What are the actual implications of the ‘side hustle tax’ for online sellers?
5th January 2024
Posted in Articles by Forbes Dawson
Over the past few days, much attention has been given to a new ‘side hustle tax’ coming into force from 1 January 2024. Under these rules, online platforms, such as eBay and Depop, will now be required to collect and send seller information to HMRC. This includes sellers’ bank account details and transaction volume, amongst other data. The digital platforms must report sellers’ income by January 2025; sellers will also get a copy of the information provided to HMRC.
Widespread media attention of the issue has resulted in misunderstandings and inevitable concerns that individuals will be taxed if they so much as put their grandmother’s unwanted Christmas jumper up for sale online.
In fact, the ‘side hustle tax’ is not a new tax at all and is merely part of HMRC’s implementation of international agreements regarding digital taxes. The type of seller affected is likely to be quite narrow, as we explain below.
Selling unwanted items on an online platform
A big concern that has been rolling around social media is that people will have to pay tax on unwanted items that they sell online to make some extra cash. This is incorrect.
For an individual to be subject to tax on money they make from selling online, they need to be ‘trading’. The general principle here is that they must be doing the activity for profit. Selling your own unwanted clothes is generally not considered to be for profit (and in most cases the items are being sold for less than they were originally bought for). Consequently, individuals are not liable to pay tax on these sales.
What if the unwanted items were a gift?
The answer is still likely to be ‘no’ for items which were received as a gift. One would assume that gifts are received only now and again, and simply selling the item second-hand is unlikely to be seen as ‘trading’ in the eyes of HMRC.
What if you are regularly buying and selling items for a profit?
Where items are being bought and sold on a more regular basis, the seller should assess whether this could be considered a ‘trade’. The most obvious ‘badge of trade’ is the individual having a profit motive.
For example, if you are regularly purchasing clothes for a low price from a charity store and selling them on for more, then HMRC are likely to view your intention as being profit-making. The profit would then be subject to income tax.
However, there are other factors to consider. For example, an individual who simply spots an opportunity to make a one-off profit without undertaking much additional effort would arguably not be considered a trader. If more effort is required, e.g. repairing a car to sell it on, then the lines become more blurred.
It is worth noting that under the agreed protocols, online platforms are only required to report sellers with more than 30 transactions in a year. This indicates the level of threshold that would generally be considered to constitute trading activity (although there are examples in case law where a single transaction has been deemed to be a trade).
How the rules apply in practice
As noted, the ‘side hustle tax’ is not a new tax. It is simply applying the rule that income earned from trading activities is taxable. However, it is important to note that every individual can earn up to £1,000 of trading income before expenses, tax free. Similar rules apply to property ‘side hustles’, e.g. hosting a property on AirBnb, for which a separate £1,000 tax-free allowance exists (not to be confused with rent-a-room relief). In both these scenarios, there is no reporting obligation to HMRC.
If you earn more than the allowances in a tax year, then a reporting obligation will apply (unless, say, the income fell within the personal allowance). In this case it is important that you keep track of expenses as well as the revenues received, e.g. online marketplace fees. Where allowable, these costs will reduce the amount of profit on which tax is due. Indeed, in some cases, there could be an overall trading loss that may potentially be offset against other income – although conversely this would bring into question whether the business is realistically being carried on for profit.
Forbes Dawson view
This hopefully clears up some of the misconceptions. For most, the odd ‘side hustle’ here and there will not be subject to income tax or will fall within the allowed thresholds. However, individuals who have been undertaking more organised activities generating above £1,000 per annum need to be aware that HMRC will now have access to data from digital platforms. If they have not been following the rules correctly this could lead to an enquiry, and individuals who have not paid the correct amount should consider whether there is now a need to voluntarily disclose their affairs to reduce the risk of penalties.
