The truth about the ‘side hustle tax’
Following the speculation of a new ‘side hustle tax’, Chris Campbell, Head of Tax at ICAS, separates the facts from the myths on what has changed.
How will the new rules affect the penalty charged for late VAT returns?
Since the new reporting requirements for online platforms were introduced on 1 January 2024, there’s been a lot of talk on social media about the ‘side hustle tax’. But let’s clear things up: contrary to the recent social media reports, clearing out your attic and selling things you no longer need is highly unlikely to be taxable. The new rules relate to sharing information with
the HMRC rather than what is and isn’t taxable. Nothing has changed here.
The fact that the items are being sold on an ‘online platform’ like Vinted makes no difference to the tax treatment compared with more traditional forms of sale. HMRC has issued an information sheet detailing the tax treatment in different scenarios. For example, selling unwanted items is different to a clothes reseller selling clothes for a mark-up (which is regarded as a commercial enterprise intending to make a profit).
Understanding the badges of trade is an important starting point for identifying whether a taxpayer is trading. This applies not only to selling on online platforms but equally when it comes to more traditional sales methods (such as a car boot sale or local market).
The badges of trade
The badges of trade are a range of factors used to determine if an activity qualifies as trading. A single factor isn’t enough in itself, so the position would need to be looked at as a whole.
- Profit seeking motive: Where there’s an intention to make a profit, this is more likely to be a trading business. Selling unwanted clothes or old books from the attic is unlikely to be with the intention of making a profit, so it's unlikely to be trading.
- Repeated transactions: The higher the frequency of transactions, the more likely those transactions are trading. Selling one old handbag wouldn’t be trading, but selling several handbags each week makes it more likely. Many businesses will operate a trade of selling on pre-loved handbags.
- Method of acquisition: If someone has been given or has inherited an asset and then sells it, it’s unlikely to be trading.
- Quantity purchased: The higher the number of assets purchased, the more likely the transaction will be trading. In the case of Rutledge v CIR  14TC490, the taxpayer bought a million toilet rolls. This was seen as trading since it far exceeded the need for personal use.
- Length of ownership: The shorter the time between purchase and sale, the more likely that a transaction is trading.
- Nature of the asset: Assets which will give personal enjoyment are less likely to be classed as trading compared with those where the only benefit of owning the asset will be realising a gain on its sale (profit seeking motive as above).
- Modifications to the asset: If the asset has been modified to make it easier to sell, it’s more likely to indicate that a trade is taking place.
- Connections with an existing trade: If transactions are similar to those carried out in an existing trade, it’s difficult to argue that it’s not trading. Case law uses the example of a housebuilder buying a property as an investment. HMRC would likely argue that there was a connection with the housebuilding trade and that the sale of property bought would be considered trading when sold.
The £1,000 trading allowance
As well as the ‘side hustle tax’ being a myth, even if a transaction was considered to be trading, it doesn’t necessarily mean that there is tax payable. The £1,000 trading allowance means that trading income of up to £1,000 per tax year is exempt from income tax. A similar allowance when it comes to property income.
Capital gains tax implications and when they apply
There are special capital gains tax rules for ‘chattels’, defined in Section 262 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) as tangible moveable property. Many items sold on online platforms may qualify as chattels, given that they can be touched and moved, but they will often be of low value and may be exempt from capital gains tax.
Section 262 TCGA 1992 exempts chattels bought and sold for less than £6,000 from capital gains tax. There’s a separate exemption in Section 45 TCGA 1992 for wasting chattels, which are assets with a useful life of less than 50 years.
There will be cases where a transaction isn’t trading or subject to capital gains tax, making the concerns about the new disclosure rules unnecessary.
New rules from January 2024
Although the underlying tax rules for online platform transactions remain the same, the new rules create an obligation to provide HMRC with information on an ongoing basis. Previously, HMRC has been able to receive information on an ad-hoc basis, but going forward this will be an annual report for the calendar year. The first reports will be due from the online platform providers by 31 January 2025.
‘Casual sellers’ won’t be required to report. This is defined as taxpayers with less than 30 sales per year for no more than €2,000. The threshold is in Euros as it’s based on an Organisation for Economic Co-operation and Development report. As long as both thresholds are not exceeded, no disclosure will be made to HMRC.
While there is no change to the tax rules, HMRC will have more visibility on transactions to determine whether a tax liability may arise.
Disclosing trading income from online platforms
If a taxpayer should’ve declared income and this exceeds the £1,000 trading allowance, they should consider if they need to register for Self Assessment.
Income tax will only be payable on taxable profits, so we recommend keeping details of any receipts for expenditure that could be tax deductible.