Etsy is the best known creative marketplace allowing sellers to not only design, create and sell products they are truly passionate about, but also market them worldwide. However, HMRC is in the process of cracking down on Etsy sellers they believe should be paying tax on their earnings. So with your online Esty earnings being very easy to track, you should definitely read my article to decide whether you need to pay tax to HMRC on your Etsy sales.
Hobby or Business?
Just to be clear anyone in business or earning income probably needs to let HMRC know what they are earning and pay tax on it. That’s just a fact of life.
However obviously there are situations where people are making products and creating handmade goods simply as a hobby, just like how another person may play golf or go cycling.
HMRC ask a series of questions in determining whether someone is in business or just has a hobby. These include:
- What is the persons motivation behind ?
- Are you selling regularly to make a profit?
- When you buy your stock, how long do you hold onto it for?
- Do you make items to sell at a profit?
- Are you registered as a business on Etsy, eBay or Amazon etc?
- Do you buy things at wholesale to sell on?
The above questions are what HMRC call ‘Badges of Trade‘ and if you answered yes to any of these, then it is likely that you are in business and will have some tax obligations. However if you remain unsure then you should seek a professionals advice because there are penalties for businesses that fail to report to HMRC.
Etsy Seller Do Need to Pay Tax
As a registered business on Etsy then it is likely that you are selling your products online for a profit (income less costs = profit). The amount of tax yo pay depends on they amount of money you make from all your sources of income, not just Etsy.
Regardless of how much profit you make you must let HMRC know how much you have made. Even if you know you have made a loss or a really small profit that is below the personal allowance you have to report it to HMRC.
If your income from Etsy is less than £1,000 then you may be entitled to the £1,000 Annual Tax Allowance for traders meaning you don’t need to register and declare your income. Check the criteria to understand your eligibility and whether this allowance is the most tax efficient solution for you here.
How to Notify HMRC of Your Etsy Business
The simplest way to let HMRC know you are in business is to register yourself as Self Employed and report your earnings on a Self Assessment Tax Return.
Once self employed you must then:
- Set up a bookkeeping system that keeps a record of all your income and expenses, as well as filing all your receipts;
- Complete a Self Assessment Tax Return by 31 January each year summarising your business income and expenses for the previous tax year;
- Pay any Tax due by 31 January each year (and payments on account by 31 January and 31 July each year).
Register as Self Employed Online with HMRC
You can register online as Self Employed on the HMRC website. The process can take 10 days to complete upon which HMRC will post you a UTR number (Unique Taxpayers Reference). Keep this safe as you will need this code to file your Self Assessment Tax Return.
If you already Submit a Tax Return
If you already complete a Self Assessment Tax Return, for example because you collect rental income or have savings interest, you need to complete a Form CWF1 to notify HMRC that you have a new form of income (in this case self employment) that you need to report to them on. Again, you can do this online here and you will need your Unique Taxpayers Reference.