From this month, online retailers are allowed to earn only £1,000 annually without being taxed.
HMRC is targeting businesses like these, which have mushroomed in number in recent years using web platforms such as Amazon, eBay and Gumtree.
Many of them are run from home by entrepreneurial types in their spare time as a way of generating a second income.
Often the traders are unaware that they have to pay tax on their trading, or believe their earnings are too small.
Often traders are unaware that they have to pay tax on their trading, or believe their earnings are too small.
Accountancy firm Moore Stephens has analysed recent fines and says that HMRC is getting tougher.
The average fine imposed on online traders is now 59% of the tax owed but in several instances traders have been fined 70% of the unpaid tax. That compares to a more usual fine of between 35% and 50% of tax owed.
Moore Stephens’ analysis is backed up by the tax investigations specialist Forths. It says: “It could be the case that many online traders perceive their earnings to be low enough to avoid HMRC’s attention.
“This is not true, and now HMRC is taking a tough approach with online traders in a bid to recover unpaid tax.
“HMRC is targeting both individuals and small businesses that trade goods online and it suspects have undeclared tax from the sales.”
“HMRC is targeting both individuals and small businesses that trade goods online and it suspects have undeclared tax from the sales.“
There are other pitfalls for online retailers.
One specifically affects those selling digital products or services to consumers (but not businesses) in other EU countries. They are required to charge and collect VAT even if their turnover is below the UK VAT threshold.
Worse still, the rate of VAT they must charge is the rate that applies in buyer’s country. This is a measure introduced to stop the likes of Amazon routing all their digital sales through Luxembourg, which has the lowest VAT rates in the EU, but it affects every online digital trader, however small.
Ironically, the way for small traders to avoid this VAT liability is to sell through online platforms such as Amazon. They are then, in law, selling to Amazon (a B2B transaction) not directly to consumers.
So ironically, the regulations are driving more business to Amazon, the very people they were supposed to be targeting.
How to work out if you are an online trader
Do you regularly sell goods and services online?
Do you buy products to re-sell online and make a profit?
Have you registered as a shop with an online auction site?
Do you sell the same type of items/products?
Have you borrowed money for the goods you’re selling?
Do you make items and sell them for more than they cost to make?
Do you change the things you’re selling to make more profit?
If you answered ‘yes’ to any of the questions above, then you should be registered with HMRC to pay tax.
Online traders can find out more by clicking here.