You may have heard recently that HMRC are following up on people making online sales through the likes of eBay etc. without declaring their income. Are you worried about online income and don't understand the rules? Well, read on...

How Would HMRC Know?

HMRC has the power to request information it reasonably needs to check your tax position. This authority, commonly used during tax inquiries or tribunals, is granted under Finance Act 2008 and can also be used to collect data without the taxpayer’s permission. HMRC uses these powers to request data from third parties like online retailers, banks or letting agents to give HMRC a wealth of data about online sales, property rentals, insurance, bank interest etc. all tied to an individual.

In brief, HMRC receives bulk transactional data involving thousands of users. For example:

  • They may request customer lists from sales websites offering items or services (think eBay, Etsy, AirBnb, OnlyFans, Depop, Vinted etc.)
  • They could ask for policyholder lists from insurance companies, especially those offering specialized services like landlord insurance.
  • Letting agents might be required to provide details of gross rents received per property in a tax year.
  • Mortgage providers, especially those offering Buy-to-Let mortgages, might also be approached.

HMRC has also been thought to use information from social media to identify individuals who seem to be living beyond their apparent means, or are selling goods or offering property for rent etc.

Will HMRC contact me?

In short, yes. If HMRC think you have undeclared income, the next stage is usually a ‘nudge letter’. This letter will state HMRC believe there could be an error on your tax return(s) and will ask you to check and confirm, or inform them about missing income or payments. If you get to this stage, you have been ‘prompted’ to disclose further information. This means penalties could be higher than if you had volunteered the information without a prompt. (See the table below for maximum penalties)

What are the rules?

  • Are you trading or not? Selling your old unwanted clothing and belongings for less than you paid for them is not trading, however sourcing items and marking them up to sell is, even if the items you are selling are second hand. If you are trading, remember you have a £1000 Trading and Miscellaneous Income Allowance – this means if your total income* from trading or providing services online was less than £1,000 you don’t need to tell HMRC. Be aware that any belongings you sell for over £6,000 could fall under Capital Gains Tax rules if you make a profit.
  • If you’re renting out property (including holiday rentals), you have an additional £1,000 property allowance – so again if your total income* from property is less that £1,000 you don’t need to tell HMRC
  • If you’re renting out your home, or part of your home (think AirBnB), you can earn up to £7,500 tax free with the Rent a Room Scheme. You MUST complete a Self-assessment Tax Return if your total income* exceeds the £7,500.
*£1,000/£7,500 of total income is before you deduct any expenses, not your profits.

What Should I Do?

Remember, if HMRC start a tax investigation they can go back through the last 4, 6 or 20 years depending on whether they think the behaviour is a normal mistake, careless or deliberate. If you’re worried about undeclared income, don’t wait for a nudge letter, speak to your Tax Agent (accountant or bookkeeper). Maximum penalties are greatly reduced for unprompted disclosure of errors or omissions. If you are worried and don't have a Tax Agent please get in touch.

Penalties for submission of an incorrect tax return
(Shown as a percentage of the tax due)

Behaviour Pattern      Maximum penalty      Maximum penalty (unprompted disclosure)      Maximum penalty (prompted disclosure)
Deliberate Concealed: 100% 30% 50%
Deliberate Not Concealed:    70% 20% 35%
Careless: 30% 0% 15%
Mistake: 0% - -

Full details can been seen in the reference links below

For Reference:
GOV.UK | HMRC Guidance : Selling online and paying taxes - information sheet
GOV.UK | Check if you need to tell HMRC about additional income
GOV.UK | Tax-free allowances on property and trading income
GOV.UK | Capital Gains Tax on personal possessions
GOV.UK | The Rent a Room Scheme

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