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MAKING MONEY ONLINE: WHEN A HOBBY BECOMES TAXABLE INCOME

Last updated: 06 Jul 2021 10:20 Posted in: AIA

When a Hobby Becomes Taxable Income 

As we know a hobby is an activity performed for fun, whether that’s making art prints of movie stills or teaching guitar basics on YouTube. When this activity becomes monetised, that’s when the attention of HMRC is drawn and the hobby may be regarded as a business.  

As an accountant you will be aware that once the income (not profit) exceeds the annual trading allowance of £1,000, the income needs to be declared to HMRC.  

Rachel Rutherford, Director of Policy and Public Affairs added “If the sole purpose of the activity is to turn a profit, then this is a business and HMRC must be advised once the annual income exceeds £1,000. Of course, there will be people who might just be selling old clothes on the likes of eBay or Depop in order to make a little pocket money, and if these are personal possessions then there is no need to report this to HMRC. 

“To help keep your clients on the right side of the taxman, we’ve invited Mike Parkes from strategic partner, GoSimpleTax to explain this further – as well as outline the next steps if it’s required to report taxable income.” 

What is the trading allowance?

Selling across the likes of Facebook Marketplace, Etsy or eBay in spare time, there is a set amount of money allowed to be earnt before there is a requirement to tell HMRC. The trading allowance allows earnings up to £1,000 a year tax-free. 

Keeping a log of all sales made across each platform ensures the amount is not exceeded, giving protection in the event of a HMRC investigation. Should this be the only income then no tax will be paid until more than the personal allowance is earnt. 

A reminder of the personal allowance 

The Personal Allowance is the amount of taxable income made before Income Tax is incurred. It factors in employment earnings, rental income, and any additional online trading profit made – among other sources. Therefore, if the items sold online result in less than £12,570 annually (the Personal Allowance as of 2021/22), and there are no other sources of income, there won’t be any Income Tax charged. 

Once that amount is exceeded, there will be tax: 

  • 20% on the portion of earnings between £12,571 and £50,270 
  • 40% on the portion of earnings between £50,271 to £150,000 
  • 45% on the portion of earnings over £150,000 

The same is true if tax is paid through PAYE at a current employed role, and earn more than the trading allowance. Income Tax will be charged according to the total amount of taxable income that is earnt. 

Is a tax return required?

A Self-Assessment tax return is required if the trading allowance is exceeded, regardless of whether or not there is also employment. Within the self-assessment it is required to report the sales made along with anu associated business expenses. However, before this can be completed it is a requirement to register for self-assessment and this will depend on if you’re self-employed or not. 

Once registered, a letter will be sent with a Unique Taxpayer Reference (UTR) number on. This reference number is essential to using HMRC’s Self Assessment service and takes 10 days to arrive, so remember to register long before the deadline 

An activation letter will also arrive with an activation code – when both are received it is possible to start a self-assessment tax return. 

Can the tax bill be lowered?

When HMRC treats online selling as a business, then the eligibility for the benefits of business expenses comes into play. Business expenses are purchases made that can be claimed back on in a tax return, provided the purchase was for business purposes. For example, claims could be made on: 

  • Office supplies – any stationery used, envelopes or printing costs 
  • Delivery costs – postage and packaging costs 
  • Website charges – either for a website owned or the fee of the seller site 
  • Bank and credit card fees – charges incurred from selling online 
  • Marketing and advertising costs – any adverts ran on seller sites 

There could be a possibility to be able to reduce the cost of running a home! A portion of utility bills, council tax, and telephone and internet costs can be considered a business expense, depending on the amount of time spent using a house as a base for the online selling. All that is needed is to keep a log of the expenses being claimed, and store evidence for them should HMRC ask for it, potentially reducing the total tax bill. 

Getting the most out of online sales for your clients

If a hobby tips slightly into business territory, don’t panic. Registering for Self-Assessment and completing a tax return is straightforward provided your clients have the right tools and act early. If sales exceed £1,000, register your client as soon as you can, and ensure they keep records of income and expenses to include them on their tax return. 

From there, you’ll be able to work out their profit and possibly lower their total bill by making sure they have recorded all allowable expenses.  

Further Advice

If you require further advice on tax related matters go to the AIA Tax Insights Page, or alternatively visit the AIA GoSimpleTax Partner Page. 

“If the sole purpose of the activity is to turn a profit, then this is a business and HMRC must be advised once the annual income exceeds £1,000. Of course, there will be people who might just be selling old clothes on the likes of eBay or Depop in order to make a little pocket money, and if these are personal possessions then there is no need to report this to HMRC. 

“To help keep your clients on the right side of the taxman, we’ve invited Mike Parkes from strategic partner, GoSimpleTax to explain this further – as well as outline the next steps if it’s required to report taxable income.”