To combat the cost-of-living crisis, more adults across the UK are turning to side hustles to bring in extra income. However, to ensure that people are paying the correct amount of tax based on the profits that they make, HMRC has instructed popular online platforms such as Vinted, Depop and eBay, to record and report on the income that is being generated.
This caused confusion amongst the public that rules around sources of income were changing. This is not the case. The reality is that trading profits, whether primary or secondary, have always been taxable.
Stevie Heafford, Tax Partner at HW Fisher, explains:
“What can start out as a simple way to make some extra income can quickly turn into a confusing, complex and challenging exercise. While HMRC has tried to simplify matters over the years, such as the introduction of the trading allowance, more could be done. If it were made simpler, more people might be able to recognise the need to report their taxable profits and make their reports accurately and on time.”
In this article, Stevie answers four commonly asked questions that will help you navigate how you need to report on your side hustle.
1. What is a trading profit?
In their online manuals, HMRC list a number their ‘badges of trade’ which they use to determine whether an activity is a trading activity, from a business, or whether it can be deemed as a hobby.
Within the badges of trade, one of the key questions is whether the asset was acquired with the intention of making a profit, but there are others that look at the frequency and similarity of repeated transactions, and the nature of the asset.
For example, if you are selling your children’s old toys or clothes on eBay, that is unlikely to be considered a trade, however if you are buying toys and clothes (second hand or otherwise) specifically to sell on and make a profit, that would be considered a trade.
2. Having made a profit, do you need to report it?
Each year, you are allowed to earn £1,000 in gross trading income tax free, otherwise known as your Trading Allowance, and this does not have to be reported to HMRC. Above £1000, your income may be taxable and will need to be reported.
The £1,000 applies to all trades so if you have more than one, the total must not exceed £1,000.
3. Can you deduct any expenses?
Provided you have not claimed your Trading Allowance, there are a range of expenses which can be deducted but you cannot claim for any element of personal use (for example, broadband or phone costs) so it is important to keep clear records of expenses and be able to identify the business-related element.
4. How do I report the income?
Most people would do this by registering themselves as a sole trader with HMRC. This must be done by 5 October following your second tax year, and you will also need to report your taxable income via a self-assessment tax return.
This can lead to another layer of complexity as there are a number of possible methods of reporting, and it is important to remember that this can affect your overall liability. For example, if you report on the cash basis, there are restrictions on how losses can be utilised.
If you’d like to speak to Stevie about your tax obligations, please get in touch.
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