In January 2023 we wrote about how HMRC had started to target taxpayers who they suspected may have an undisclosed income from their online trading. We were subsequently contacted and instructed by many clients who had sold goods on online marketplaces, predominantly eBay, who had received a letter from HMRC and these activities constituted a taxable trade (see below).
Given the perceived success of the campaign from HMRC’s standpoint, the net has now been cast much wider and the amount of information provided to HMRC will start to significantly increase. This will likely impact not just those with a tax issue to resolve, but those who don’t but just happen to be a user of online platforms.
New legislation
New regulations came into force on 1 January 2024, known as “The Platform Operators (Due Diligence and Reporting Requirements) Regulations 2023” which require online platforms to share information they collect with HMRC about who is earning what on their platform. This information will start to be collected from 1 January 2024.
This is likely to have wide-reaching implications and catch individuals with no UK tax issues to correct. Examples of those taxpayers likely to be impacted include –
- eBay sellers (again)
- Airbnb hosts (see our article here)
- Social media influencers (see our article here)
- Private tutors
- Deliveroo drivers
- Vinted sellers
- Onlyfans content creators
- Substack contributors
- Driveway renters
- Any many others
The first reports made by the online platforms about their users must be submitted to HMRC before 31 January 2025. As such we expect HMRC will consider opening a targeted disclosure facility aimed at users of online platforms in the coming months. If they choose not to, then we expect the majority of disclosures will be made using the existing Digital Disclosure Service (DDS) – see here.
What those individuals impacted will want to know
Every taxpayer can receive up to £1,000 of income each tax year (the “trading allowance”), from one or more trades, without having to pay on tax on this income. The trading income can be from self-employment or casual services. Therefore, if an individual is earning less than £1,000 in a tax year from an online platform, or their ‘side hustle’, there will be no requirement to notify HMRC of this source or make a disclosure.
The new rules which came into effect on 1 January 2024 exclude, for reporting requirement purposes, those individuals receiving less than 2,000 EUR (c. £1,700) and (if relevant) making less than 30 sales in the tax year. These are proportionally reduced if the individual has not been a user of the platform for the full year.
It is a complex area, but there may also be defence against an alleged tax liability arising if it can be shown that the taxpayer was simply pursuing their hobby rather than actively trading. This involves considering the ‘badges of trade’ and we strongly recommend speaking with us or another professional advisor experienced in this area to establish whether the threshold from hobby to trade has been crossed.
What to do if a disclosure is required?
This depends on the specific facts of the case which should be considered on its own merits. For most cases, an online notification is made to HMRC informing them of an intention to make a disclosure under the Digital Disclosure Service (DDS). On receipt of the letter confirming the taxpayer’s acceptance into the DDS HMRC allow 90 days for the taxpayer, or their advisor, to calculate the tax, interest and potential penalties due. Menzies approach is to also prepare and submit a separate disclosure letter to HMRC to explain the background and make representations on the taxpayer’s behalf.
The tax calculations can potentially go back up to 20 years depending on the circumstances. The nature of the underlying “tax offence”, i.e. whether it is an error in a filed return or whether no tax returns have been filed, as well as the “behaviours giving rise to the loss of tax”, will determine how many years to include in the disclosure.
In more serious cases it may be necessary to consider making a disclosure to HMRC under the Contractual Disclosure Facility and Code of Practice 9 (COP9) to protect the taxpayer from any risk of criminal prosecution.
What happens if you do nothing?
If you need to make a disclosure and choose not to come forward, then you can expect HMRC to open an enquiry into your tax affairs at some point in the future. The downsides of adopting this approach include:
- Not retaining control over the HMRC investigation and facing uncertainty that can last many months or years.
- Higher financial penalties.
- The risk that HMRC will start focusing on other aspects of your tax affairs, even if there are no other issues to disclose.
If you would like to discuss the new online platform regulations or voluntary disclosures more generally, please contact Menzies’ Tax Disputes and Disclosures team below: