HMRC is getting cannier at detecting and penalising people who make extra income but don’t declare it. With that in mind if you start a small side venture to make some extra cash, is it always necessary to declare it to HMRC?
Naturally, HMRC is interested in anyone who makes a little extra through freelance work or online selling. With up to 20% of us engaged in extra money-making endeavours, it’s important to understand how HMRC views these and if you’ll have tax and NI to pay.
Tip. Income from selling unwanted personal possessions isn’t taxable as trading income but can be liable to capital gains tax (CGT) if sold for more than you paid for it.
What counts as trading income?
Deciding if a trade exists is notoriously tricky, especially in relation to ad hoc income. Although HMRC provides some guidance and a simplistic checker you should use it with caution. If in doubt consult a tax advisor.
Trap. Remember, just because your business does not make a profit doesn’t mean you aren’t trading.
Tip. If you are trading and make a loss it can be used to reduce your tax bill on your other income.
Big brother is watching
A recent case, Milasenco v HMRC 2023 , is an example of the resources available to HMRC for detecting undisclosed trading. HMRC used special software to identify Milasenco’s online trading and referenced this against his tax returns.
Exemption for low value businesses
If your trading income doesn’t exceed £1,000 in the tax year, the trading allowance exempts it from tax. This means that you don’t need to report anything to HMRC.
Tip. If your income exceeds £1,000, you can elect to deduct the trading allowance in place of your actual expenses. There’s a similar £1,000 allowance for rents received from property.
Trap. The trading allowance doesn’t apply to either a partner’s share of partnership income or to trading income derived from a close company, i.e. one that’s controlled by up to five people, which you own or control.
Example. Emma earns £60,000 per annum and sells handmade jumpers on Etsy for which she receives £870 in 2022/23. She also lets out her driveway for £800. She won’t need to report either of these minor income sources on her tax return. In 2023/24, the jumper income increases to £1,400 while the cost of the wool is only £100. Instead of paying tax on the actual profit of £1,300, the trading allowance will reduce the profit to just £400 (£1,300 - £1,000).
If your activity isn’t taxable as income, you still need to consider whether you need to report any profits as a capital gain. However, the first £6,000 of gains in 2023/24 will be exempt, plus the chattels exemption (see The next step ) will cover individual items which are sold for less than £6,000.
Income from trading is only taxable if the amount received exceeds the trading allowance of £1,000 per annum. There’s no requirement to declare the income to HMRC unless it exceeds the trading allowance. If it’s greater you must declare it. The trading allowance can be deducted from income to arrive at the taxable amount instead of actual expenses.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.