From 1 January 2024, HMRC has been given new powers to target those that make a little on the side from selling through online platforms – HMRC is coming after the ‘side hustle’. These new powers require popular apps and websites, such as Etsy, Vinted and Depop, that provide a platform for online selling, to provide information about on who is selling on their sites. This data includes the names of sellers and how much income they are generating each year from sales on their platform.
With changes in the way we work and the effect of inflation on the cost of living, many people have turned to a Side Hustle to make a few extra pounds. There are countless examples of how this is being done, from letting out a spare room to turning a crafting hobby into an income stream. Basically, anything that is not connected to their main source of income which can generate some extra cash.
What not everyone has realised though, is that this income is often taxable – and HMRC has decided to make sure they do!
HMRC provides various allowances per tax year that allow most people to earn a little bit, tax free. These include:
- Personal allowance of £12,570 (providing your total income does not exceed £100,000)
- Capital Gains tax annual exemption of £6,000 (reducing to £3,000 from 6 April 2024)
- Dividend allowance – £2,000 (reducing to £1,000 from 6 April 2024)
- Interest allowance – up to £1,000, depending on your other income
- Rent a room allowance – up to £7,500 for letting out a room in your home
- Lettings allowance – up to £1,000 from rental activity
- Trading allowance – up to £1,000 from trading activities
If we look specifically at the Letting Allowance and the Trading Allowance. These were introduced in 2017 to allow most people to earn a little extra casual income without the need to do a tax return or pay any additional tax. One of the main reasons for doing this was, from HMRC’s perspective at least, is that it would be too expensive to administer a tax regime for those who have a small amount of trading income. The tax generated would be less than the cost to do it.
However, HMRC is now reportedly investing £39.9million in a specialised team to identify those individuals who are not reporting the income they make through these digital platforms. Clearly, is has decided that there is taxable income slipping through the net.
This means that HMRC is convinced that there are a significant number of Side Hustles and other businesses out there which are making enough money to exceed the allowances provided, perhaps significantly so. It is unlikely it would be prepared to spend this sum if it did not believe the tax take would be sufficient to cover it over a relatively short period of time.
Are you affected?
If you are earning £1,000 or more from casual earnings each year, then quite possibly.
Depending on what else is going on in terms of your income, you may have other allowances that can be used to reduce how much of this is taxable. But if not, then you should be including the amounts you earn on your Self-Assessment Tax return, or registering to complete a Self-Assessment return, if you are not already doing so.
That said, not everything you sell online is taxable. For example, if you use an online platform to sell your car, that will not trigger a tax charge. This is because this one-off sale, which may be worth more than £1,000, does not carry the usual Badges of Trade. In addition, disposal of your own car is specifically excluded as a taxable disposal, not least because HMRC usually expect you to have made a loss, and it would not want to have to give tax relief to all of us who do that!
So, what makes something a trade?
There are a number of ‘badges’ to consider, but the key things to look for are:
- When you acquired the item, were you seeking to make a profit from selling the item?
- How many sales are you making each year of a similar type?
- Do you have to do anything to the item before you sell it in order to make a profit – modify (or even make) it, for example?
- How long did you own it before you decided to sell it?
- How did you acquire the asset – was it a gift or something you inherited maybe?
Clearly if you make something specifically to sell, or you bought something knowing you could sell it on for a profit, it will look more like a trade than if you inherited a ring from your grandmother but decided to sell this on in later life to help with cash flow.
Whether you are taxable or not, all digital platforms will be reporting this information going forward, so you should make sure you are keeping track of what you are selling online, and, if required to do so, you are telling HMRC about it. And where your sales are not taxable, you should be prepared to explain to HMRC why, should it ever ask.
VAT
Income tax is not the only issue – we also need to consider the indirect taxes, such as VAT and the requirement to register at the appropriate time, as with any luck business is thriving and therefore it will be easy to reach the VAT registration threshold (currently £85k) for a UK based individual/business. However, if you are not UK based, that VAT registration threshold is NIL, meaning that a UK VAT registration will be required before a sale of even £1 for any goods is made!
There is also the possibility to register for VAT on a voluntary basis, therefore if sales are not nearing the current VAT registration threshold for UK established businesses, a VAT registration can be requested to enable recovery of VAT on costs, such as VAT on the materials to produce any goods.
Please also note that buying in accommodation from the home owner and resupplying this can also bring with it, some fancy VAT accounting that will be required if the criteria has been met, so care does need to be taken.
The key thresholds to bear in mind are:
- VAT registration – for UK established businesses is £85k in a rolling twelve month period
- VAT registration for non UK established businesses is NIL
Next Steps
If you have casual earnings, and you are already doing a tax return, even if the income you make does not exceed £1,000, you should be including it on your tax return, and either claiming the trading allowance or paying the Tax, and National Insurance (class 4) that is due. HMRC will be aware, and it may not be long before questions are asked.
If you are not already doing a tax return and you should be, then you must contact HMRC to apply for a Unique Tax Reference (UTR) and make sure that you complete a tax return each year.
If you have done this in the past and you think that there may be tax to pay, you should contact us to discuss your options for telling HMRC and paying the tax that should have been due.
If your Side Hustle is starting to look more like a Main Hustle, even if you have paid the tax, there may be other things to discuss, and we would love to hear from you. Please contact the Gravita tax team so that we can look at your options to structure your business more tax efficiently, and to ensure you are meeting all your Tax and VAT obligations.
