In the ever-evolving landscape of online commerce, the UK’s HM Revenue & Customs (HMRC) has recently gained new powers aimed at addressing the taxation of individuals engaging in side hustles and selling through popular online platforms such as Etsy, Vinted, and Depop. As of January 1, 2024, these platforms are now required to share crucial information about sellers, including names and annual income generated from their sales.
With the rise of side hustles as a means to cope with changes in work patterns and the impact of inflation on living costs, many individuals are unknowingly stepping into taxable territory. While HMRC offers various allowances to allow for tax-free earnings, it has invested £39.9 million in a specialized team to identify those not reporting income earned through digital platforms.
Key Allowances to Consider:
- Personal Allowance: £12,570 (income up to £100,000)
- Capital Gains Tax Annual Exemption: £6,000 (£3,000 from April 6, 2024)
- Dividend Allowance: £2,000 (£1,000 from April 6, 2024)
- Interest Allowance: Up to £1,000 (depending on other income)
- Rent a Room Allowance: Up to £7,500 for letting out a room
- Lettings Allowance: Up to £1,000 from rental activity
- Trading Allowance: Up to £1,000 from trading activities
Letting and Trading Allowances, introduced in 2017, were meant to spare individuals with small amounts of trading income from the hassle of tax returns. However, HMRC’s significant investment suggests a focus on ensuring taxable income isn’t slipping through the cracks.
Determining Taxable Income:
Not all online sales are taxable, and understanding the badges of trade is crucial. Consider factors such as the intent to make a profit, the frequency of similar sales, modifications made to items, duration of ownership before selling, and how the asset was acquired.
VAT Considerations:
Apart from income tax, sellers must also navigate indirect taxes like VAT. For UK-based businesses, the VAT registration threshold is £85,000, while non-UK businesses have a nil threshold. Voluntary VAT registration is an option, allowing recovery of VAT on costs.
Next Steps for Sellers:
- If earning £1,000 or more annually from casual earnings, report it on your tax return.
- If not doing a tax return but should be, contact HMRC for a Unique Tax Reference (UTR) and file a tax return annually.
- If there’s potential tax to pay from previous unreported income, seek professional advice.
Conclusion:
As the digital landscape continues to reshape the way we earn, HMRC’s new powers underscore the importance of staying informed and compliant. Whether you’re a seasoned side hustler or just testing the waters, understanding the tax implications of your online ventures is key to avoiding unexpected surprises from the taxman. Stay diligent, track your sales, and be prepared to explain your tax position if HMRC comes knocking.