Examples

The following examples will help you work out if you are trading and liable for VAT or whether you have to declare a capital gain.

Example 1

Gail is a full-time employee working for a stationery company. She pays her PAYE tax on this employment every month.

In her free time Gail makes cushions and uses most of them in her home. Occasionally she sells them to friends and work colleagues for an amount that just covers the cost of materials of £15. Sometimes she makes a loss. Any money she does make goes towards her holiday fund.

She decides to make extra cash by selling cushions on an Internet auction site and starts auctioning three or four to see how they go. They all sell for more than £50, a profit of at least £35 each.

She uses this money to buy more materials and within a month she is selling around ten cushions a week, always at a profit, and is considering setting up her own website.

Gail’s initial sales of cushions to friends are not classed as trading. It lacks commerciality and she does not set out to make a profit. The occasional sales are a by-product of her hobby. Once she begins to auction her cushions, she has moved into the realms of commerciality.

She is systematically selling her goods to make a profit. She will need to inform HMRC about her trade, and keep records of all her transactions. On the level of sales shown in the example the potential turnover of around £26,000 is well below the VAT annual threshold so Gail does not need to register for VAT.

Top

Example 2

Ravi stays at home looking after his twin 18 month old daughters whilst his wife works full-time.
During a spring-clean, he finds his old collection of cricket magazines and Wisden books, and decides to get rid of them as they are taking up space.

He advertises all the items for sale in the classified section of a magazine and sells them for £80. Encouraged by this he has a rummage in his garage and finds a number of other items he can auction. In the next month, he sells five items for a total of £120. Later in the year, he sells his old car for £300. Over the next 12 months, Ravi sells another ten personal items in this way, for a total of £140.

Ravi is not trading. There is nothing commercial about this. His original purchases were for personal use and he is selling items that he has owned for some time. None of his personal items were individually worth more than £6,000 when sold. These are exempt from CGT as ‘chattels’.

Top

Example 3

Carmen is training to be an Occupational Therapist. She uses the Internet regularly and is registered on an Internet auction site. Occasionally she sells odd items: a book or CD. In her spare time, she enjoys car boot sales and antique auctions.

On one visit to a car boot sale, she spots a bronze statue, which she knows is quite valuable. She buys it for £5, and when she gets home she immediately goes online and puts it up for auction. Within an hour she sells it for £220, a profit of £215.

Over the next six months, Carmen finds three more bronzes by the same sculptor. She pays a total of £80 for them but sells them online for £700. She also purchases some First Editions of Sherlock Holmes stories for £80 and sells them through an auction for £540.

Carmen is clearly trading. The whole enterprise has an air of commerciality. She needs to inform HMRC of her activities, and she should be keeping a record of all her income and expenses to help her complete her first tax return. The level of sales will not exceed the VAT threshold so Carmen does not need to register for VAT.

Top

Example 4

Monique inherits from her grandfather an Impressionist painting valued at £120,000. She puts it into a safe deposit box for nine months whilst she decides what to do with it. As she is getting married later in the year Monique decides to sell it to pay for her wedding.

She puts it up for auction at an established auction house during the tax year 2006/07, and it fetches £194,000.

Monique did not purchase the picture for resale at a profit and is not trading. There is no commerciality to this transaction. However, the picture was worth more than £6,000 when sold, and is not exempt from Capital Gains Tax (CGT).

Because Monique sold the picture for more than its value at the time she inherited it, and made a chargeable gain of more than £8,800 she will be liable to CGT.

Top

Example 5

Jeff is employed by a company that manufactures shoes. He browses the Internet regularly and spots a gap in the market for selling shoes on the web. He uses some work contacts to obtain a supply of shoes, and sets up his own website to sell them.

He registers with an Internet payment company, so that he can receive credit and debit card payments. Within six months he has received over £40,000 and made a profit of £15,000.

Jeff is clearly trading. The whole venture has an air of commerciality. He will need to tell HMRC not only for Income Tax and National Insurance, but also for VAT.

His turnover in the first 12 months of trading is likely to exceed £100,000. He will have to register for VAT when his annual turnover exceeds the current registration threshold. He will then have to charge VAT on his sales and claim back VAT on his purchases.

He will need to keep records of all his transactions for the purposes of tax and VAT.

Find out more about VAT

Top

Example 6

Melody regularly uses the Internet at home in the evenings, after she has finished college. She buys a personal CD player for £40 on an Internet auction site and pays with her credit card. Over the next few months, Melody buys a number of CDs on Internet auctions.

She decides to upgrade her CD player and buys one for £65 from the same source as her first. She registers as a seller and auctions the old machine for £17 recouping some of the money she spent on the new one. In the next six months, Melody sells three personal items for £72 in total. By this stage she has bought 20 items on the auction site, and sold three.

Melody is not trading. She is not buying items to re-sell. There is no commerciality in these transactions. All of these items she has sold are exempt ‘chattels’ so she is not liable to CGT.

Top