How to Check Whether You Need to Register for Self Assessment and File a tax Return

  • Emily Coltman, Chief Accountant at FreeAgent

  • 28.12.2016 09:15 am
  • Tax , Emily Coltman is a Chartered Accountant (FCA) and is FreeAgent’s Chief Accountant. A graduate of the University of Cambridge, Emily has been working with small businesses since 2000 and is the author of three books: “Refreshingly Simple Finance for Small Business”, “Micro Multinationals”, and “Very Awkward Tax.”

Are you trading?

HMRC expects you to file a Self Assessment tax return if you are one of the following:

a self-employed sole trader
a partner in a business partnership
a company director (unless the company is a non-profit organisation and you don't get any pay or benefits, like travel expenses or a company car)
It's the first of these cases where some people slip up, as they may not realise or understand whether they are actually “trading”. If you only sell items occasionally through eBay or via the classified ads in your local paper, for example, then HMRC doesn't class this as trading, which means you wouldn't have to pay any tax on the money you receive from what you sell using these methods.

However, if you sold goods more frequently than this in the 2015/16 tax year, it will probably count as trading. This means you will need to file a Self Assessment tax return by 31st January 2017 and pay income tax and class 4 National Insurance on the profits you've made. As a self-employed trader you would also have to pay class 2 National Insurance.

Badges of trade

HMRC has produced a list of nine “badges of trade” that they look for to determine whether or not an individual is trading. HMRC will look at the whole picture and consider each badge as part of the whole.

The badges of trade are:

Aim to make a profit - if you're aiming to make more money by selling the goods than you spent on buying them, this is a strong indication that you could be trading - but it's not conclusive on its own.
Number of transactions - HMRC is looking for “systematic and repeated” transactions, which could indicate a trade.
Nature of what you're selling - if you're selling something that in itself gave personal enjoyment either to you or to someone else (e.g. a relative's model railway collection), then that's a pointer away from trade. If you're selling something that is only likely to make you happy once it's converted to cash (e.g. a set of dishcloths), then you could be trading.
Existence of a similar trade - if what you're selling closely relates to a trade you already have, this sale will be treated as part of the existing trade. A pot plant sold on eBay by an established florist, for example, would be treated as part of the florist's existing trade.
Changes to the item - if you've repaired, modified or improved the item to make it either more easily saleable or saleable for a greater profit, this could point to trading. For example, if you bought a beat-up old car, fitted it with a new engine and a new chassis, and sold it as refurbished.
How you made the sale - did you make the sale to raise cash for an emergency, or in a way that's typical of a trading business? eBay, for example, can be used for either, while Amazon tends to be used by traders.
Where the money came from to buy the item - if you had to borrow money to buy the asset, and you could only repay that money by selling the item, then this could point to trading.
How much time passed between buying and selling the item - the quicker you sold the item after buying it, the more likely you are to be trading.
How you acquired the item - if you inherited the item or if it was a personal gift, then selling it is unlikely to mean you're trading. For example, if your grandma left you her autographed collection of LPs in her will, and you sold them, then that wouldn’t count as a trade.
The crucial point is whether, on balance, the badges point to whether or not you are trading - not whether more of them suggest you are trading than suggest you are not. You need to look at the whole picture.

Make sure you consider all the badges and think holistically about what you’re doing, to see if you are trading or not. If you’re unsure, you may wish to ask a professional accountant to check for you - and if you discover you are, in fact, trading, you’ll make sure you register with HMRC as soon as possible!

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