UK tax implications

[philipp]

Hi chaps,

How do you declare your domain sales on your tax return?

I imagine that the sale of a domain at a price higher than the purchase price is a capital gain, which is good news because the tax threshold is relatively high.

But isn't there a point where you should be paying income tax rather than capital gains tax, if you trade regularly in domains? Does anyone know when this cross-over point is reached?

Any helpful comments would be appreciated.

Thanks,

P.

 

[accelerator]

I guess the question that needs to be answered here is are domain names to be treated as a security which is subject to capital gains tax.

I'm not an expert but I expect that the tax office has to define which securities are subject to capital gains tax, and I doubt that domain names are defined as taxable securities yet. Therefore, money made from trading domain names would be regarded as income and taxed accordingly.

I would advise contacting your local tax office and asking them this question. Please post the answer here!

Rgds

accelerator

 

[domaingenius]

Another question would be interested to know is "how do IR value domain names " ?. I mean 123.co.uk could be worth £100 or could be worth £10M ,its all in the eye of the beholder.

DG

 

[philipp]

Another question would be interested to know is "how do IR value domain names " ?. I mean 123.co.uk could be worth £100 or could be worth £10M ,its all in the eye of the beholder.

I suppose you mean for inheritance tax purposes, or something like that? I'm not sure about this, but imagine it would be a probate issue.

To explain my question more fully, here's an example. If a retailer purchases a commodity for 20p and sells it for 50p, then although they have made a capital gain of 30p, isn't their company charged income tax on that transaction, rather than C.G. tax, since the nature of their business is making capital gains?

I'll speak to my accountant, but would be interested to know what you others do.

Cheers,

P.

 

[bb99]

I'm a Chartered Accountant so I'll try and answer these questions... but I must qualify what I'm about to say with the comment that I'm not a personal tax specialist. I've never dealt with Revenue queries about personal domain sales so I can't guarantee that what I'm telling you is correct. It's possible that there's other case law meaning domain names are treated differently.

OK, that's the caveat, here goes.

I'm making the assumption that we're talking about the tax affairs of one individual rather than a Limited Company.

What you're doing is buying one thing (a domain name) and later selling it on. So you're making a gain. The issue is whether that gain is a capital gain or whether it's a gain in the course of trade.

A capital gain occurs when you buy an asset and sell it on at a profit. So if you buy an antique vase at a car boot sale for 50p and then sell it on for £500k then you've made a capital gain.

However, that only applies if you're not an antique dealer. If you're an antique dealer then you're making profit in the course of your trade. So this is part of your normal trading profit.

So in order to work out where to put your domain profit on your tax return (ie capital gains or trading income) you need to consider how involved in the domain name business you are.

If you buy/register primarily for resale then you're effectively a sole trader running a domain dealing business, and hence need to report to the Revenue as such.

If you buy domains more for investment purposes and don't tend to sell them, but you then sell one in the year, then I think you could get away with calling this a capital gain.

Generally speaking, as has been pointed out above, it's more beneficial for you if the sales are treated as a capital gain. Sort of.

It can be a very fine line between being a trader and just having the odd capital gain. The Revenue use something called "the badges of trade" in order to assess whether you're a trader. If you Google it, you'll find loads of case law and guidance (and a load of nonsence lingo to go with it).


As to how the Revenue value domain names, they generally don't have to as they'll be mostly reviewing other people's sales so the sale price has already been agreed before the transaction. They would only query these if they were part of a tax avoidance scheme or if they were being sold between connected persons/companies.

[For a Limited Company, UK accounting standards don't really allow you to register a domain name for £5 and then increase its value in the balance sheet to £10k if you think it's worth that.]


To further complicate things if you do have a massive portfolio of domain names and you park them or run advertising/affiliate schemes on them all and generate a tidy sum... How do you deal with that? Is it investment income? Is it trading revenue? Unfortunately I don't know the answer to that without taking advice from some of my elder/wiser colleagues... But it won't be an easy answer, there'll be lots of ifs/buts.


This is not advice etc etc. If in doubt, speak to an accountant who can ask you all the right questions in the context of all your tax affairs.

Hope all that makes sense - have typed it out very quickly as I'm going out soon!

 

[philipp]

Hope all that makes sense - have typed it out very quickly as I'm going out soon!

It does, thank you very much for the excellent response. Caveats understood of course.

Many thanks,

P.

 

[bb99]

Having said all the above, it has in fact made me annoyed that I don't know for sure. So I'll get a more definitive view from some proper bean counters and post here when I get it...

 

[newbie]

superb post bb99!

 

[paymatters]

If a capital gain then remember the first £8500 gain is tax free!! (wife also gets annual exemption so useful if domain held jointly).

Also if trading may be able to offset cost of all domains bought that year in calculating profit??

(Same caveats as BB99!!)

 

[Godfrey]

I acquired a high value .co.uk domain which I planned to use setting up a business so I registered my wife and I as a self employed partnership with the Inland Revenue. I didnt have the domain for sale however I was approached and a sale was made. £15,000 profit. I ceased the business because it lost its main online trading asset.
Capital gain covers me for £8,500 (PER PARTNER). £8,500 x 2 = £17,000 tax free Capital Gain. No tax to declare on the domain sale.

I informed the local Inland Revenue office and they confirmed that this was the right treatment.

I have sold the odd domain since. Which were just bought and sold by me (without my wifes involvement) of course which doesnt affect the partnership sale. I assume!

 

[bb99]

Haha, this gets even more tricky because there's a whole new set of rules for cessation of trade. But your circumstances sound pretty straightforwards and from what you've said below I think I agree with what happened!

To update on what I said above, I'm still waiting for one of my egg headed friends to get back to me with either a confirmation or contradiction of my general views. Will probably be after Xmas now.

I acquired a high value .co.uk domain which I planned to use setting up a business so I registered my wife and I as a self employed partnership with the Inland Revenue. I didnt have the domain for sale however I was approached and a sale was made. £15,000 profit. I ceased the business because it lost its main online trading asset.
Capital gain covers me for £8,500 (PER PARTNER). £8,500 x 2 = £17,000 tax free Capital Gain. No tax to declare on the domain sale.

I informed the local Inland Revenue office and they confirmed that this was the right treatment.

I have sold the odd domain since. Which were just bought and sold by me (without my wifes involvement) of course which doesnt affect the partnership sale. I assume!

 

[olebean]

I spoke to my accountant for a long period on this issue the question remains at what point does a collection of domains become a business?

Monitorising domains in the pursuit of income by definition suggests there is a means for income, which should be declared. That is the easy part.

In the sense of domain purchases, my understanding is that the purchase of a domain with the intention of seeking a profit means a business exists with or without profit or loss.

On speaking to the Inland Revenue, they appeared less knowledgeable than I would have hoped. This makes me express caution in tax affairs and trading of domains (since you are presumed guilty in tax law and must prove yourself innocent if you are investigated, which can be very costly).

The point is, that domain sales / revenue are relatively new to the IR, usually in these cases when the IR is ready to pursue the marketplace they will. It will not surprise me if the IR does not investigate a few "parking companies", with a view to "seeking out" the undeclared. I can see a few people falling on the wrong side (I might add, not people I know)

In the case of the sold domain: At the point a partnership business commenced a business existed, that in turn does not mean the business owned the domain or the domain was an induced asset of the partnership. The next question I would then ask is, did the additional sales take earning significantly higher, as BB suggested in the earlier article, this may be an issues that you need to watch.


Oh, these are only my views / opinions and are not suggested as professional advice, if you are unsure you should seek the services of a professional advisor.

 

[james26]

Now 4 years on does anyone else know of the real UK tax implications of domains sales? Especially for Limited Companies?

 

[woopwoop]

For limited companies I believe it's similar re: the distiction between capital gains and revenue.

Plus it depends if you occasionally sell domains or if 'domain selling' is your main business.

This also brings up the issue of a domain being an asset vs zero inherent value but an expense (reg fees).
Depending on the nature of your business you might have some under each category.

As mentioned earlier, if you buy a domain for £5 (and are treating it as an asset), even though you may think it's worth £1000 you must list it on your balance sheet as an asset with value £5 (or it could have zero value and you are paying £5 expense for 2 years registration fees). You can only record a value of £1000 as a gain when you sell it for £1000.

The buyer would then be able to put the domain on his balance sheet for £1000 as that's the price he paid for it. This balance sheet's listed value shouldn't really change until the asset is disposed of (sold for more/less gives a capital gain/loss respectively)

Some domainers might operate where it's better to treat domain renewal fees as an expense. Such that the domains themselves aren't assets but the value is in using them, to generate revenues (parking, as a forwarder, to be a domain for company emails etc.)

 

[dougs]

tax

We simply work on the idea that we buy and sell all the time, hence we are trading in domain names. Like someone buying and selling apples....its our trade and hence it goes against our income.

Some of our bigger purchases...ie above £10K we have always classes as assets....I believe.

doug

 

[lethal0r]

my accountant told me when I bought a website for £5k that it was classed as an asset.

im not sure if there is a cut off value, or if its the same thing for just domains.

 

[max_rk]

I treat my purchases above £5k as an assets and devalue if I think price is too high for current market.

I been trading domains for almost 10 years and I spoke to so many people about this. My tax adviser (for the last 5 years) - ex IR man, isn’t clear about all this as well. But he thinks £5k level is fair ( I believe some people use higher some use lower levels). But ultimately he thinks there isn’t much difference because you will pay tax anyway after you dispose the domain. It’s just a meter of time. We ( my account , tax adviser and I) have talked about this many time over for hours and hours, and we always come to same conclusion.

I don’t suggest that you do the same. You should seek own tax advice on this matter.

Max

 

[tifosi]

I treat normal (£5+vat) purchases & renewals as revenue expenses along with server costs, nominet/dac fees, IT & consumables etc. Any sales are treated as standard sales and treated as income. Any purchases as capital expenditure. After balance against personal allowances etc any profit is taxable as income. Accountant & IR seem happy with this.

Saying that, I've structured this so the domain business is solely concerned with this alone. Any offshoot businesses are/will be structured as completely separate entities, with the domain as an initial asset cost for transfer between entities, for banking/revenue/tax purposes. Keeps it less messy and with a papertrail.

Just beaten the Jan 31 deadline... phew!

 

[archibel]

Taxation Tips

The crucial point is whether you are purchasing domains (or websites) for resale (in which case they are stock – and can be treated as expenses) or used in the course of operating a business (in which case they are fixed assets – and subject to capital allowances).

E.g. (1) I purchase a domain for £5k and develop a site on it which earns an income from selling advertising. In this case I would capitalize (create a fixed asset) both the domain cost and development cost – and use capital allowances to offset against income. If I subsequently sell the website/domain, it falls within the scope of capital gains tax.

E.g. (2) I purchase a domain for £5k and solely have the intention of holding it and selling on a future date. I would class this as an inventory purchase and offset the cost against income. (Useful for reducing profits/creating losses and can easily demonstrate to HMRC that they are indeed for resale by listing the domains for sale on SEDO.)

Note 1 – any domains/websites you capitalize as fixed assets probably should not be depreciated but instead subject to revaluation every two or three years (the same way land is treated) – on the basis that there is no ‘expected life’ for these assets. Obviously revaluation is very subjective with purchase price probably being the best guess.

Note 2 – depreciation & revaluation of fixed assets is irrelevant for both income and corporation tax liability...asset cost and capital allowances are.

(Hope this helps a little…I am a Chartered Accountant – but with limited knowledge of personal taxation, but this is the way I prepare my own tax return. To be honest I could argue a decent case with HMRC for almost any alternative approach – there is very little guidance/case law in this area.)

 

[grandin]

A thought

I think like residential property (being a landlord) it really depends on transaction level and if it is deemed your income generator i.e. do you live off the act of buying and selling.

Like being a landlord if you buy and sell alot then it maybe worth buying and selling in a company and then be subject to CPT/dividends/salary.

The big problem as a landlord is that when you realise it would have been better to put them in a company its too late.....i.e. you could build a portfolio of 10 properties in personal names and then think now it would be great to put them in a company BUT to transfer them into a company would create a CGT event and no matter what you did it would be charged at the recognised market value which would be quite easy to measure.

Domain names are very different as who could value them?.......arguably you could transfer them all into the company for reg fee.......so when you get to the size of a few 1000 or you give up your day job it maybe the time to transfer them into the company.

My domains were bought in the company so easy to account for either way