I took on a client recently and they sell on Ebay.
They started in 2006 and are making losses for the past six years. I just don't think this is the correct picture and they are perhaps making a small profit though do not have much proof at the moment apart from saying we do not want to pay tax. They carry out their own book-keeping
If a business is making loss after loss especially when trading on ebay would this increase chances of an HMRC investigation.
Are there any other implications that I should consider ?
Replies (14)
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A few implications:
HMRC may well commence an enquiry into the client's affairs but I would proffer this would only occur if they were trying to utilise certain reliefs or allowances.
I suppose the key considerations would be:
1. Are they in fact 'trading' (lack of profit-seeking motive)?
2. Are 'trading' losses available for offset or future use?
3. Could HMRC seek to deny IHT & CGT relief?
This is on the basis that they are not merely cooking the books. I am sure you will be aware of the implications if this is the case...
More searching questions required
Trading on ebay and making losses for 6 years. Is that a joke?
Hobby farming
I am not sure of the source, but I seem to recall that if a farmer does not make a profit once every seven years, HMRC will regard him as being a hobby farmer - not in it to make a profit - and will therefore disallow his losses as a deduction from his other income. I doubt that their view would be restricted just to farmers.
BIM75625
There is specific legislation relating to farming - see reference above.It's not just HMRC practice.
Quite correct though that HMRC might look askance at continuing pattern of losses though perhaps might not investigate unless losses being offset or actual turnover was sufficiently high to suggest that disallowance of expenses would produce a taxable profit worth assessing.
I have seen e bay traders think they can claim entire running costs of home because they are working from home - what are the expenses looking like I wonder?
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Either they are not very busy savvy, albeit its easy to lose money on these types of things. It is not uncommon for people to be seduced by turnover and make no money despite having a huge turnover.
Or it could simple be they are lying to you.
So which is it?
It ought to be quite easy with an ebay business to look at some typical high volume selling items and assess the GP (including ebay fees) and compare that to the actual GP, and also track the number of sales (unless customers typically purchase multiple items) and cross reference to the number of purchases. ie bog standard sanity checking.
Take what half an hour to do that if you have access to their records?
Your basic fraud would to be have two ebay accounts and only book the sales of one of them but all the costs.
Definition of losses
To expand a little - losses are before capital allowances so you could have a taxable loss but it is still treated as a profit for trading definition purposes.
I remember looking into farm loss making businesses and the txt says that a farm is regarded as profit making if a competent farmer could farm it at a profit. So basically, tell HMRC that your client is incompetent and keep claiming the loss relief!
Be aware
The client needs to be aware that the authorities can, in certain circumstances, require ebay and PayPal to produce their records of the trader's transactions over the past several years. Those records may reveal that the information which the client has provided to you is not the whole story.
This is more likely to happen if the client comes under investigation for possible benefit fraud (Income Support, Housing Benefit, Tax Credits etc).
Obviously if you suspect that your client is evading tax or fraudulently obtaining benefits then you need to consider whether you have to make a Suspicious Activity Report to the NCA under MLR 2007 / s330 PoCA 2002.
David
Your suspicion appears to be based on (i) the inadequacy of the records being made available to you, (ii) the apparently unexpectedly low GP %age, (iii) the continuing losses - meaning that logically you would expect your client to have stopped trading, and (iv) your 'hunch' that the purchase invoices from friends are inflated.
The picture from this (admittedly circumstantial) evidence leads you to suspect tax evasion. That is a reportable suspicion of yours. You should file a Suspicious Activity Report with the NCA.
Do not make the mistake of thinking that circumstantial evidence is somehow not evidence. Murderers have been convicted on circumstantial evidence!
David
Hobby trading and other income
Some clients (maybe the OP's in this instance) have a full time job taxed under PAYE occupation to sustain normal living needs and do eBay trading as a pass-time with a vague hope of making a little profit. Sometimes part-time activities are a hobby that develops into a trade.
If a "hobby" then losses are not useable for offset against other income, instead only against future profits of same hobby-trade.
If there is no other income (as in a job taxed under PAYE) I would ALWAYS be asking the client how they sustain themselves in the absence of profits. Could be living off capital, could be accumulating debt (as in credit cards, overdraft or family loans).
Regarding Amazon potential profits, I wouldn't be surprised if the Gross Margins are very low such is the set up at Amazon that directs buyers to the lowest price, and once a modest GP is achieved then there's Amazon fees (15% x selling price I believe). If the goods are coming from China then the cost will be goods + Import Duty + Import VAT (*).
(*) Unless VAT registered in which case import VAT recoverable but Output Tax payable on sales.