Many people make a handy bit of extra income as online traders and have heard something about new tax rules popularly referred to as the Ebay tax or the Etsy tax coming into force, and want to know more.
The key change is that from 1 January 2024 HMRC is asking the big online platforms to start reporting the earnings of their users. Before this date it was only able to request this information. There is an implementation period till 31 January 2025 for platforms to tell HMRC whether or not they are subject to the new rules. If they are, they will have to report users’ data every year to HMRC by the self assessment deadline of 31 January.
This requirement will potentially have a big impact on anyone with a ‘side hustle’ such as an Ebay or Etsy trader or someone who lets rooms on sites such as Airbnb or Spare room and makes a regular income from it.
However, it is important to understand that people are not being asked to pay more tax nor has a new tax been introduced. What is new is that HMRC is now able to access more information about people trading using the various online platforms, with the aim of increasing its tax take.
Essentially, income from trading or property is taxable if it is more than £1,000 a year. It makes no difference if the value of the individual goods is low, for example, secondhand clothes or minor household items – the key thing is the total income over a year.
The £1,000 allowance is called the trading allowance for sellers or providers of services and the property allowance for people letting property or rooms. If you go above this amount you should fill out a self assessment tax return. And if you already have income above the £12,570 annual personal allowance you will have to pay income tax on those earnings. The allowance applies to income not profits. If, for example, your Etsy sales are more than £1,000 you pay tax on only the income above £1,000.
Are there exceptions?
The new rules were developed by the OECD (Organisation for Economic Co-operation and Development) for application in member states. It has recommended that those who make under 30 sales a year should be exempt from income tax if their total sales are less than €2,000 (about £1,700). The rules are aimed at drawing in people making a sustained income from online trading rather than say people involved in a flurry of online sales before downsizing their homes.
The €2,000 exemption should be in addition to the trading allowance but it is worth checking the specifics with an accountant. It is expected that smaller platforms probably won’t have to report users’ information but HMRC has not yet provided more details about this.
Trading on sites such as Ebay, Vinted, Depop and Etsy
These platforms are likely to be a particular focus of the taxman. They are now required to pass on the exact earnings of users, hence terms like Ebay tax or Etsy tax being bandied about. The fact that the platforms are based overseas makes no difference; it is the UK operations that HMRC will be targeting just as, say, the Internal Revenue Service will focus on US sellers.
HMRC is likely to decide you are running a business if:
- you buy stock and resell it;
- you buy or make items that you resell;
- you are a regular seller;
- you have created a brand.
Letting rooms on Airbnb and Spare room
Income can quickly build up for people letting rooms so it is likely almost any short-stay landlord will have to pay income tax, popularly known as Airbnb tax.
Taxi, delivery and Uber drivers and minicab services
The new rules are intended to catch passenger and delivery services so companies such as Uber will be required to share the identity and income of its drivers. Also, people who do a bit of mini cabbing on Friday and Saturday nights for a bit of extra income should make sure they declare this money to HMRC. However, if they make less than £1,000 a year they won’t have to pay tax on it. Gigeconomy workers for the likes of Deliveroo also come under the new rules.
Income earned overseas
Countries such those in the EU and the US are affected as they are members of the OECD. If you let properties abroad the tax authority in that country as well as HMRC can get your details.
The good news is if you are buying and selling as a business then you can deduct some of your expenses from your taxable income. The biggest one for many will be Ebay sellers’ fees. However, you can also claim PayPal fees, postage and courier costs, and for packing supplies.
In addition, you can claim for marketing costs, hiring a stall to sell your goods, photography costs, card processing charges and equipment and raw materials needed for your products.
Make sure you keep records of all of these. Do bear in mind that HMRC can look at your account and transaction details, and can approach your credit or debit card provider for information about you.
How much will I owe?
What you might owe is based on the standard HMRC allowances. You are entitled to a tax free income of £12,570. Income between that and £50,270 is taxed at 20% and above that at 40%, with an additional rate band of 45% for those on more than£125,140.
Realistically, if you have a full-time job and extra earnings of more than £1,000 (excepting the occasional trader allowance mentioned above) you will need to pay tax on the extra earnings. You should of course declare your PAYE income and tax on your self assessment as well as your top-up income.
What if I ignore the changes?
This is not a good idea. Affected online platforms must collect data such as names, addresses, dates of birth, taxpayer reference numbers, business registration numbers and transaction details, and share this information with HMRC. It is much better to be upfront and declare the income before the taxman starts asking questions.
What if I have been trading for years and not declaring the income?
HMRC can require tax owed in previous years to be paid with interest. In addition depending on whether or not it regards the unpaid tax as due to negligence, innocent error or intentional evasion, it can apply a percentage increase in the tax owed. If it deems the tax not to have been paid due to negligence (you should have known you had to pay it but didn’t know) an uplift of 30% would be typical. Deliberate evasion can attract higher rates up to 100% as well as prosecution. If you have underpaid tax HMRC is likely to treat you more favourably if you volunteer information without being asked.
Those who need individual advice about their tax affairs or who are worried about not having paid tax in the past on digital sales should give one of our friendly team a call on 020 8858 4303 or email us at firstname.lastname@example.org.We can also help you make the most of any applicable allowances and expenses claim to ensure your tax bill is as small as it can be and compliant with HMRC rules.