Tax Evasion?

I am mainly interested in the response from British players who generate a rl income from SL, although any informed advice is welcome.

Do you pay tax on your SL earnings?

I don’t really know allot about tax laws in the UK. Basically once a month I pay an extortionate amount of tax and this is all handled through my employer. I have never self assessed and wouldn’t know where to start. Common sense dictates though that it is a legal requirement to declare all of your earnings and to pay the applicable amount of tax. I have not done so to date but am considering starting as I don’t want to get stitched up at a later date and find that I have to pay an excessive amount of tax in one hit.

A friend of mine is currently being prosecuted for distributing copyrighted material. He would DL files and sell them through his website. All very foolish I know, but what got him caught was Paypal. Paypal are legally required to pass your transaction history to Trading Standards when your incoming payments exceed £12K, Trading Standard will then launch a thorough investigation. Apparently your Paypal account is flagged when you reach £7K although I don’t know if any action is taken. Although I am not earning the money illegally I still fear the prospect of being prosecuted for tax evasion.

What are your thoughts?

Thanks, Porky.

"A new guide has been released which tells occasional online sellers if they should be paying income tax on their profits."

http://www.theregister.co.uk/2007/02/09/ebay_uk_traders_tax_guidance/

...not, I'm afraid, completely relevant but somewhat related.

And Her Majesty's Revenue and Customs have this to say:

http://www.workingforyourself.co.uk/etraders/default.htm

I am based in the UK and I have discussed this issue with my accountant.

Broadly speaking there are three separate issues to address.

1) If your use of SL is a hobby with the occasional land trade and sale/rent/trade/earn of objects priced in pure linden dollars and if your total profits are less than the real US dollar Linden Labs membership charges OR are less than say £100.00 sterling per tax year above the Linden Labs cost of membership then in reasonable opinion it could be considered as a hobby, and in normal circumstances non taxable.

2) If the above does not apply, in other words your profits are above this figure then it should be declared as self-employed income. You will need to keep records of income and expenditure. On that point there is reasonable evidence that profits are only taxed when they are taken out of game and converted into a first life currency. Source Reuters on this point, as the law has not yet been addressed to the issue of virtual worlds, rather than that of pure trading sites such as Ebay.

3) A separate situation can/could apply if somebody decided to use the Second Life banks, (Ginko SL Bank etc) as an alternative investment seeking to use gross roll up of interest or profit on more substantial sums of money. Again I would use the rule of £100 ($200 US dollars) or the Linden dollar equal (270:1) of say $L50,000 plus. My gut feeling is that in all cases this should be declared as an investment. An investment is not carrying out a trade, neither is it a hobby.

To finish off on this point I do not think HMCR are really interested in what could be deemed as micro profits or transactions, but they would be certainly interested in sums of money that would mean something in terms of fungible value. It is matter of common sense, £100 or less per tax year is neither here or there, but £500 is a different matter. The Revenue will typically ignore any transaction of less than £10 so the figure of £100 is based on 12 monthly instalments of premium membership and/or land costs with a margin of error.

Finally if a taxable event happens is it taxable to income or is it capital gains.?

I believe that as far as running a business is concerned any profit would usually be considered as tax assessable against income. One exception to this is if you are running a business in Second Life as a pure land baron, that in my opinion could be considered to be assessable against capital gains rather than income. On that point each one of us in the UK has a CGT allowance of £8,800 in this tax year, therefore the first £8,800 of gain is free of tax.

However if you trade/turnover more than £14,000 per annum the Revenue can require you to declare each individual trade although when I last asked about this I gather the local Revenue inspector has some discretion.

If you constantly trade land it is possible you can apply to the Revenue for a legal exemption that allows you to treat profit as income. There are plus and minus points on this as the scope for legal deductible expenses is greater with profits treated as income, however on investments the current situation that applies is "For the Investment, on the Investment" and it is a pure hard criteria.

Finally from an alternative investment position (Ginko SL Bank etc) any dealings with them must be considered as income not gains as I understand the law and should be declared

In all cases the penalties for non compliance or tax evasion are draconian, they include more or less unlimited fines, investigations that can go back up to 20 years, and even prison. So I would respectfully suggest people consider their position with care.

I do not work for the Revenue, this post represents my own personal opinion based on research, and you should seek advice if uncertain of your own position.

Regards

John

Yeah that...

Thanks John, thats some really useful information and it's clear I need to research this further. Thanks for your replies!

I run a VAT registered business and have held numerous interesting conversations with my local collectors regarding VAT and liability in general.

I would advise, contact an accountant (in all likelyhood they wont have a clue) and at the same time contact your local tax/excise office/s.

I have found sympathy and assistance, with the revenue working to ease my workload and working in my favour.

If you don't declare (despite comments above about how it is OK to make a few hundred pounds) you deserve every fine that the revenue decides to throw at you.

You may well find each office deals with liability in a different manner, much the same way as is the case for RL businesses (within the guidelines).

I operate a project management team as well as items 'directly for my account' in addition to Land trading and rental. My income is generated in L$ as well as £, EUROS and US$. It is not relevant for me to detail how my business is being dealt with, other than to say, you will find support and help if you approach them first. I can however categorically state one of the opinions stated in this thread is absolutely incorrect (in so far as my own tax office is concerned)

Don't take 'expert' knowledge on the forum as anything other than an uninformed opinion, unless that person is a Collector or Accountant who has knowledge of this specialist area and they are hardly likely to be posting advice on a US based forum. Pronouncements from uninformed accountants are as useless as uninformed opinions from non-experts.

All the best

Yes.



It was less than that for me - about £5k, IIRC. At this point, Paypal temporarily freeze your account, and you need to fill in an on-line form that elaborates on exactly how you're making the money, whether you're registered as self employed, and other such gubbins. On completion of that form your account is unfrozen, and HMRC is (I assume) forwarded all the details.



I am not your financial advisor. However, this is (roughly) what you need to do in the UK:

1. You have to register with the inland revenue as a self-employed worker. (note that it's perfectly normal to be "self employed" in your spare time, while still holding a regular full-time day job!). The form you need to do this is a CWF1, available here: http://www.hmrc.gov.uk/pdfs/cwf1.pdf ...print it out, complete it, and mail it in to the supplied address. Alternatively, you can register by phone - the number is given on the form. You'll probably want to declare yourself as a "sole trader". Consult your financial advisor (or - who am I kidding? - google) to find out what that means in terms of legal implications, and what other options exist.

2. The bad news: once you're registered as self-employed, you'll need to pay class 2 national insurance contributions. You'll get a letter explaining this shortly after you've sent in the CWF1. It's not too harsh - about £2 a week... you can either pay by direct debit, or they'll send you a quarterly invoice. If the "business start date" that you supplied on the CWF1 is backdated, you'll get a bill for the contributions that you already owe.

3. forgot to mention - if you've already been conducting business for more than 3 months without registering as self employed, you'll be fined for late registration (owch!). Bare this in mind when you fill in the CWF1 dates... (especially if you're still dallying over whether you should register or not!).

4. At the end of the tax year, you'll be sent a tax return to complete. It's a huge chunk of paperwork, and seems really scary ... but it's actually not too difficult to complete if you take it logically, step by step - you certainly don't need an accountant to fill in a basic return. Essentially, you just copy a bunch of stuff from your P60 about your day job and the tax you've already had deducted at source, and then fill in a supplement about your self-employed (SL) earnings.

You can register to file your tax returns online, via the "government gateway". It's a bit of a pain to get your account set up, but once you're registered it's a much easier/quicker method than the paper version, as the online version is intelligent enough to skip any questions that aren't relevant to your circumstances. You also get slightly longer deadlines than people using conventional filing methods

When you've finished filling in the online tax return, it'll instantly tell you how much you owe.

5. If it turns out that you don't owe a huge amount (less than ~£2K?), and you already have a day job where you pay tax on a PAYE basis, you can opt to have next year's tax code adjusted to deduct what you owe at source. Otherwise they'll invoice you for the full amount at the start of the year - you can pay in two installments, AIUI.

Hope this info helps to steer you in the right direction.

Shep.

Government is always so worried they will miss out on a dime.....

Just simply has to be the greediest entity out there...

If you are earning significant income from this game yes claim it. If its just a drop in the bucket say a couple of hundred per year (enough to pay for the premium membership) the paper works probably costs more then the actual tax.

Also I suppose it will depend on what you already earn. If your pushing yourslef into another tax bracket I would claim it or die a horrible ugly death hehe.

Some countries have tax systems set up where when you earn money from a business there is a minimum taxable amount like 30,000 or 20,000 dollars or something. In the end the best person to ask is someone who handles taxes for a living. Where I am in canada if i have any questions like that there is always some wierd free clinic around where I can seek advice on the right way to do stuff or some service or other that explains it all to me.

If you spend more money in SL then you are "earning" then you have nothing to claim but if you are earning more then you are spending then you have to start to think about it i guess hehe

Of course now...

One must also consider: If you are making an income from SL - can't you consider the price of your PC, Power, Internet, Gaming fees.... all business expense?

I agree about National Insurance and self assessement but one flat rate plus a percentage of profits is due on all self assessed income. Of course it is a totally different situation if you have an employed job and/or are a director of a limited company, thats a bit outside the scope of this thread, likewise VAT. On that point VAT turnover figure for this current tax year is £61,000.

However I suspect for most of us these figures are not really relavent to our every day SL life but perhaps this link will assist in reviwing the situation.

http://www.hmrc.gov.uk/manuals/acgmanual/ch5/ACG05010.htm as you can see the Revenue do look on what is called a profitable hobby on a case by case basis, that is why I used the figure of £100 of pure profit as a starting point to keep detailed records.

I think on that final point you have to review the issue of "Are your activities a true adventure in Trade" or not as the case may be

Cool, lots of really useful information here and I will definitely contact my local tax office for direct instruction. It's obvious from these posts that I am going to have arrears to pay from the last 12 months so thanks for the warning about that. I'd never imagined my SL income would ever become significant enough to declare but due to the recent mass influx of players and the relaunch of my SL business I am looking at thousands of pounds of additional income per annum. So there is no question that I need to take action. Hopefully this thread will also enlighten others who generate an income from SL. It's easy to just ignore these things as it is a game after all, but with the rate that SL is growing i'm sure i'm not the only one who has noticed a significant boost in business and my SL earnings. Thanks for the great advice.

Ok, a question here:

The UK tax site linked to above says that if you sell "with the intent of making profit", then you are a trader and have to register as self-employed. But does selling things to cover your land fees count as "intent to make profit", or just "intent to cover costs?"

Lets vote on it.

Good point.

Here

http://search.hmrc.gov.uk/kbroker/inldrev/inldrev/search.lsim?sr=0&nh=20&cs=iso-8859-1&sc=ir&ha=7&mt=0&qt=hobby

Is a more detailed link obtained via a search on the HMRC web site.

There are more case examples mentioned together with comments from the Revenue about hobby and trade etc.

I think it comes down to what the Revenue call "An Adventure in Trade"

You can only look at this from a common sense attitude, this involves revenue received over expense the nature of your SL business, and perhaps even your first life job.

One thing that has come though in reading various comments here on this thread is that (and it can happen) that all of a sudden that SL hobby, that if we were honest was costing us more in tier fees and expenses than we were earning, can all of a sudden turn into something generating thousands of pounds profit. Clearly at that point it is no longer a hobby in the true sense of the word

From the research I have done I really dont think you need to declare any earnings that are used to pay membership and land fees. The money allways stays on the SL website and never actually get converted into GBP. So as the money never actuallly reaches the UK you shouldnt have to pay tax on it. At the end of the day you are earning money through an American based comany and using it to pay fees to an American based company. Hopefully we arnt liable to pay tax to the US government as well!

Another tricky question that I thought of it: is your trade "making things and selling them in Second Life" - or is your trade "selling L$ for US$"? I'm guessing this would be connected to the applicability of the part of the SL TOS that says L$ don't directly represent value. This is tricky because it doesn't fit any of the categories on their site - you didn't buy the L$ in order to sell them, and you didn't manufacture the L$.