couple of unwanted books or your old sofa, it is very unlikely that you need to worry.

Instead, the taxman is targeting those who use eBay as a business activity. There are two main tax liabilities that might arise here. To begin with, depending on whether or not you have incorporated a company, you will be liable for either Corporation Tax or income tax on your profits. If you have not incorporated, you will normally have to complete an annual Self Assessment tax return.

But it is VAT that HMRC seems particularly concerned about – and it is VAT on which they are focusing in this latest crackdown. The taxman is targeting those traders whose profits exceed the VAT registration threshold, but who are not registered – and are therefore not paying enough tax.

What should I do?

The VAT registration threshold is currently set at £73,000. If your sales exceed that threshold, or if you think that your sales for the last 12 months will exceed it within the next 30 days, you are legally obliged to register.

In the latest in its series of amnesties, HMRC is encouraging those who should already have registered to come forward. Those who do so will have to pay a 10 per cent penalty – but once that is settled, the matter will be considered closed.

Those who fail to take advantage of the amnesty, however, risk prosecution. HMRC has said that it will aggressively pursue those who it suspects of having underpaid their tax – as is evidenced by the vigour with which it has begun tackling underpaying plumbers who failed to take advantage of the Plumbers Tax Safe Plan.

In either case, you should seek independent financial advice before approaching HMRC – particularly if you are unsure whether or not you have underpaid.