HMRC’s announcement may have many pet owners wondering whether they might be chased for tax on occasional sales of unwanted puppies, kittens or other pets. With pedigree or high demand breeds, the amounts involved could be significant – some of the puppy breeders apprehended by HMRC had tax bills of over £400,000.
HMRC will charge tax on profits from what it sees as trading activities. The law which decides whether a person is ‘trading’ is based on decided cases in the Courts. From this case law, hallmarks of trading have emerged which are known as the ‘badges of trade’.
The ‘badges’ include factors such as whether there was an intention to make a profit, whether the assets sold were of a type which would typically be traded, the frequency of transactions, how long assets were held prior to sale and how the activity is financed and organised.
These “badges” do not all need to be present for the activity to be trading. So, even if someone just sells one pedigree puppy, the activity could nonetheless be trading but infrequent sales of puppies or kittens are unlikely to be viewed as trading.
In the event that you are “trading”, the next question would be, have you made a profit and, if so, what allowances can be offset. Everyone has a personal allowance of £12,500 to offset against their overall taxable income which could cover the profit if not already used against other income.
Since April 2017 there is also a £1,000 trading allowance. This works by reference to someone’s income before expenses from all trading activity (‘gross’ profits). If this amounts to no more than £1,000 there is no need to fill in an annual tax return and no tax is due.
If someone’s gross annual trading profits exceed £1,000, they might be better off claiming expenses instead. This would be the better option for someone with more expenses than income, in which case they can claim a loss. They would however have to fill in an annual tax return.
The £1,000 trading allowance covers other types of income (such as babysitting) and other trading activities like ebay selling and income from hiring out items. Even if someone doesn’t need to fill in a tax return, they should make sure they keep all records in the event that HMRC asks any questions.
With HMRC having significant powers to get information from online platforms and high-tech software to detect taxable activities on social media, whether people are selling puppies, kittens or anything else, they should think about what to claim and whether they need to register with HMRC.
Tim Stovold is head of tax at Kingston Smith