The entrepreneurial spirit has never been more alive and here at All About Accountants we meet so many entrepreneurs making money from so many different types of businesses. Over the recent years more and more people are finding that they can earn an income from selling online and it always raises the question of tax. We start by considering the motivation behind the sale…
Are you a trader?
If you are selling something you just don’t need, don’t want anymore or perhaps were given you aren’t considered a trader. You aren’t trying to set yourself up in a business to make a profit, you may just want a little extra space in your wardrobe! So there are no tax implications for this.
However, if you are buying items to sell on with the motivation to make some money and are doing so on a regular basis, then you may well be considered a trader and may need to pay tax. Here are some of the questions we ask to work out whether someone is a trader:
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 eBay or Amazon etc?
Do you buy things at wholesale to sell on?
If you are a trader?
Then you must let HMRC know. You own an online business and therefore need to calculate your income and report this to HMRC through self assessment.
You can let HMRC know you are in business by going online here. You have until the 5th October of your business’ second trading year to do this.
HMRC will now expect you to submit a personal tax return online by 31 January each year for the previous tax year. A tax year runs from 6 April to 5 April. On this form, you will report your income from selling online (your sales less your costs).
What information should you keep?
To work out your income, keep hold of details of all your sales (whether that’s emails with customers or online statements from the marketplace you sell on). Keep receipts for anything you buy that relate to your online business – products, commissions you pay to the marketplaces, postage, packaging and even the mileage to do to buy goods or take them to the post office.
What Tax will you pay?
Personal Tax is payable based on all your income, so if you have a job in addition to your online business, you will pay the income tax based on your total earnings. The current income tax rates are:
Up to £11,000 0%
£11,000 to £43,000 20%
£43,000 to £150,000 40%
Over £150,000 50%
In addition to income tax, you will also need to pay Class 2 and Class 4 national insurance based on your profit from your online trading as follows:
Class 2 £2.80 per week
Class 4 9% on profits between £8,060 and £43,000
2% on profits over £43,000
As an online seller it is really important to take into account tax and national insurance obligations when trading, as this does affect your profit and whether your business is truly viable. HMRC are tracking down people who trade online but are not paying tax, there marketplaces are more commonly asking for tax details of their traders. So don’t delay and make sure you stay on the right side of the tax man by registering for self assessment if you are in business.