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Navigating Side Hustle Taxes: What Sellers Need to Know

Side hustle tax is a colloquial term that refers to the taxation of income earned from supplementary, independent ventures or part-time commercial activities outside of an individual’s primary source of employment.

Earlier this month, it was announced that moving forward, businesses such as Depop, eBay, Etsy, Vinted, and Airbnb, are obliged to share the details with HMRC of sales by those that use such platforms. The announcement has led to widespread confusion amongst the public on what constitutes taxable income. In this blog we outline how to navigate your ‘side hustle’ taxes and your reporting requirements to HMRC

What Exactly are the New Rules?

From January 2024, various online businesses will be legally required to report on the income generated by sellers through their respected platforms.

These new rules have been put in place to help HMRC identify any cases of tax evasion and non-compliance on trading activity. You are likely trading if you have a profit seeking motive and a significant number of transactions.

To clarify what this may mean… Put simply, if you are selling your second-hand clothes that you no longer wear on platforms online, you do not need to worry about incurring a tax liability on these sales as it is unlikely to be considered trading. However, the buying and selling of second-hand clothes with the aim of making a profit will likely be a trade and taxable.

What Constitutes as Trading?

The key point to acknowledge on the matter of side hustles is – Are you trading?

It’s important to clarify that HMRC has not introduced a new tax on side hustles. Instead, HMRC has implemented a new rule on reporting requirements. This is where most of the confusion to the recent news has arisen.

Sellers who are ‘trading’ via online platforms are who HMRC are seeking to find through these new rules. Identifying whether someone is trading involves considering the following key factors. However, note that this is not a tick box exercise and not all need to be present.

1.Regular Transactions:

Regularly engaging in buying and selling activities, such as reselling items on platforms like eBay or Etsy, might indicate trading.

2. Profit-seeking Motive:

The presence of a profit motive is crucial. If the primary goal is to make a profit from the side hustle, it aligns with trading for tax purposes.

3. The Nature of the Asset:

Engaging in various income-generating activities, including services like consulting, tutoring, marketing, or coding, suggests a business-oriented approach. Also, If someone is monetising online platforms such as blogs, YouTube channels, or social media accounts, it may fall under taxable trade income.

4. Organisational Sophistication:

The degree of sophistication and organisation such as running an online dropshipping business, indicates a more structured and potentially taxable trade.

5. Changes to the Asset

Selling an item that underwent repairs, modifications, or improvements to enhance its marketability or boost its value for increased profitability may be subject to taxable trade.

6. Interval of time between purchase and sale

Where the intention is to resell an item shortly after its purchase, this will likely indicate trading.

You can find further guidance on trading from HMRCs Business Income Manual here.

Seeking Tax Advice

If a seller is making sales of over £1000 through their collective side hustling activities, they must notify HMRC. To do this, the seller will need to register themselves as self-employed and file a self-assessment tax return (SATR).

HMRC expects individuals involved in such ‘side hustles’ to adhere to tax reporting and payment obligations, like other small trades or self-employed businesses. Monitoring these factors helps in determining whether someone is trading.

If you are unsure on your tax position it is important to seek a professional advice. A tax advisor will be able to review your circumstances and clarify your requirements to HMRC and help to ensure on-going compliance.

Got some questions? Get in touch with our experts today at info@wttconsulting.co.uk or call us on +44 (0)20 3468 0000 for more information.

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