OVER the past few years, HM Revenue & Customs has been cracking down on those who have not disclosed all of their income and capital gains and have as a result underpaid tax.
Their attention now is on individuals who use the internet, car boot sales or classified advertisements to sell goods or their services.
HMRC has stated that those who are just selling some of their personal belongings such as unwanted books, CDs, toys or household items would not be regarded as carrying on a trade.
Consequently, the sums received from such sales would not be liable to income tax and as long as the proceeds from the sale of each item or collection of items did not exceed £6,000 there will be no Capital Gains Tax implications either.
So, when does this kind of activity amount to a trade?
Over the years, many tests have been established to help determine whether a trade exists.
Commonly, a trade would exist where an individual undertakes their activity with the intention of making a profit, where goods are either bought or made and then sold on a regular basis.
For instance, where an individual who makes greetings cards and occasionally sells them to work colleagues and friends for an amount to cover cost and sometimes at a loss, their activity would normally be treated as a hobby rather than a trade.
But if sales were made on a regular basis for profit and the money was used to buy further supplies for re-sale, a trade is being undertaken.
In such circumstances an individual would be treated as self-employed and any profits made would then be liable to income tax and national insurance contributions.
If the turnover from this activity in a 12-month period was sufficiently high, then the individual may also need to register for VAT. The current VAT registration annual threshold is £73,000.
From the date trading starts, you have three months to notify HMRC that you are trading and for income tax and CGT purposes, you have until October 5 following the end of the tax year to tell HMRC that you are liable to tax. For a trade starting in 2010/11, the deadline is October 5, 2011.
Failure to notify HMRC can lead to financial penalties being imposed.
Those whose tax returns have understated their profits from such trades may also face penalties for inaccuracies in returns.
Penalties are linked to the behaviour which gave rise to the failure to notify or tax irregularity.
For careless errors, the maximum penalty will be 30% of the tax unpaid after the due date rising to 70% for deliberate errors but not concealed.
Errors which are both deliberate and concealed face a maximum penalty of 100% of tax unpaid.
Penalties can be reduced if a person makes an unprompted disclosure to HMRC and co-operates in the course of the disclosure process.
No penalty will be charged if a person has a reasonable excuse.