HMRC - Meaning of trade

[dch2112011]

Internal business income manual - updated May 2024  

Interesting reading for those unsure of How HMRC class you as trading 

[*knight-rider*]

Personally, i don't get how difficult it is to understand, if your buying items, from anywhere, with the intention to resell at a profit, your trading. If you buy something that is faulty and fix it, then resell at a profit, your trading. If you buy something from a charity shop for £1 and resell it for a tenner, your trading. If you have 300 items in the loft that have been there 20 years and you sell them all, your not trading ....... Non of this is rocket science!

[magpiecorner1]

Well, it can certainly be confusing - there is also this paragraph that would contradict that assumption

'You should distinguish an intention to trade from an intention to seek a profit from a transaction. The latter is one of the badges of trade, but is not conclusive, in the absence of other factors, because the intended profit could be a capital profit on an investment'

Nothing in this manual that would stop stop someone from buying a car and selling it on, whether its been in the barn for 20 years or you bought it last week and just didn't  like the colour.  Nothing to stop you buying a decent classic car with the express intention of watching the market to sell it on if the market is rising - that would not only be considered capital profit on an investment, but would be exempt from capital gains tax.

If it has dawned upon anyone that the opportuniity to became a trader, either self employed small business owner or setting up a limited company, could actually be a very very good opportunity to REDUCE their tax bill, HMRC have a webinar at the moment CAPITAL ALLOWANCES FOR THE SELF EMPLOYED. 

[therenewalworkshopltd]

Whilst I agree, that there is some wiggle room there, ie. a single case of buying a car, doing it up and selling it on, could be dealt with as capital gains, doing it several times will very much put you within the remit of a business.

HMRC are not that bad at allowing for this kind of thing, but it's when you take the mick with it, that you will become a cropper.

However, at the end of the day, it is a fairly simple calculation.  If you buy something with the intention of selling it on, you are a trader!  One off, isn't so bad, but to continually do that kind of thing, then your not going to get away with it.  

The very first paragraph sums it up quite well.

"Although an isolated transaction can amount to a trade, the systematic repetition of a transaction is a pointer towards trading. Where sets of operations, each set not in itself constituting a trade, are carried out on occasions not widely separated in time, the series of operations may amount to the carrying on of a trade. You should consider not only the number of the transactions but also the frequency with which they are repeated. Thus ten transactions every year would, all else being equal, be more likely to amount to trading than say two transactions every year."

[dch2112011]

It takes some digesting but interesting and you are right if you can get your head around it - you may well save tax !

[magpiecorner1]

 Its not about wiggle room, its about the reason for the purchase. 

In a business, the business would be buying the item with the expectation that it can be sold quickly for a profit, for a private individual, the purchase would be - if not for the pleasure of owning the car - as an investment in the hope that the car would - at some time in the future - be worth more than was paid for it, therefore an investment, and taxable under CGT tax rules, not Income Tax rules.  And at the moment the market can move upwards in days or weeks, and at some time the market will go down.  Nothing to stop that private individual buying and selling as many cars as he pleases.   Just how much he has to spend. 

But - the business seller can utilise all his capital allowance, depreciation and all his costs against the sale - and if he makes a loss it is offset against his other profits, if he makes an overall annual loss, he can offset agains future profits and tax paid on other income.

If the private individual makes a loss, its an investment - investments go up and go down, and the risk is the individuals.

Exactly as investing in stocks and shares.  And we all buy stocks and shares with the express intention of reselling for a profit.  It is an investment, and comes under CGT.

[firstgardencity]

I completely agree but I know of a seller trading as a limited company with staff according to the listing who is shown as a private seller with "no refunds".    eBays response to my query was something like "Ai have decided there is no problem".

[therenewalworkshopltd]

I will refer you back to the article and the parts that I quoted.

There is wiggle room in the system, or whatever else you want to actually call it, simply because some things are done as an investment and others as trade.

At the end of the day however, if HMRC think that you are trading, it's up to you, to prove them wrong and not the other way around.

I think most people case see when something becomes a business, rather than an investment, in most situations.

It's like saying a private investor, who does nothing but trading stock and shares is an investor and not a business, when they have no job etc.

There is a calculation here that needs to be made as it's not so cut and dried.

[*knight-rider*]

What also comes into play when buying and selling something, is the time period between the two, so to use your classic car example, if you buy a car on the 1st jan and the market changes on the 1st of feb, so the car goes up £500 and you sell, thats trading. So the time period between buying and selling anything is also key here. If you buy a car and sell it, because you didn't like the colour, then you sell it to get your money back, but if you sell it knowing your making a profit, then there's no arguement.

So i have to say again, this isn't rocket science!

[dch2112011]

Here is an interesting thought, if an individual lists and sells personal items on behalf of a relative but not his spouse or offspring would they be classed as personal items or trading ?

HMRC state that they could be classed as trading because they are not personal items and may be sold for profit ?

Although I dearly wish that your thoughts of simplicity were true - in reality they are far more complex !

[papso22]

It would depend on what they did with the money and who owned the goods

The business activity is probably that of selling agent and the turnover would only be any commission.  They are providing a service, not selling goods they own.

[4_bathrooms]

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@dch2112011 wrote:

Here is an interesting thought, if an individual lists and sells personal items on behalf of a relative but not his spouse or offspring would they be classed as personal items or trading ?

HMRC state that they could be classed as trading because they are not personal items and may be sold for profit ?

Although I dearly wish that your thoughts of simplicity were true - in reality they are far more complex !

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It isn't just profit - the relative could have stated something like "You can keep 10% of whatever they sell for". This essentially makes the seller's cut a commission which could be deemed as taxable earnings.

[therenewalworkshopltd]

At the end of the day though, if it's just a one off, then it's not likely to be classed as trading.

HMRC requires you to register if you turnover more than £1000.

They won't care if your doing it for someone else or not.  If you are making a profit, then you are trading in most circumstances.

This really isn't rocket science here.  Common tells you if you are buying and selling for profit, or taking a commision when selling something for someone else.

There will always be loopholes/exceptions, but in the vast majority of cases, it's fairly straightforward.

[dch2112011]

Both posts b yourself and papso22  prove the point that it is not as simplistic as some think -  there are a lot of grey areas.

If I expand on this scenario in that a member puts up for sale his parents house contents while they were alive but in care and the member does not have power of attorney 

against a member in the same situation puts up their parents possesions but has power of attorney 

One could be classed as trading -  

A member would be paid in both situations 

[dch2112011]

HMRC publicly announce that if the personal possessions are  not yours or your spouses or your childrens but belong to another family member that they are not your personal possesions and therefore you could be classed as trading.

The 'one off' applies to personal possesions ? 

I repeat I wish it was as straight forward as you and others think but HMRC obviously do not - I hope for everyones sake that HMRC are wrong and you are right - but it's interesting how HMRC are assesing online trading from all angles - if only to have the answers ready should they ask 

[therenewalworkshopltd]

Like I said, there are always going to be loopholes etc.

But it really is as straightforward as it appears.

If your selling to make a profit, you ARE trading.

If it's a one off, even if it's a large value, then your not.  Though capital gains may well come into the equation.

The thing is, if your below the radar and don't peak your head above it, you will be fine.  As long as you are not doing a lot of trade.  Particularly so, if you keep below the £1000 limit.

So selling the odd thing for the neighbour, cousin and so on is really not a big deal.  It's a case of using common sense.

HMRC are really not that interested in the small fry.

What they are after, are those who are pretending to be private sellers, but are actually making additional/replacement income from what they are doing.

[magpiecorner1]

Certainly not rocket science, simply accounting!  And HMRC rules.

'interval of time between purchase and sale'  - you can't make assumptions based on only one of the badges alone - and HMRC can't either.  Your certainly can't determine that a timescale of one month determines it was an adventure in trade, because there is no specific timescale - you could sell something after 10 years or longer and it could be a trade!

 'If you buy a car and sell it, because you didn't like the colour, then you sell it to get your money back, but if you sell it knowing your making a profit, then there's no arguement'

There is never 'no argument'.  In fact the whole system is in place to allow argument, hence HMRC must always be able to make its argument in a court of law.  And they don't always win.

But the biggest argument you have inadvertently given for the NOT being a trade is 'and the market changes', because if he is selling because the market has changed, that is an excellent argument to determine it was an investment, as the whole point of investments is to wait for the market to change.  Because no one can foretell market changes.

[*knight-rider* · Accepted solution]

And with respect, this is why these discussions are a waste of time, because as i've pointed out in other threads, find 50 people who agree with something, there will be another 50 that don't!

Selling something 10 years after original purchase and considering that 'trade', in just ridiculous, because if your buying and selling to make a profit and/or a living, you don't keep it for 10 years and that's clearly not what HMRC are concerned about. The issue is people making 5 figure sums or more on here, not declaring that income and paying what they should be, falsely registered as 'private' sellers. 

The time is also important when it comes to trading, which is what they want to look at. Nobody can argue that if they go to a cash and carry, charity shop, car boot etc etc, buy an item one day, then the next day put it on Ebay for doubld the price, that that isn't trading.

With reference as well to your selling something after 10 years being looked at as trading, you could argue that i buy a house next week for 250k, then 10 years later it's worth 500k, i've traded, where's the difference 🙂

The main point of this hmrc thing is to weed out people making a living out of buying and selling, earning five or six figures a year, not people making a couple of quid here and there and within the allowance.

People are panickng too much about this, because there's a big difference between selling 1000 items you only bought last week and 1000 items that have been in someone's attic for 30 years and no doubt, hmrc know the difference 🙂

[dch2112011]

HMRC  are simply trying to recover tax from anyone trading above the threshold and who is earning above the personal allowance.

The purpose of this discussion is simply to highlight how HMRC look to establish whether an individual is trading or not. 

No one disputes that anyone selling personal items should not be subject to investigation but what is relevant is HMRC's basis for  deciding whether an individual is a trader or not.

HMRC  if an individual meets the basic number and value of sales is a potential trader - this trigger will  be filtered based on other triggers  - without just quoting the publication linked - it contains the triggers which makes interesting reading.

The one thing to bear in mind is if an individual meets  enough trigger criteria to be investigated the onus is on the individual to prove that they are not trading - not on HMRC to prove they are -

Therefore for anyone who is likely to exceed the threshold in any 12 month period who is not submitting returns  may want to make themselves aware of what the HMRC triggers are  - the saying is forewarned is forearmed 

Many members vehemently believe that they are selling personal posessions  but they may meet some of the criteria for trading - it will depend on how many trigger points they meet as to whether it will affect them or not.

The vast majority of members will carry on unaffected but a significant number will be affected  - I believe HMRC have estimated a one billion pound recovery from this initiative - which is no small amount.

[dch2112011]

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@*knight-rider* wrote:

With reference as well to your selling something after 10 years being looked at as trading, you could argue that i buy a house next week for 250k, then 10 years later it's worth 500k, i've traded, where's the difference 🙂

It would depend on the circumstances,

if you died and it was part of your estate - the house value would form part of the calculation for inheritance tax.

If it was a second home the difference between buy and sell prices would be subject to capital gains tax when sold

If it was a buy to let property - the rent would be subject to income tax and the difference between buy and sell price would be subject to capital gains tax 

If it was used  partly as a business property you would be subject to capital gains tax 

If your main home curtilage is greater than 5000m2 you will be subject to capital gains tax

If it was your main home but you own more than one home  you may pay capital gains tax

If you have not lived in the property for the whole time you have owned it you may be subject to capital gains tax 

If you bought it to make a gain you will pay capital gains tax

However if it is your main home and non of the above apply - you get private residence relief  and pay no tax

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