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HM Revenue and Customs (HMRC) have recently carried out research on the 'sharing economy' – by which people share skills, resources, time or property with one another without cash changing hands. There are a number of websites that facilitate such transactions.
What was clear from the research was that the majority of those engaged in the sharing economy did not know that the value of services received in exchange for those provided represents taxable income. Income Tax applies whenever an activity is carried out 'in the nature of trade'.
More surprisingly, one in seven of those working in the sharing economy and earning more than £70,000 a year claimed that they thought they were not earning a sufficient amount to have to inform HMRC. A similar proportion kept no record of their income.
The risks of undeclared income being identified by HMRC and a tax investigation resulting are considerable. The consequences can be significant: not only can penalties and fines be imposed but such investigations can also be stressful and involve considerable time.
Where records are missing, HMRC will typically compare the actual lifestyle of the taxpayer and the assets built up over time with what might be reasonably expected based on the declared income and other income sources (such as inheritances).
Where tax evasion is alleged, HMRC can go back 20 years and seek penalties of 100 per cent of the tax evaded (on top of the tax due) and interest. In larger cases, the defaulting taxpayer may be 'named and shamed'.