Why you might face a shock tax bill for selling online (2024)

The taxman is believed to have sent thousands of nudge letters this year to online marketplace sellers who it believes may not have declared tax.

HMRC has access to a host of information and data, and it has been cracking down on online traders who use platforms such as eBay who've failed to declare taxes for annual sales made over £1,000.

One of the easiest way to make cash is by selling unwanted items gathering dust online. As well as eBay, apps and websites such as Depop, Facebook Marketplace and Vinted have exploded in popularity since the pandemic.

In turn, millions of us have usedonline marketplaces to make some extra cash or even launch a business. So, could you face a shock tax bill if you don't declare the income you make online?

Do I really have to pay tax on my old junk?

It's easier than ever to sell online and it can be an easy way to earn extra cash to help with bills or build up a savings pot.

Most sellers will only be selling a few items here and there rather than becoming a professional seller. But you should be aware of the tax implications.

HMRC has been cracking down on online traders who've failed to declare taxes for sales made over £1,000. In January it stepped up its efforts by sending out a series of letters to sellers alerting them to unpaid tax.

A spokesperson for HMRC said: 'Individuals who regularly sell goods or services through online marketplaces may need to declare this income.

'We believe our customers want to pay the right amount of tax, and our online guidance can help customers to do so.

'This is routine activity. Each year we send out thousands of reminder letters on various areas of tax.'

If you're selling online on a regular basis to make a profit or are buying stock in bulk, HMRC is more likely to consider you a business and that you're selling to make a profit.

If you're selling online, it is your responsibility to get clued up on whether you'll need to declare tax.

Ebay's website says sellers are 'responsible for complying with all applicable tax laws. Sellers must follow all tax regulations that apply to eBay sales.'

HMRC's trading allowance means you can make up to £1,000 a year without paying tax. This is not to be confused with your personal allowance, currently £12,570, which is the tax-free portion of your full-time earnings.

You might also have to pay capital gains tax if you make a profit when you sell a personal possession for £6,000 or more. These possessions include jewellery, paintings, coins and antiques.

Given that everything is conducted online, records of your transactions are easily-accessible so it won't be too hard to calculate whether or not you exceed the £1,000 allowance.

How does HMRC know if I'm trading or doing a clear out?

The key point is whether or not the taxman considers you to be 'trading'. It is likely that the taxman is looking for sellers who are making regular profits or running full-time businesses, rather than casual sellers offloading unloved items.

For example, if you're having a clear out and you sell the unwanted items online you're unlikely to have to pay tax. This is because it's a one-off and the items sold are more likely than not will fetch under the original price.

It gets more complicated if you're a collector.

If you buy and sell model cars, for example, but also look to swap some of your collection to make complete sets, HMRC will classify this as trading.

This is because you're swapping and selling things to make a profit. In this case, HMRC advises you register for Self Assessment and pay tax on the profit made on the sales.

Marketplaces like Etsy have become a popular place to start a side line business selling handmade goods, but you might receive a letter from HMRC if you're selling with the intention of making a profit.

How much tax will I need to pay if I'm a fulltime seller?

If your side hustle starts to make serious cash, or you want to establish yourself as a full-time trader, you'll need to register as self-employed.

UWM Accountants say that while you might need to register for Self Assessment if you earn over £1,000 from selling online, simply registering as self-employed doesn't mean you'll have to pay tax on your online sales.

For full-time online traders, it means you'll only be taxed on annual gross profit over the personal allowance of £12,570. You will have to pay tax on profit made between £12,570 and £50,270, which will rise to 40 per cent up to £150,000.

Stuart Miller, head of UK product compliance at Xero says: 'If you need to register as self-employed, you must do so through the HMRC website before 5 October in your business's second tax year, or risk facing fines.

'It's also worth noting that if you want to pay Class 2 National Insurance, you will need to be registered as self-employed.

'Even if your profits aren't taxable, some people may choose to register so they can make these contributions to maintain their entitlement to state benefits.'

If you're self-employed, HMRC will also allow you to claim expenses which are relevant to your business.

UWM Accountants say this includes PayPal fees, postage and courier costs, packaging and stationery costs as well as eBay seller fees.

Miller adds: 'Traders often forget that business expenses like web hosting costs, advertising fees, use of a home office, postage or even mileage can be claimed back, if they deliver the items they sold to the customer.'