The growth in side-businesses over the past few years has been significant, and from this January’s tax return deadline, the new rules introduced by HMRC last year to target individuals and micro-businesses making money from online platforms come into effect.
Prior to the new measures being introduced, HMRC could request information from UK based platforms. However, the new rules indicate platforms will be required to routinely report on transaction data for sellers; this will enable HMRC to ensure that all income earned through side businesses is tracked in order to tackle tax evasion and to detect any deliberate non-compliance.
Since the initiative was announced in October 2023, it has raised concerns amongst those that sell goods online, as the threshold for obligatory self-assessment is relatively low at £1,000.
If your whole business or side hustle is making income via digital platforms, you are likely to be affected by the new HMRC regulations when doing your tax return in January 2025.
Rob Rees, Divisional Director at Markel Direct, the specialist insurer of freelancers and small businesses, breaks down the so-called ‘side hustle’ HMRC regulations, gives guidance on who will be impacted and shares tips for keeping on top of your tax return.
Who is impacted by the change?
Anyone making money from online platforms could be impacted by the change; however, those operating side-businesses that trade online are most likely to be affected.
The new measures will apply to anyone who makes more than £1,000 a year by providing services or goods online, and are classed by HMRC as ‘trading’: This would include resellers of items or making goods with the intention of selling them for a profit, but does not include people disposing of second-hand or unwanted items for a lower price than they originally paid.
If you exceed this £1,000 threshold by selling goods or services online and making a profit, then it’s likely you will have to pay tax.
To give some examples of who would and would not need to pay tax under the new rules:
- Example 1: Sarah clears out her wardrobe and sells her unwanted clothes on a digital platform for £6,000. She sells these goods at a lower price than she originally paid. She does not need to pay tax on this income, as you do not need to pay tax on personal possessions you’ve sold for £6,000 or less if you did not make a profit.
- Example 2: Graham purchases clothes from charity shops, which he then sells on digital platforms. He aims to sell the clothing for more than he originally paid, and makes more than £1,000 a year doing so. As Graham would be making a profit, his income from this activity would be taxable.
- Example 3: Alex makes wax melts in her spare time, which she sells online through digital platforms. Her side-business grows rapidly and she soon makes in excess of £1,000 a year profit. As Alex is trading with the intention of making a profit, this activity would be taxable.
For more information, check the HMRC website.
Five key takeaways
Tax returns can be daunting for any business, especially for sole traders or ‘side hustlers’ who may manage their tax affairs without an accountant. To help you stay ahead of the game, here are our key takeaways.
1. Personal old items and old clothing can still be sold online
Despite misinformation spreading on social media, like TikTok, HMRC are NOT targeting individuals that wish to sell their own clothing second-hand for less than they originally paid. Individuals are allowed to sell items on eBay, Vinted, Depop etc. up to £6,000 without paying tax, so a ‘new year’ clear out of your wardrobe can continue.
2. If you are making a profit on online sales, you need to declare it in a self-assessment
Although you may not feel like a business owner, if you’re providing a service or selling goods online and making a profit of over £1,000 on the sale of items, you must declare it on your self-assessment and pay the correct level of tax. You can find out more information on how to submit a self-assessment here.
3. Remember to submit your tax return before the deadline
Tax returns can be unnerving, particularly for those who run a side-business as a way to boost their income. However, under these new regulations it is important to ensure your self-assessment is submitted by January 31st, or you could face fines or penalties for filing late.
Those newly impacted will have to submit theirs by 31st January 2025, so it is best to start gathering all transactions on online platforms and begin this process as soon as possible to avoid a tax return headache closer to the deadline.
4. Consider arranging cover against tax investigations
If you operate as a micro-business, it’s worth considering arranging legal expenses insurance. Amongst other things, it covers the legal costs and expenses in respect of tax investigations, so if you were to make an accidental mistake in your tax return, you would have the peace of mind that you are covered.
5. Don’t forget to claim expenses
Side hustles come with their own running costs, whether that is special equipment and materials, delivery costs or even fuel. Like with other businesses you can reduce your side hustle tax bill by claiming allowable expenses.
The HMRC website has a detailed list of what these expenses can include. Expenses are deducted from your total income, and as you are taxed on the profit generated from your income, it can result in a lower tax bill.
To find out more about insuring your online retailing business, visit the Markel Direct website.