Insights

The level of power wielded by HMRC to obtain information from third parties has increased very significantly in recent years. Banks, estate agents, insurance providers, Facebook, Airbnb and online marketplaces like Vinted, Depop, Etsy and eBay are all obliged to provide transactional data to HMRC if requested. It is a key method used by them to identify cases of tax fraud.

A 2016 case highlights that this method to recoup lost tax is actively being used, with one business trader using eBay being caught out. This particular taxpayer, a single director limited company (Adspec Limited), was importing electronic tablets and accessories from China and re-selling them online in the UK - via eBay, Amazon and its own e-commerce site. The case highlights that it’s not necessarily the ‘big boys’ that are of interest to HMRC; smaller traders are just as likely to be caught out.

Adspec was declaring tax, filing annual accounts and corporation tax returns, but when the company’s activities were analysed by HMRC, the amounts declared did not match reality; Adspec’s import figures did not tally with the turnover reported on its VAT and corporation tax returns. Using data obtained from a company eBay account, it was clear a large number of sales were not being declared, and HMRC was able to calculate the likely actual revenues, together with the VAT and corporation tax underpaid.

HMRC was interested in recouping unpaid tax from undeclared sales and imports for the accounting periods ended 3 March 2014 to 31 March 2015 and VAT quarters 4 March 2013 to 31 December 2015.  It estimated the tax outstanding was £316,053 and with associated penalties of £193,585. HMRC also issued Personal Liability Notices (PLNs) for the penalties to the sole company director.

The crux of the case, which went to a Tax Tribunal, was that:

• Trading receipts and profits had been deliberately omitted for corporation tax purposes for the periods in question, and this intent to defraud validated HMRC’s penalty demands;
• Undeclared sales for VAT purposes had been made during the periods in question; and
• Adspec should have registered and accounted for VAT from 4 March 2013, rather than 1 January 2014.

There was also a question about whether the director was personally liable for the company’s penalties via the PLNs.

The Tribunal found that withholding information in this case was a deliberate act to minimise the amount of tax payable.

HMRC also questioned whether the director had additional bank accounts and whether the record keeping was otherwise accurate; the company had produced very little supporting information when requested, which made viable counter arguments against the charges very difficult.

Ultimately, due to the lack of additional information about business transactions and the clear discrepancies between actual and declared transactions, HMRC won the case. Adspec was liable for unpaid taxes and penalties.

Many people sell via eBay and other marketplaces as a ‘side hustle’. For anyone who makes revenues of £1,000 or less, there are two special tax allowances – the trading allowance and property allowance. Both of these tax allowances allow up to £1,000 of trading or property income to be earned per taxpayer each financial tax year, without paying any income tax. There is also no need to declare the income on a self-assessment tax return if the amounts are less than £1,000.

For everyone else, if you are using online marketplaces to sell goods or services, be aware that financial data is shared with HMRC as this case highlights. If you would like tax advice for your business, contact us via partners@rjp.co.uk.