Many digital platforms and online marketplaces in the UK, such as eBay, typically consider a seller to be a trader if they list items frequently or in bulk, or if the individual is perceived as selling items with the intent to generate profit in running a business. Being classified as a trader leads to additional fees not applied to private sellers. In addition, if 30 or more sales transactions are completed or total sales exceed approximately £1,707 after fees, eBay and other similar platforms are obliged to report such transactions and certain other information to HMRC as trading. HMRC will therefore expect such income to be declared on a self-assessment tax return. Such platforms will notify the seller that the information has been shared with HMRC.

Trading or not

The £1,707 threshold does not mean that gross earnings below this amount need not be declared as legislation requires declaration above the trading allowance of £1,000. The trading allowance allows taxpayers to earn up to £1,000 in gross trading income or what HMRC terms as ‘casual services’ (which would include selling on eBay or such activities as carers, gardening, etc.) per tax year without having to pay tax or declare to HMRC.

Differentiate – business or hobby

Many would say that such a limit would equate to being a hobby, but HMRC does not rely on any monetary test to determine trading, instead looking at the overall nature of the activity. The difficulty lies in the fact that many activities sit somewhere in between. 

HMRC often refers to a set of indicators known as the ‘badges of trade’ when deciding whether an activity constitutes a business. These are not strict rules but guiding principles.

HMRC guidance (in the Business Income Manual at BIM20205) lists the badges as follows:

1. profit-seeking motive;
2. the number of transactions;
3. the nature of the asset;
4. existence of similar trading transactions or interests;
5. changes to the asset;
6. the way the sale was carried out;
7. the source of finance;
8. interval of time between purchase and sale; and
9. method of acquisition.

One key badge is the first ‘badge’ – whether there is the intention to make a profit. If an individual is seeking to make a profit, adjusting prices, marketing their goods or services, or expanding operations, this points strongly towards a business. Consistent losses over time, especially without a credible plan to become profitable, may suggest a hobby instead.

Another significant ‘badge’ is the frequency and regularity of transactions. A one-off or occasional sale is less likely to be considered a business, although legislation does include ‘any venture in the nature of trade’ which allows for the possibility of isolated or speculative transactions being ‘trading’. The quantity of the purchased item can also indicate a trade. The oft-cited tax case under this heading is Rutledge v CIR [1929] 14 TC 490, where the transaction involved the purchase and sale of one million rolls of toilet paper.

The nature of the asset or service is also relevant. Some items are more likely to be traded for profit (e.g. a consignment of mobile phones or the purchase of materials) with the intention of turning those items into products for sale. Items such as furniture, electronics or personal vehicles, whilst having a value, are primarily used for personal enjoyment rather than trading for profit.

The time lag between purchase and sale may be important in establishing whether there is a trade. A short period of ownership suggests trading, whereas an asset held for some time or owned for a time personally before selling is in a stronger position to argue that the asset was purchased as an investment rather than a trading activity.

Practical point

Whether a sale is undertaken for profit or enjoyment, clear records of purchases, holding periods and the intended use of items could help justify the classification of the sale as a trade or hobby to HMRC.

Partner note:

BIM20200 – Meaning of trade: badges of trade

Government news – information for online sellers

Guidance check if you need to tell hmrc about your income from online platforms