How do HMRC find out about undeclared income?
If you are someone who sells goods or services online through platforms like Amazon, eBay, or Etsy, you need to be aware of the rules and regulations surrounding taxes.
HM Revenue and Customs (HMRC) has been sending letters to individuals who they believe have not disclosed all their income as online sellers. This has really ramped up in the last 3 months from the start 2023. The letters contain a certificate of tax position that HMRC requests recipients to complete and return.
Word of warning to all sellers who think operating as a private seller on eBay allows you to avoid tax (this is not mine I run a Ltd business) as of this year eBay is feeding sales information about private sellers as well as business sellers to HMRC
WOW! So I have just learned today, HMRC send letters out regarding selling on online marketplaces!!
Why am I receiving this letter if I am not a business?
Many people think that when they sell on Amazon, Etsy or eBay as an individual, they do not need to pay tax. However, HMRC have now completed access to sales data from Amazon, Etsy and eBay.
This means they will know the exact number of sales you have made. If you have sold more than £1000 worth of items in a tax year you will need to submit a self assessment. You still have to do this even if you have made less than £1000 in profit, its all about your gross sales rather than your costs. This is the part which catches people out.
If you sell goods or services through an online marketplace, you might need to pay income tax and National Insurance contributions on your profits, depending on the amount of money you make. Even if you only sell things occasionally, you should check if you need to tell HMRC about the money you make.
If you receive a letter from HMRC, it’s crucial that you respond by the date stated on the letter. Even if you don’t have any income to tell them about, you must respond within 30 days of the date the letter was issued. We would be extremely precise in what you share with HMRC as they have already obtained information from third parties.
Therefore it is always best to get an accountant to take a look at your income before replying to this letter. You may just send your sales listings from the online platforms and show no costs. HMRC will make you pay income tax on whatever you submit so using an accountant will ensure you have incorporated all the allowable expenses you can reduced your tax position and liability.
Is the HMRC online marketplace sales letter genuine?
You may think this is a phishing exercise, but HMRC genuinely do send these letters and have more information than you think. If you receive a letter from HMRC regarding your online marketplace sales, you may wonder if it is genuine. It is important to note that the letters are real and are part of HMRC’s ongoing efforts to tackle tax evasion and ensure individuals pay the correct amount of tax.
The letters are based on information obtained by HMRC from third parties and are aimed at encouraging people to bring their tax affairs up to date. If you receive a letter and are unsure about its authenticity, you can contact HMRC directly to confirm that it is genuine before taking any action.
How do I know if I have income from online marketplaces such as Amazon, Etsy and eBay?
If you have sold goods or services through online marketplaces such as Amazon, Etsy, and eBay, you may have income that needs to be reported to the tax authorities. To know if you have income from these digital platforms alone, you should check your account statements, which will show the payments you have received from buyers.
You should also keep track of any expenses related to your sales, such as fees charged by the marketplace or shipping costs, as these can be deducted from your income. It’s important to keep accurate records of your online marketplace income and expenses throughout the year so that you can file your tax returns correctly and avoid penalties.
For Amazon download the date range report for the Tax year.
For eBay download the eBay managed payments report for the tax year
For Etsy download the sales data for each month in the tax year
What if I have undeclared income I need to tell HMRC about?
If you have completed self-assessment tax returns for previous years, make sure they are complete and correct. Include all your taxable income, and if your gross income from trading through online marketplaces is less than £1,000, you might be able to use the £1,000 trading and miscellaneous income allowance. This will depend on whether you have any other sources of self-employment, casual, or miscellaneous income.
If you haven’t completed self-assessment tax returns for previous years, check if you need to tell HMRC about the money you’ve made through an online marketplace. Use HMRC’s guidance and online tool. If you need to tell HMRC about income that you haven’t disclosed to them, use the online Digital Disclosure Facility or Disclosure Service. You need a Government Gateway user ID and password to use the Digital Disclosure Facility. If you don’t already have a user ID, create one by registering for HMRC online services.
Recommended read: Do eBay Sellers have to pay VAT on fees?
If you’re confident that you don’t have undisclosed income that you need to tell HMRC about, including cases where all your undeclared income (and any other trading and miscellaneous income that you’ve disclosed) is covered by the trading allowance, contact HMRC to let them know. You can complete the certificate of tax position, write a letter, or telephone HMRC. Whatever method you choose, you must confirm that you don’t need to make a disclosure and explain why.
While there’s no legal obligation to complete and return the enclosed certificate of tax position, you must respond to the letter from HMRC. If you don’t respond, HMRC is likely to follow up. They’ll probably send you another letter in the first instance. If you fail to respond, HMRC may decide to open a compliance check into your tax return if you’ve submitted one. If you haven’t completed a tax return, they could issue a notice to file a tax return or issue an assessment.
What happens when HMRC sends a follow up letter requesting information?
When HMRC sends a follow-up letter requesting information, it means that they require additional information from you to determine how much tax you owe or if you need to submit a self assessment tax return. You should carefully read the letter and provide the requested information within the specified deadline. Failure to respond to the follow-up letter or providing inaccurate information can result in penalties or further investigation.
At this point we would recommend contacting an accountant who understands ecommerce as they can ensure that all revenue, fees, advertising and costs can be presented to HMRC exactly how they want. This will get you the most favourable tax outcome and HMRC will be content you are now handling your tax affairs
How best is it to deal with HMRC?
The best way to deal with HMRC is to be open and precise. Do not send partial data or assume they will fill in the blanks for you. You want to present your data in the format they want and can understand. We strongly advise getting an accountant to do this for you so that HMRC will be confident of the information you are providing.
The more they perceive you as difficult the more likely it is your will get an unfavourable outcome or increased penalties.
Recommended article: How to View Your VAT Certificate Online
What information will I need before I send this to HMRC?
You will need the following information:
Bank statements for the period, even if not all business expenditure
Sales Reports from the online platforms you sold on (see above)
Details of business expenses, including invoices where you have them
A statement of profit and loss
Will this impact my income tax position?
If you had a full-time job while selling on Amazon, Etsy or eBay. Then you may have to pay tax between 20% to 40% plus national insurance on all profits you have made on your e-commerce profits. This can be quite a shock if you have not planned this.
Will I have to pay penalties and interest?
If you fail to provide accurate and timely information to HMRC, you may be subject to penalties and interest charges. Penalties are usually calculated as a percentage of the tax owed, and can vary depending on the severity of the non-compliance. Interest charges are applied to any outstanding tax due, and accrue daily until the tax is paid.
However, HMRC may exercise discretion when considering whether to apply penalties and interest, and may take into account factors such as the nature of the non-compliance, the taxpayer’s past compliance history, and whether the taxpayer took reasonable care to meet their tax obligations. It’s always best to be proactive and work with HMRC to address any issues as soon as possible to minimize the risk of penalties and interest.
The best course of action to reduce any potential penalties are:
Provide all the information required
Do not hide anything
Appoint an accountant to deal with it for you to show that you are now taking this seriously and seeking professional tax advice
What to do now?
The increasing number of online sellers has led to more people selling goods or services online. We strongly advise you get an accountant to respond to HMRC to ensure you do not incur penalties or pay too much tax. We have helped 100s of people deal with these stressful HMRC audits.
You can book a free consultation with us by going to the contact page.