You may have recently heard or read on the news about new HMRC rules for taxing people who are making money on eBay, Vinted, Airbnb, Depop or Etsy and other apps. These companies will now be required to share more information with H M Revenue & Customs.
Many are worried after reports that these digital sales platforms will automatically start passing sales information on these online sales platforms to H M Revenue & Customs. Affected individuals who make money from online ‘side hustles’, aka part-time self-employments, will find the tax net closing in on them. You should of course never take tax advice tax advice from social media, but an experienced accountant or tax adviser.
From 1 January 2024, digital sales platforms will start passing more information about sales made through their platforms to HMRC. A digital platform is any website or app that facilitates transactions between sellers and their customers. This will allow HMRC to consider if affected individuals are trading and not including such income on their Self-Assessment Tax Returns.
The legislation has been introduced to incorporate the Organisation for Economic Co-operation and Development’s (OECD) model reporting rules.
The new rules now require digital platforms to report the income that sellers are receiving through affected websites and apps routinely to HMRC. The disclosure 'new rules' do not create any new tax obligations for individuals, as they have always had an obligation to report their profits, in full, to HMRC. It is just that HMRC may now find out about undeclared sales!
The online platforms will be required to send this information to both HMRC and the individual themselves. The reported sales information must be made annually, for the preceding calendar year, and must be reported on or before 31 January. Therefore, the first data, for the year ending 31 December 2024, must be reported by 31 January 2025.
Perhaps because of OECD rules, the calendar year has been used, whereas we in the UK use a tax year end of 31 March / 5 April each year.
The disclosures to HMRC will apply to the provision of services or the sales of goods by UK or other taxpayers through digital platforms. This could include handcrafted and second-hand clothes. It will also apply to services like taxi and private hire services, food delivery services, freelance work and letting of short-term accommodation, including hiring out your home and driveway for parking.
An HMRC spokesperson said: "These new rules will support our work to help online sellers get their tax right first time. They will also help us detect any deliberate non-compliance, ensuring a level playing field for all taxpayers."
The information that HMRC will receive will include tax references, bank account details, the value and volume of transactions made by sellers through these websites. Disclosure to HMRC will only arise where activity is of a significant enough size. This is designed to ignore legitimate small sales of surplus household goods or sales by extreme micro hobby businesses.
Those individuals and businesses who fully declare their sales and profits through their annual account and Tax Returns will have no need for concern. It is only those trying to keep under the radar of HMRC and perhaps those in the early stages of starting up a small business that need to sit up and review their tax affairs that should be concerned. This may also include those with low volumes and low amounts of sales that may need to review their activities in greater depth, declare their profits and pay tax. This is who HMRC wish to target.
In the rest of this article, we hope to clear up concern or confusion on the new HMRC rules for those using theses online platforms and who may be on the HMRC disclosure lists.
Reportable transactions
Under the new rules, affected digital sales platforms will not need to provide data about sellers to HMRC who make fewer than 30 transactions or €2,000 (£1,735) a year.
It will only be a small proportion of non-mainstream business users using these platforms, who are not already paying tax on their profits, who should be concerned about triggering these thresholds and where HMRC will be wanting tax on their sales income.
What is trading?
There are lots of misconceptions about declaring income made from online platforms. Many people think that if they have a part-time activity, and not making too much money, that they don’t need to declare this to HMRC. This is simply wrong.
Some people may be worried about the new rules if they sell items on an online platform. People selling unwanted personal goods, like old clothes or toys, are unlikely to be trading, even if a significant amount of money is received. Accordingly, the amounts received would not be taxable.
There is no book, checklist, or set of legislated legal rules that defined what trading is. We need to review the 'badges of trade' that have been established through case law over many years.
Examples of what may constitute trading. Your whole activities should be viewed in total. Failing one of the questions does not mean that you are trading.
Are you buying and selling goods with a view to making a profit or surplus? If you are selling off old clothes you most probably will be taking a loss. However, if you are selling a large, rare record collection that you have built up over 50 years, is that trading? Probably not; but you may be subject to capital gain tax! What about if you purchased 100 kettles, at an extremely low price in the Christmas sales, and then immediately sell them on? You will be trading.
Are you selling your services to generate income or to make a profit?
How much profit are you generating? Are you selling something just to recover your costs?
Are you making lots of sales or sales of similar items over a year? Selling the odd item occasionally is probably not trading. However, selling small items persistently most probably is.
What is your intention when you buy something? Is it to use and keep personally or is it to sell on at a profit. Even a single sales transaction can be deemed as trading if you deal with the matter like any other trader would.
How was the item acquired? The sale of an unwanted gift or inheritance is probably not trading. However, if the item’s value is over £6,000 you may need to pay capital gains tax on any profit.
Why are you selling the goods? Are they surplus personal items?
Are you just generating enough money to cover your costs? Loss making or very small income generating hobbies and activities may not be trading.
Have you changed the item e.g. repaired it to then sell at a profit?
Do you already have a trade or similar trade? If you have a shop or sales outlet and start selling online then this is probably just an extension of an existing trade
How did you sell the item? Was it through an online shop, a local craft fair or market stall. Was it through a small add in the paper or just to a neighbour?
What is the interval of time between purchase and sale? Buying and then selling soon after, particularly at a profit, may indicate trading. Selling off a new purchase that you do not actually want, cannot use or wear is not trading.
You may wish to watch a short YouTube video on what constitutes trading that talks through the above in a little more detail and with some real-life examples.
Tax free allowance for small amount of income
There are no changes to tax rules for people who use online marketplaces. HMRC are looking at people who are 'trading' under the guise of making small private sales without the visibility of a formal High Street shop,
Even if you are trading, since 2017 individuals can claim the £1,000 tax-free allowance. This mean up to £1,000 of total sales, not just the online part of your sales) can be ignored i.e. they are tax free, or if higher, you can claim £1,000 of costs against your gross income in lieu of claiming for the actual cost.
There is also a similar property allowance to ignore up to £1,000 of total rental income or claim £1,000 of rental costs in lieu of your actual costs associated with renting.
These two allowances are designed to avoid declaring and paying tax on very small amounts of trading or property income. Under current HMRC reporting rules, sales income and rental income over £1,000 must be reported to them.
If you still have questions and think that you may be trading then please contact us.