February 2024
Selling second-hand items on digital platforms like eBay is commonplace, but do you know when income tax is due on the items you sell? It’s been well-reported that HM Revenue & Customs (HMRC) is cracking down on online sellers, so you may be wondering if you have to pay a ‘side hustle tax’ on the items you sell. The crucial factor is whether you are ‘trading’ or not.
To tackle tax evasion, platforms like eBay, Vinted and Etsy must report seller information directly to HMRC. Sales of personal items are not usually taxable. But if you buy clothes to sell for profit and earn more than £1,000 per year, you are ‘trading’ and must register with HMRC for tax purposes.
Digital platforms started collecting this data on 1st January 2024, and the first reports to HMRC are due by 31st January 2025. If you think your online selling activities may be classed as ‘trading’, then read on for Spotlight’s essential guide on what to do next.
Is there such a thing as a ‘side hustle tax’?
‘Side hustle tax’ is not a type of tax in itself, nor is it a new tax. The new rules are there to ensure that anyone turning a profit from a side hustle is disclosing their earnings to HMRC and paying tax in the same way as traditional businesses.
If you have a clearout and sell some unwanted clothes, you are not classed as trading, and there is no need to inform the tax man.
However, if you purchase clothing in bulk to sell for a profit on eBay or Vinted and your profits exceed the trading allowance of £1,000 per year, this is classed as ‘trading’. You must register for self-assessment, declare your earnings to HMRC each year and pay tax on profits above your tax-free personal allowance (see more on this below).
It’s worth noting that, even if you are not ‘trading’, you may have to pay Capital Gains Tax when selling personal items if your profit is more than £6,000 (£3,000 from 6th April 2024).
How will this affect sellers on online platforms like Vinted, eBay and Etsy?
Online sellers must now provide additional information to digital platforms such as eBay, Vinted, Etsy and Airbnb, including how many sales they make and how much income they generate from those sales. The online platforms then must share this information with HMRC, who may investigate any traders that should be registered for self-assessment.
If you are already registered for self-assessment, there is no further action to take. If you are earning in excess of £1,000 a year from your side hustle and have not registered for tax, then it’s important to do so now or you could face penalties from HMRC.
What are the penalties for side hustle tax evasion?
As part of this new year’s tax clampdown, HMRC will be informed if your online sales exceed the trading allowance of £1,000. Sellers who don’t declare their side hustle profits from online platforms may be investigated and fined.
Penalties vary depending on:
- the amount of tax evaded
- the number of years that tax was not paid
- if the disclosure was prompted by HMRC
- if there was a lack of reasonable care
See more on tax penalties here
Why has Vinted introduced a £1,000 limit?
Following the announcement of the new HMRC tax rules described above, there has been some outcry among the Vinted community. While the new rules may seem severe, it is not a targeted attack on Vinted sellers. Until this point, online selling has often slipped under the tax radar, and the new rules are there to detect those who are either mistakenly or deliberately avoiding tax. It’s hoped that it will bring about equality with how traditional businesses pay tax.
Will this prevent sellers from exceeding the taxable threshold?
No, it will only prevent online sellers from exceeding the trading allowance via Vinted sales alone. If you sell across multiple digital platforms, you must register for tax if your total sales exceed £1,000.
It is also vital to understand that it is not the responsibility of online platforms to pay tax on your behalf. These new rules are purely to report online sales to the tax authorities – it is you who must take action and register for self-assessment.
What to consider when selling on online platforms such as eBay and Vinted
Just because your income may be a ‘side hustle’, it is not a right to avoid paying tax. If you are trading on digital platforms such as eBay and have not declared your income up to now, let’s take a look at what you need to do next.
Register for self-assessment
When your online sales reach £1,000, your side hustle has become a business in the eyes of HMRC, so it’s time to register for self-assessment. It is a straightforward process – simply visit the Gov website and complete the registration process online. HMRC will then issue you a Unique Taxpayer Reference (UTR) number, and you will receive a notice to file a self-assessment tax return each year.
Complete an annual tax return
Once registered, you must file your self-assessment tax return online at the end of each tax year by 31st January. You will need precise details of your income and business expenses. Some expenses can be used to reduce your taxable income, such as costs of purchasing goods sold, internet costs, stationery, software and accountancy services.
Tax is only due on profits exceeding your personal allowance, which currently stands at £12,570. All profits under this threshold are tax-free. Even if you earn between £1,000 and £12,570, you must complete a tax return to assure the tax authorities that your earnings are below the threshold. If they suspect you are underestimating your income, they may open an investigation.
Consider professional advice from an accountant
If you’ve never paid tax before and have been somewhat blindsided by these new rules, then it may be a good idea to get professional advice. Spotlight Accounting can guide you through the process, including advice on deductions and allowable expenses.
We can even complete the self-assessment on your behalf. If your side hustle is on the rise and turning a good profit, we can help you to be more tax efficient and plan your business growth in the world of e-commerce.
Call Spotlight Accounting about tax on side hustles
We hope this article has been useful for you in determining your own personal tax situation. If you still have doubts, the experts at Spotlight Accounting can help. Please contact us, and one of our friendly accountants will be in touch.
Conclusion
The ‘side hustle tax’ is not a new tax designed to persecute online sellers. It is part of a UK government initiative to ensure that online traders are properly declaring their income like other businesses do.
If your total side hustle earnings exceed £1,000, you must register for self-assessment and pay tax when your income exceeds your personal allowance of £12,570.
