As an online trader who sells on online marketplaces, you may be familiar with the differences between eBay and Amazon – eBay is better suited for individuals and sole traders, and Amazon is a platform oriented towards third-party sellers and small businesses. That said, this is not the only difference between these two, as there is another major difference you may not be aware of: the fact that eBay has a £1,000 tax-free allowance which sellers can use if they choose to.
If you are a seller on eBay, this allowance can be highly beneficial – however, if not used correctly, it can lead to paying more tax than you need to.
What is the £1,000 tax-free allowance?
The £1,000 tax-free allowance came into play on eBay in April 2017. If you are not familiar with this regulation, it is highly recommended you read on as this read may save you a great deal of unnecessarily paid tax.
Once registered on eBay, the individual seller receives a £1,000 tax-free allowance. This allowance translates to a tax saving, namely any sales below £1,000 are tax-free and do not need to be declared to HMRC in a tax return. People however who are not familiar with this allowance and are new to eBay’s tax process could end up paying high tax rates by earning just £1 more than the allowance.
How does it affect me?
Take this as an example of how you might end up paying more tax than you need:
- Imagine you had a turnover of £1,000 from selling books on eBay and the books cost you £100, your profit would be £900. There would be no need to declare this to HMRC with the amount being under £1,000
- However, if your turnover was £1,001, you would have to inform HMRC of this on your tax return
- HMRC would then deduct the costs spent on the books (£100) and charge tax on the profit, and so tax would be charged on £901 instead of £1. A basic-rate (20%) taxpayer would then have to pay £180.20 in tax
How can I avoid paying this unnecessary tax?
You can prevent the above depicted scenario of having to pay 20% on your total profit, if you communicate with HMRC. With their registration on eBay, individuals need to inform HMRC that they plan on using the £1,000 allowance, and then HMRC, being aware of this, will only make sellers pay tax on the amount that is over the allowance. In the above case the difference would be to pay 20% tax on either £1 or on £901. So this call to HMRC is well worth our while. When a seller informs them, this is known as ‘making an election’ – or electing to use the allowance.
Have any more questions?
If you want more advice on tax compliance and selling on eBay, please do not hesitate to give us a call on 0161 637 1080 or send us a message via social media, and we will be happy to help.
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