Airbnb or eBay user? The £100 fine that could dent your profits
Consumers who take part in the ‘sharing economy’ and earn cash on the side are being reminded to submit a self-assessment tax return or risk a £100 fine.
While people who run an established business may be accustomed to filing an annual tax return, those who rent out properties via sites such as Airbnb, or who regularly use eBay and Gumtree, may not know whether the extra money they make is taxable.
“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,” said Ed Molyneux, CEO and co-founder of FreeAgent, an online accounting service.
You need to register for self-assessment before you can submit a tax return. If you fail to register, and then pay your self-assessment bill late (after 31 January 2017 for online submissions), you will face an automatic £100 fine from HMRC.
Last year, 870,000 people failed to submit their tax return before the 31 January 2016 deadline.
With changes in regulation about how much you can earn tax free when it comes to ‘trading’, here’s what you need to know.
Do I need to submit a tax return?
HMRC expects you to file a self-assessment tax return if you are one of the following:
- You are self-employed or 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)
- You are a minister of religion or a Lloyd’s underwriter#
- Your annual income is £100,000 or more
- You have income from letting any property or land you own
- You receive other untaxed income, or significant capital gains, and the tax due on it cannot be collected through a PAYE tax code
- You need to claim expenses or reliefs
- You or your partner receive Child Benefit and your income is over £50,000
- You receive annual income from a trust or settlement, or any income from the estate of a deceased person, and further tax is due on that income
- You have taxable foreign income, even if you are claiming that you are not normally resident in the UK
- You are a trustee
When it comes to property, the rules are clearer on how much you can earn each tax year, such as through renting out your spare room. Under the government’s Rent a Room scheme, you can earn up to £7,500 per year tax-free from letting out furnished accommodation in your home (half if you share the income with a partner).
FreeAgent said many people slip up because they do 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, then HMRC doesn’t class this as trading, so you wouldn’t have to pay any tax on the money you receive.
But if you’re a more regular seller, it is likely HMRC will view this activity as trading so you’d need to file a self-assessment tax return by 31 January 2017 and pay income tax and class 4 National Insurance on the profits you made.
However, there are no set definitions on what HMRC deems to be a ‘regular’ seller and FreeAgent said this is a largely “grey area”. As a self-employed trader you would also have to pay class 2 National Insurance.
HMRC uses a ‘badges of trade’ scheme to work out if you’re trading, such as whether you aim to make a profit, the number of transactions you make, the nature of what you’re selling, whether you’ve repaired or altered an existing item, how you made the sale, how you acquired the item (inheritance or personal gift) and where the money came to help you buy the item.
‘Avoid any nasty surprises from the taxman’
Molyneux said it’s vital to check whether the money you 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,” he said.