I’ve received a letter from HMRC about income earned on online marketplace 2024

Received a letter from HMRC about selling online

The rise of online marketplaces has led to an increase in the number of people who sell goods or services online. While many people do so as a hobby or to make a little extra side hustle money, others use places like Amazon, Etsy, eBay, Depop and Vinted as their main source of income. HMRC has been stepping up its enforcement efforts to ensure that everyone pays the correct amount of tax on their online marketplace earnings. Understanding and paying tax on earnings from online sales is crucial, and this article will guide you through navigating these obligations.

How do HMRC find out about undeclared income?

So, if you sell goods or services online through platforms like Amazon, eBay, ETSY, Depop or Vinted you need to be aware of the new rules and regulations surrounding taxes. These rules are nothing new but how they are being reported is.

Over the past years, you could quite comfortably sell your personal possessions and wares online, including engaging in eBay selling (or start a business from home) and be able to sell on these marketplaces, you would then declare any income on a Tax Return if you sold more than £1000 worth of products online – generally if you were acting as a business, you would then need to register as a business.

However, there used to be no way for HMRC to find out from these marketplaces the actual amounts you had been selling. This changed in January 2023 as HMRC could then request your sales information from these marketplaces, and some people started receiving a letter from HMRC.

What has now happened (1st January 2024) is that online marketplaces sellers will need to report sales volumes to the HMRC as a matter of course, rather than by request, and, if you sell more than £1000 you will more than likely need to fill out a tax return.

Since this started in 2023, 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 ramped up from the start of 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 HMRCWOW! 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 online on Amazon, Etsy or eBay as an individual, they do not need to pay tax. However, HMRC has now complete access to sales data from Amazon, Etsy, eBay, Depop and Vinted (Plus others).

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 tax return. You still have to do this even if you have made less than £1000 in profit, it’s 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, you must respond by the date stated on the letter. Even if you don’t have any additional income to tell them about, you must respond within 30 days of the date the letter was issued. You need to be extremely precise in what sales data you share with HMRC as they have already obtained information from third parties and know what to expect.

If you are unsure of what to do – Which is probably the main reason you’re reading this – then you have two choices.

First is the recommended way:

Get an accountant to look at your income before replying to this letter. You may 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, and you can reduce your tax position and liability.

Second is fine if you know what you’re doing:

If you know what you are doing and have kept meticulous records on stock purchase costs, postage & packaging costs, allowing for all allowable expenses, then go ahead and submit, but do this with caution, there is no way to make changes once sales data is sent to HMRC and you could potentially be opening yourself to costs that would really don’t need to pay!

Is the tax authorities’ online marketplace sales letter from HMRC genuine?

You may think this is a phishing exercise, but HMRC genuinely sends these letters and has 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 action.

How do online sellers know if they have income from marketplaces like Amazon, Etsy and eBay?

If you have sold goods or services through online marketplaces such as Amazon, Etsy, eBay, Depop or Vinted then 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, showing the payments you have received from buyers.

These sales must be the total sales price, i.e. the total amount the buyer has paid – not the total minus fees and postage!

I.e. If you sell an item on eBay for £100 the breakdown of the sale may be as follows: Sales price £100.00 eBay Fees £15.00 Cost to post £5.00 Cost of packaging: £1.00Total you get in your pocket £79.00 In the exercise above the amount you need to take note of as your total sales amount is £100 NOT the £79 you are left with after your costs, the direct costs part of this transaction would be the £21 you paid out.

Then you need to work out your profit from selling it, so if the item cost you £50 then your profit is the difference between your purchase price and your sales price minus the direct costs of selling that item: Sales price £100 Direct costs £21 Cost Of Goods £50Gross profit £29 Note that the gross profit doesn’t include any of the other allowable costs that an accountant would be able to add to lower the profits.

In some cases, selling personal items for more than their purchase price could result in owing capital gains tax, specifically if the profit exceeds a certain threshold. This is particularly relevant when selling personal items of significant worth.

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

If all this looks very daunting and you want to make sure things are done properly and you’re not having to pay more than you need to then contact us, we can offer a free consultation to chat about what needs to happen, give you some free advice and offer you a transparent price to take this burden off your hands.

What if I have undeclared income I need to include in my self assessment tax return to HMRC?

If you have completed self-assessment tax returns for previous years, ensure they are complete and correct. Include all your taxable income, and if your gross income from trading on 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 self-employment, casual, or miscellaneous income sources.

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 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 allowance, 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, 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 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 you 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:

  1. Bank statements for the period, even if not all business expenditure

  2. Sales Reports from the online platforms you sold on (see above)

  3. Details of business expenses, including invoices where you have them

  4. A statement of profit and loss

Will this impact my income tax position?

If you had a well paying full-time job while selling on Amazon, Etsy, eBay, Depop or Vinted. Then you may have to pay tax between 20% to 40% plus national insurance on all profits you have made and taxes 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 about taxes you owe 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 consider factors such as the nature of the non-compliance, evade tax due, 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 minimise the risk of penalties and interest.

The best course of action to reduce any potential penalties are:

  • Respond Quickly

  • 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 here

Free 30 Minute Consultation

Why not grab a Free 30-minute consultation with us, we can answer any questions you have about your e-commerce or marketplace business, guide you on tax efficiency and see if we can help you.

Free 30 Minute Consultation

Why not grab a Free 30 Minute Consultation with one of our Accountants, they can answer any questions you have about your e-commerce or marketplace business, guide you on tax efficiency and see if we can help you.

You Have Nothing to Lose & A Lot to Gain

Free 30 Minute Consultation

Why not grab a Free 30 Minute Consultation with an Accountant, they can answer any questions you have about your e-commerce or marketplace business, guide you on tax efficiency and see if we can help you.

You Have Nothing to Lose & A Lot to Gain
Share the Post:

Recent Posts

Book your Free Consultation or Quote for services

Want to speak to an e-commerce accountant for free, get 30 minutes of expert advice on accounting for your e-commerce business.
Not have any questions? If you just want a quote then book a meeting, we can discuss what you need and give you a quote.

Get more information on becoming an affiliate.

Please get in touch

Wait! Before you go...

We don’t want you to miss out on your FREE consultation with one of our team.
Ask any accounting questions you might have. We’re usually about to give you some quick fixes or answer those questions that have been bugging you.
 
We’ve even advised some Amazon sellers on how to save Thousands of pounds on their Amazon fees.