Online selling – when a new tax rule is not a new tax rule
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
12 January 2024
Following the recent changes to the reporting rules for online selling platforms, we separate the facts from the myths on what has changed from January 2024.
Since the new reporting requirements for online platforms were introduced on 1 January 2024, there has been widespread social media reporting, suggesting that new rules will result in sales made on online marketplaces being taxed - termed as the ‘side hustle tax’. However, this is not the case.
Section 349 Finance (No. 2) Act 2023 gave the Treasury powers to issue regulations to require platforms such as eBay, Vinted, Etsy, Airbnb to disclose information to HMRC as part of the OECD model rules for reporting by platform operators with respect to sellers in the sharing and gig economy. However, this didn’t change the underlying rules on the tax treatment of transactions on digital platforms. If a taxpayer is liable to pay tax on a transaction, this would have been the case previously, and continues to be so.
Online transaction tax rules explained
The tax rules relating to online platforms are no different to more traditional outlets such as car boot sales or local markets. In order for tax to be payable on the sale of items, the transaction would need to be as either trading income or as a capital gain.
Contrary to the recent speculation, clearing out your attic and selling off items that are no longer wanted is highly unlikely to be taxable. The fact that the items are being sold on an online platform makes no difference to the tax treatment.
HMRC has issued an information sheet, providing details of the tax treatment in a few different scenarios. Selling unwanted items is seen as different from a clothes reseller selling clothes for a mark-up, selling handmade cards to customers or a model car collector (all three of which are regarded as commercial enterprises intending to make a profit).
When would a transaction be treated as trading income?
Section 5 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) sets out the charge to income tax on profits of a trade, profession or vocation. The territorial scope of the income tax charge on trading profits are outlined in Section 6 ITTOIA 2005 and in the case of UK residents this arises wherever that trade is carried out in the world.
When deciding on whether a trade exists, it is necessary to consider whether the badges of trade apply. This looks at factors including whether there is a profit seeking motive, repeated transactions, the nature of the asset, whether any modifications have been made to an existing asset, connections with an existing trade, the financing arrangements and the length of ownership.
In the case of the one-off attic clear out of surplus clothes, the reason for the transaction is unlikely to be any of these factors as there is no commercial motive to make a profit from the sale. But the position would be different if there was an established pattern of buying and selling for profit.
Even if a transaction was considered to be trading, it does not necessarily mean that there is tax payable. The £1,000 trading allowance means that trading income of up to £1,000 per tax year is exempt from income tax. A similar allowance applies in respect of property income.
If a transaction is not trading income, what capital gains tax exemptions could apply?
There are special capital gains tax rules for ‘chattels’, defined in Section 262 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) as tangible moveable property. Many of the items sold on online platforms may qualify as chattels given that they can be touched and moved, but they will often be of low value and may be exempt from capital gains tax
Section 262 TCGA 1992 exempts chattels which are bought and sold for less than £6,000 from capital gains tax. There is a separate exemption in Section 45 TCGA 1992 for wasting chattels, being assets with a useful life of less than 50 years.
There will be cases where a transaction is neither trading nor chargeable to capital gains tax, which means the alarm caused by the new disclosure rules is rather unnecessary.
What has changed from January 2024?
Although there is no change to the underlying tax rules on whether an online platform transaction is taxable, the new rules create an obligation to provide HMRC with information on an ongoing basis. For some time now, HMRC has been able to receive information on an ad-hoc basis, but going forward this will be an annual report for the calendar year. This means the first reports will be due from the online platform providers by 31 January 2025.
There will not be a reporting requirement for ‘casual sellers’. This is defined as taxpayers with less than 30 sales per year for no more than €2,000. As long as both thresholds are not exceeded, no disclosure will be made to HMRC.
While there is no change to the tax rules, HMRC will have more visibility on transactions to determine whether a tax liability may arise.
What happens if a taxpayer has not disclosed trading income from online platforms?
If a taxpayer should have declared income and this exceeds the £1,000 trading allowance, they should consider if they need to register for Self Assessment. It is important to bear in mind that income tax will only be payable on taxable profits. We recommend that it is worthwhile keeping details of any receipts for expenditure that could be tax deductible.
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