Do I Need to Register for Self Assessment?

With the self assessment registration date today, we are issuing a warning to those active in the sharing economy: you may need to register for self assessment.

Last year, close to one million people failed to file their tax return on time, leading to automatic £100 fines from HMRC. Some of those people were unaware they even had to file one — possibly like you are now.

In this blog, we’ll look more closely at the sharing economy and why people are being caught out in a taxation grey area.

 

What Is the Sharing Economy?

Investopedia defines the sharing economy as:

…an economic model in which individuals are able to borrow or rent assets owned by someone else. The sharing economy model is most likely to be used when the price of a particular asset is high and the asset is not fully utilized all the time.

The model has boomed in recent years, spawning a legion of pioneering companies that link members of the public with potential customers.

Now, any homeowner can rent out a spare bedroom on Airbnb, any motorist can rent their car on Turo and any cyclists can rent their bicycles on Spinlister.

To give you an idea of just how popular sharing economy companies are, consider this. In the London alone there are 40,000 available properties. Across the UK as a whole, there are tens of thousands more.

However, while many think of sharing economy services as a little money on the side, HMRC begs to differ. Many people earning money on sites like Airbnb will in fact have to pay tax on their income.

 

Do I need to Register for Self Assessment?

In short, probably.

If you rent property on websites like Airbnb or rent out other assets on similar sites, we urge you to check whether you need to fill in a self assessment.

To find out if you need to register, check whether you meet HMRC’s Badges of Trade criteria below. If you meet them, you will have to pay tax on your income.

 

HMRC Badges of Trade

HMRC has published a list of nine Badges of Trade that they use to determine whether an individual is trading. HMRC tends to evaluate organisations using the whole picture and consider each individual Badge as part of the whole.

The Badges are:

Personal Allowance

Profit

If your goal is to make money by selling goods for more than you spent on them, that is a strong indication you are trading. However, this Badge is not considered conclusive on its own.

Capital Gains Tax

Transactions

HMRC looks for “systematic and repeated” transactions, which could indicate that an organisation is trading.

Nature of Assets

Nature of Assets

This badge is more difficult to explain. Basically, if you buy something that gives enjoyment to you or someone else, that’s fine. However, if you buy something that’ll only make you happy once it’s sold, that’s less fine.

Similar Trades

Similar Trades

If you’re selling something that is closely related to your existing trade, HMRC treats this sale as part of your existing trade. If you owned a bakery and sell bread on eBay, that is part of your existing trade.

Wear and Tear

Changes to Assets

If you’re modifying, repairing or improving assets to make them more saleable, this is an indication that you’re trading.

Higher Rate Threshold

Selling Methodology

Was the sale made in a way that is typical of a trading business? For example, sales on Amazon are almost always carried out by traders.

Basic State Pension

Finance Source

How did you afford to buy the asset? If you had to borrow money and could only repay that loan by selling the asset, this is an indication that you’re trading.

Timeframe

Timeframe

How long was it before you sold the asset after buying it? As a general rule, the quicker you sell the item, the more likely it is that you are trading.

Tax Duty

Asset Ownership

How did you come to own the asset? If you inherited an asset or had it gifted to you, it is unlikely you are trading.

 

What Do I Do Next?

While there is no one badge will tip you over the edge, the point is to consider your answers as a whole. Do your answers, as a whole, indicate that you are trading?

If you believe you are trading, it is essential you register with HMRC as soon as possible.

And if you are unsure whether you count as trading, please contact our team today.