Taxing online income

HMRC has – for several years now – been looking at social media traders and online business people, to assess whether these people are paying the correct amount of tax. Moreover, HMRC’s powers in this regard will increase over the coming months, as from January 2024 onwards, social media companies will be required to obtain and share data with the HMRC vis-a-vis those people who are ‘doing business’ through their websites.

So what does this mean in practice?

As a first principle, it doesn’t mean that ‘everyone’ selling things through eBay, Amazon, Gumtree or other online options will have a UK tax liability either from a historical perspective or on a going-forward basis. After all, many people selling things online are just selling, for example, old clothes, which they no longer need and while they are clearly hoping to make some money from the sales, this doesn’t mean that they are ‘trading’ in any way, shape or form. Moreover, in most such cases, there is no suggestion that the individuals involved have made a ‘profit’ from their sales.

In addition, even where people do actually make a small amount of profit from their trading activities, such a profit may be covered by the trading allowance. This means that profits of up to £1,000 will automatically be non-taxable in the UK. However, HMRC believes that there are many thousands of business people who actually make significant profits from their online activities and such individuals can be liable to income tax and NICs on these activities. Moreover, those people who make relatively small amounts through trading online – e.g. people who earn perhaps a profit of say £10,000 to £12,500 per annum and have no other sources of income, still need to realise that they can have, in effect, a tax liability. Or more specifically a liability to NICs. This is because while the personal tax allowance threshold is £12,570 per annum i.e. so that someone with total income/profits below this point will have no liability to income taxes in the UK – the NIC rules differ from the income tax rules. This means that someone with a trading income of say £8,000 or £10,000 per annum would – at least for all tax years up to and including 2023/24 – have a liability to class 2 NICs.

So when is someone trading online from an HMRC perspective?

In simple terms, trading online is — like any trading activity — something which needs to be assessed formally. This involves the adviser considering whether the activity satisfies the ‘badges of trade’ conditions. The questions one should ask themselves vis-a-vis the badges of trade are:

• How was the asset acquired? For example, something which was obtained as a gift or via inheritance isn’t likely to be trading when sold.
• Is there a profit-seeking motive? This could be supported by things such as a business plan, for example.
• The frequency of the transactions? The more frequent transactions, the more likely that one is involved in a trade.
• The ‘nature’ of the asset which is being sold – for example, is it something which can give 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 there any other – broadly similar – trading activity undertaken by the individual in question? If there are similar activities that the individual is involved in, this could be a sign that the relatedactivity is also trading.
• The way that the activity/sale is undertaken – for example, is the sale being proactively marketed online? Or is there just the odd sale being undertaken through word-of-mouth?
• How was the transaction financed – for example, via savings? Or via a bank loan? If so, how will the debt be paid off? If one would realistically need to sell the asset to pay off the loan, that could be a sign of trading.
• What – if anything – is being ‘done’ to the asset being sold? For example, has the asset been repaired, improved or altered?
• What type of ‘timeline’ existed between acquiring and disposing of the relevant asset? In simple terms, if the property being sold has been owned for a considerable period of time, this could indicate that the asset isn’t being traded.

In practice, one may not find all of the above ‘questions’ in a particular case. In addition, it is important to note that any aspects which are present need to be considered in ‘totality’ rather than as part of a simple ‘box-ticking’ exercise. As such, some aspects might be particularly important in a specific case and outweigh the other badges of trade in that particular scenario.

One should also realise that the decision one reaches in this regard can change over time. For example, someone making a few cakes at home for friends on a word-of-mouth basis might not be trading initially, even if they get some limited expenses from their friends for these cakes. However, if the person starts to proactively use Facebook, for example, to promote their cakes and starts making and selling these cakes more proactively, they could easily end up starting to trade at some stage.

Would you like to know more?

As this is a complex area and something which HMRC is increasingly interested in, those social influencers who are receiving such benefits – or indeed, the companies providing them with payments or products – should look at contacting their regular Blick Rothenberg contact or Robert Salter using the form below.

Originally published in AT Magazine January/February 2024 – Reproduced with kind permission