Sellers beware! Taxman to investigate eBay deals

Sellers beware! Taxman to investigate eBay deals

The taxman is to probe Britain's 10m-strong army of eBay users. HM Revenue & Customs believes many fail to declare profits from online trading. The investigation will involve trawling through millions of internet deals, looking for usernames which appear with an above-average frequency.

HMRC says anyone profiting from online auction sites must declare gains in the same way as a small business. And those selling high value items may have to pay capital gains tax.

HMRC suspects many eBay traders dodge tax, while others fail to declare earnings because they don't know they have to. This can be complex. So try our test. Work out which of the scenarios below is tax-free, or taxable. (Answers below)

Joanna works full time. She makes cuddly toys for her friends in her spare time - charging the £20 cost of materials. She then sell them for £100 each.

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Prakash is a student who sells his CD collection online because he has upgraded to MP3 downloads. He makes a profit on his collectable albums.

Edwina inherits a painting worth £100,000. Two years later, she sells it by internet auction for £200,000.

Walter falls out of love with a former pop diva. He sells his memorabilia at a profit. Then he buys in some more to sell on - also profitably.

Tara is a nurse who goes to car boot sales and scours small ads to find "heritage" goods she can sell online to Americans for a profit.

William works for an electronics company. He develops new hardware in his spare time and finds a firm to make the gadgets. He then sells these online, making a £20,000 profit on a £100,000 sales turnover.

Did you get it right?

Joanna is a trader and should pay income tax on her earnings less the costs involved in making the goods.

Prakesh pays no tax. He is not trading - just selling off surplus goods.

Edwina is not trading so pays no income tax. But as the value of the painting is over pounds 6,000, she faces a capital gains tax bill.

Walter was not trading on his first sale but has tax to pay after that.

Tara is trading and must pay tax.

William is trading, must pay income tax and register for VAT as his sales are over the pounds 64,000 registration level.

· Tony Levene is author of The Tax Handbook 2007/08, a Which? essential guide, published this weekend at pounds 9.99.

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