ONE OF the issues facing governments in the era of the gig economy is how to distinguish between people selling on unwanted goods for pocket money and those for whom it is a primary business.
The internet has provided a boost in opportunities for both – it is now easier than ever to get rid of your unwanted clutter over eBay or Etsy, for example, but this means sharing a platform alongside online retailers.
So, how does the UK tax code divide between the two?
A common feature of most tax codes is that they offer incentives to entrepreneurs. But when public finances are under ever-increasing pressure, there is also a lot of impetus to ensure that traders do not use online marketplaces to avoid paying their fair share.
This was confirmed when chancellor Philip Hammond used his Spring Statement earlier this month to announce a consultation into automatically collecting tax from income on online platforms. However, millions across the UK use such sites to supplement their incomes, and if they have always been taxed through their employer in the past, they may not know their tax status.
So, what are the rules?
From 6 April 2017, so-called micro-entrepreneurs have been able to sell up to £1,000 worth of items on platforms such as eBay, tax free.
They do not need to declare or pay tax on these earnings, or even keep business records – provided they do not exceed the £1,000 threshold, although people who are already self-employed may need to check if they are eligible to use this.
However, if their income does rise above this level, even by a pound, they need to complete a self-assessment tax return.
They then have a choice between deducting any expenses they have incurred, or, if they prefer, using the £1,000 allowance.
HMRC’s default position is to deduct actual expenses and not apply the allowance. So, unless the seller makes it explicit that this is what they are electing to do, they could end up paying taxes on a higher amount.
If the income exceeds £1,000, they will need to make sure they keep all the appropriate business records, and notify HMRC by 5 April following the end of the tax year that they need to complete a tax return, regardless of whether they choose to deduct the allowance or their expenses.
It is not only from selling items online that people can benefit from this allowance.
It can be applied to anything from selling bric-a-brac at a car boot sale, to offering a service to friends, whether that is management consulting or a massage.
By combining this with another allowance – the new £1,000 allowance relating to property, such as renting out a room on AirBnB – it is now possible to make up to £2,000 of tax-free income in a year.
The key thing is to be aware of the tax breaks available and what needs to be done in order to take advantage of them, since otherwise people could find themselves landed with a hefty bill.