Some people who trade online do so in the fond hope that the income they generate will fall beneath the tax authorities' radar. A tax tribunal ruling that left one such trader on the verge of bankruptcy showed how very wrong they are.

On his relevant tax returns, the man declared his modest income as a security guard but made no mention of his profits from online trading. That prompted HM Revenue and Customs (HMRC) to conduct an in-depth inquiry into his financial dealings. He was issued with back tax demands totalling £19,607, together with £9,341 in inaccuracy penalties.

Challenging those bills, he asserted that he had no income from online trading during the four relevant tax years and that he was being harassed by HMRC. He accepted that he had eBay and PayPal accounts, but contended that they had been hacked, resulting in many transactions that he had not authorised. Other transactions were personal in nature and did not amount to trading.

Ruling on the matter, the First-tier Tribunal (FTT) found that those explanations were not credible. HMRC had obtained his bank records, which showed numerous entries indicative of trading, including payments to suppliers and delivery firms. Deposits via PayPal amounted to a six-figure sum in a single year and his eBay account included hundreds of customer ratings for his online store.

The FTT found that his failure to declare his self-employed trading income on his tax returns was deliberate, although not concealed. He was thus liable to maximum penalties of 70 per cent of the potential lost revenue. In the event, HMRC had agreed to reduce the penalties substantially to take account of assistance he had provided during the inquiry.

In dismissing his appeal, the FTT noted that HMRC's approach was, if anything, generous to him. The tax assessments were justified and not excessive. Although he was suffering from a medical condition and on the edge of bankruptcy, there were no special circumstances that would justify a further reduction in the penalties.