Online activities such as social media and other online activities are becoming increasingly lucrative. In this article, we explain how it should be taxed and when tax on online income apply.
In order to assess whether these people are paying the correct tax, HMRC has been looking at social media traders and online businesspeople. HMRC’s powers in this regard are also expected to expand over the coming months, as from January 2024 onwards, social media will be required to obtain and share data with HMRC regarding those who use their website for business purposes.
What does this mean in practice?
From a historical perspective or on an ongoing forward basis, it does not mean that everyone selling through eBay, Amazon, Gumtree and other online options will have a UK tax liability. Most people who sell things online simply sell old clothes that they no longer need. They are clearly hoping to make some money, but they are not trading in any way, shape, or form. Moreover, it doesn’t appear that the individuals involved have made a profit from their sales in most cases. Additionally, the trading allowance may cover small profits made from trading activities. In the UK, this means that profits of up to £1000 are automatically tax-free. HMRC believes that many thousand businesspeople in the UK make significant profits from online businesses and are liable to income tax and national insurance.
People who earn relatively small profits through trading online – e.g. those earning £10000 to £12000 per year without any other sources of income – must also be aware that they can be subject to tax. In other words, a liability for NICs.
The personal tax allowance threshold in the UK is £12570 per year, which means that income/profits below this point are not subject to income tax. This means that someone with trading income of sat £8000 or £10000 per annum would still have a liability to class 2 NICs.
What does trading online mean from HMRC point of view?
Trading online, like any other trading activity, needs to be evaluated formally. During this process, the advisor considers whether the activity meets the “badges of trade” requirements. Here are some questions one should ask themselves:
- What was the method of acquisition of the asset? Gifts and inheritances, for example, are unlikely to be traded when sold.
- Are there profit-seeking motives? Business plans, for instance, can support this.
- The frequency of the transactions? The more frequent the transactions, the more likely that one is involved in a trade.
- The nature of the asset which is being sold – for example, is something is something that can be pleasure in its own right? Or is it something that needs to be sold, so that one can enjoy the proceeds of the asset?
- Is the individual in question involved in other trading activities? This could be an indication that the related activity is also trading if the individual is involved in the right similar activities.
- The way the activity / sale is conducted – for example, is it being proactively marketed online? Is it just an old-fashioned word-of-mouth sale?
- What was the method of financing? For example, why savings? Or via a bank loan? If so, how will the debts be paid off? Buying and selling assets to pay off a loan could be a sign of trading.
- What is being done with the assets being sold?
- Have the assets being repaired improved or altered?
- How long did it take to acquire and dispose of the relevant asset? When a property is sold after being owned for a considerable period of time, this could indicate that the asset is being traded.
The above questions may not be found in every case in practice. Additionally, any aspects that are present should be considered in total, rather than exporting always simple box-ticking exercises. Therefore, some aspects might be more important in a particular situation than others.
It is also possible for one’s decision to change over time in this regard. Someone who makes a few cakes at home on a word-of-mouth basis might not be trading at first, even if they receive some limited expenses from their friends for these cakes. It is possible, however, that the person could end up becoming a trader at some point if they use Facebook to promote their cakes and make and sell them more aggressively.
Check gov.uk website for more guidance regarding tax on online income.
In conclusion
The focus of this article is on individuals who use social media platforms to trade actively. Influencers also conduct their activities via social media. Influencers may face issues that are different from those that arise from online trading in general. Therefore, a separate article will be written about this.
We will be happy to assist with further queries and arrange a free chat with you if you need help. Please complete the contact form below.
You may be interested to read: