Selling online can lead you to a false sense of security when it comes to what you owe HMRC.
HMRC thinks it’s fine for you to sell online, but it does want to know when you make a business profit out of it. This is the kind of money you can make selling on marketplace sites such as eBay and Facebook, or through Bitcoin transactions.
It may be that you’re not doing this full-time, but that won’t mean you’re exempt from paying tax.
So, what do you need to know about paying tax if you’re an online seller?
Must Online Sellers Pay Tax?
Large numbers of people sell things online. Total visits to eBay’s UK site exceed 300 million a month. It’s an easy way for people to sell and it offers them a flexible and scalable business model.
However, one of the issues may be that selling this way doesn’t always feel like it’s a business, but more of a money-making hobby or sideline.
And some online sellers are indeed doing it just for fun or to raise funds for charity. But HMRC is wary about self-employed sellers who aren’t declaring their income from online selling.
It defines certain aspects of online trading as being a trade:
- Setting out with the intention of making a profit
- Carrying out repeated transactions over a short period
- Selling items at a fixed price, like a retailer
- Modifying items to increase your profit when you sell them
- Borrowing money to buy items you intend to sell then paying this back once you’ve cleared your transaction
- Limited time between buying items then selling them, which raises questions of the seller’s ownership
- Where you can’t prove you had pride of possession of the items before selling them.
Basically, it’s the difference between:
- Someone who sells items online that they own but don’t wish to keep, and
- Someone who acquires items with the sole intention of selling them for profit.
If you’re not breaching any of the conditions listed above, then you might, potentially, not be liable for tax.
However, there’s also the question of how much money you earn in online sales, whether you’re doing it for business or for other reasons.
How Much Can Online Sellers Earn Before Paying Tax?
HMRC wants to collect tax that is due by law, but it doesn’t want to penalise people indiscriminately for earning extra money.
Therefore, it has an upper limit of £1,000, up to which you can sell online and not have to pay tax on your earnings (provided you aren’t set up as a proper online business).
But as an online marketplace seller, you could still fall foul of the regulations if you sell goods worth more than £1,000 within a single tax year. This applies to sellers on sites such as Depop and Vinted as well as eBay.
Entrepreneurs can earn thousands of pounds on these platforms, even if they don’t see what they’re doing as being a proper business. This is something that HMRC is only too aware of.
Many of these successful sellers may be unaware that they will have to pay tax as sole traders.
What About Bitcoin & Other Cryptocurrency Profits?
With the value of Bitcoin and other cryptocurrencies rising rapidly, this has become another attractive way for people to make extra money through online trading.
But there is a misconception that assets from Bitcoin are like lottery wins or gaming earnings and therefore tax-free.
In fact, profits from trading in Bitcoin are subject to tax like other earnings. HMRC advises that individuals buying and selling Bitcoin are likely to be subject to capital gains tax (CGT).
If selling Bitcoin takes you over your annual CGT exemption, then you would need to pay tax on these earnings. Currently, this stands at £12,300.
Don’t Risk a Penalty, Get in Touch Today
HMRC does have the authority to access PayPal information and request seller details from marketplace sites. Small, individual amounts of income from these online sales can easily accumulate to the point where they amount to taxable earnings.
Failure to declare these earnings for tax can result in significant fines. In some cases involving many thousands of pounds in earnings, sellers have faced imprisonment for tax evasion.
The easiest way to avoid getting on the wrong side of HMRC is to complete a self assessment tax return or hire an accountant to advise you.
Your Ecommerce Accountant provide a range of ecommerce accountancy services that make this whole process straightforward and painless. What’s more, we have low-cost, fixed monthly fees making our services accessible even for startup businesses and those running online ‘side hustles’ to supplement their earnings.
Contact us for a FREE consultation so that you don’t have to fret about your online earnings.