The question being asked recently is To Sell not to Sell
Selling second-hand clothes and other items on Vinted, eBay and other platforms has become increasingly popular in recent years.
However, there has been some confusion and concern among sellers about new tax reporting rules.
Rachael Ball, one of LHP Accountants Directors, explains the in's and out's off what you need to know.
It's important to note that from the seller's perspective, nothing has changed in terms of tax rules. What has changed is that the digital platforms will now be reporting the income to HMRC. This will enable HMRC to reconcile income reported by both the seller and platform, and to identify those who have not declared their income.
In the UK, individuals can earn up to £1,000 per year from a hobby or side hustle before they need to register as self-employed and file a self-assessment tax return. Freelancers who earn income from selling items online will need to report this income on their self-assessment tax return, and it will be taxed on top of their main income at the appropriate income tax rate.
If you are employed and generate income from selling items online, you will also need to report this on a self-assessment tax return and pay tax on it each year if you earn more than the £1,000 allowance. This means registering as self-employed and filing a tax return.
It's important to note that all income generated from online platforms is taxable, but until you earn more than £1,000, you don't need to report that income to HMRC. This is known as the trading allowance.
So if you're selling your second-hand clothes or other items as a hobby or side hustle, there's no need to panic about the new tax rules.
If you regularly sell online stock, trading and generate over £1,000 from your side business, HMRC will classify you as a trader, meaning your side hustle is considered a business.
To formalise your business, you must register it as a company, with a deadline of 5th October following the tax year in which the business commenced.
When your revenue exceeds £1,000 annually, you are required to report this, along with your profits, to HMRC in January via self-assessment. If registered as a sole trader or a business and you disclose your expenses and profits, only your profits are subject to a 20% tax.
Registering as a business offers tax advantages, including relief on "allowable expenses" - expenditures that contribute to the business.
For instance, if you earned £1,100 but spent £100 or more on allowable business expenses, such as goods purchased for resale, you might not owe any tax.
Since September 2016, HMRC has had access to platforms like PayPal, enabling them to request detailed information. This initiative was prompted by 870,000 individuals in the UK, including online sellers, who neglected to submit a self-assessment return in 2016, leading HMRC to monitor this sector closely.
You must report any revenue exceeding £1,000 and profits in a self-assessment tax return by 31st January annually.
Tax-free allowance:* £1,000
Tax owed:* Earnings surpassing £1,000, minus allowable expenses, and calculated based on your total income tax rate.
If you are looking for some advice on this topic, get in touch for a free consultation.