Now I’ll admit that I had to think a bit about the natural and logical starting point for any advice about selling online as a small business. Normally I would start at the beginning of the Ecommerce business journey - probably with a nice planning and budgeting template. Then I realised that there is often an earlier step to cover, particularly when it comes to small businesses! Namely, the transition from selling online as a private individual - to selling online as a business. After all, this is how many Ecommerce businesses start up (myself included)!

If you are already registered as a business or as self employed then you can probably skip this lesson and get straight onto the business planning lesson, but if you are still acting as an individual whilst making a few sales online, then you should probably read on. Before doing so, I will quickly say that I am neither a tax expert nor an accountant but, as with all of this Guide, I have plenty of useful advice which is based on my own experience, observations and learning.

When it comes to business status and tax liability in the UK, there is much confusion over the line between personal and business selling, particularly at the time of writing this Guide. In January 2024, HMRC announced that they would be carrying out greater checks and crackdowns on those whose online selling has reached a level which requires them to register as self employed or as a business.

Let’s face it, there is nothing like the phrase ‘HMRC crackdown’ to create a mass, screaming exodus to the hills - even when nothing has actually changed or when new measures don’t actually affect us. That is certainly the case here. From reading internet forums I can see that the announcement of this ‘crackdown’ has created a blind panic amongst individuals who think they need to stop selling online immediately and allow their attic to fill back up with second hand tat! I see Ebay and Vinted sellers, tortured by the prospect of a world viewed through prison bars.

So is this a likely scenario? Fines? Your name in the court reports of local newspapers? Jail time?

Absolutely not! Be assured that, if you act honestly and stick to the rules, then there is nothing to worry about.

“But what are the rules?” I hear you say - and I’m glad you asked because, in this lesson, I will do my best to quash the scary headlines and outline the actual truth of the situation.

First of all, forget the click bait news articles unless they come from a reputable source. If you are reading random material, look for quotes from credible sources; fact check the content by reviewing more than one article; take some time to read the forums and threads since this often starts to reveal more rational advice and opinion which you can continue to hone and fact check. There are lots of news articles I could draw on here but you can look at those anytime. For now let’s focus on the facts as outlined on the HMRC website.

The first bit of good news is that, as far as you, the seller, is concerned, there has actually been no real change to the law. Since 2017 you have been permitted a trading allowance by HMRC. This is explained on the HMRC website as follows.

This sounds straightforward but the confusion for many sellers has centred on the meaning of ‘trading’ and what we understand by the term ‘gross income’.

Let’s look at each of these in turn.

What does ‘Trading’ Mean?

When I look to HMRC for a definition of ‘trading’, there is no concrete answer. This sounds unhelpful but it is largely because ‘trading’ can mean different things in different situations. However, if I wanted to give ‘trading’ its ordinary, every day meaning in terms of online selling then I might reasonably refer to the following text which appears at https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim20060. It states that;

The courts have established for themselves what amounts to a ‘trade’, or ‘trading’, and their decisions provide guidance when the point is in dispute.

“Broadly, ‘trade’ can be taken to refer to operations of a commercial kind by which the trader provides to customers for reward some kind of goods or services”

My own take on this is that, if you are selling goods online, as part of a commercial operation, and with a view to making a profit, then you are acting in the course of a business. The crux of the matter is, of course, centred on whether you are selling commercially or personally.

In my mind (and in layman’s terms), selling personally is akin to the casual disposal of unwanted personal goods in exchange for payment of some kind. Selling commercially is more likely to be assumed when you actively create or acquire goods with the intention of selling them on for a profit or capital gain.

In life there are always grey areas and this certainly applies to the crossover between personal and business selling. There is no hard line and it is up to each individual to assess their own circumstances and to decide when they have indeed crossed over between the two. In my experience, most people know, or at least suspect, when they have entered the zone of commercial selling, even if they continue to argue that they are still selling personally.

Let’s use an old watch as an example.

1. If you sell your old watch online then you are probably selling personally;

2. If you sell ten of your old watches online then you are probably selling personally;

3. If you spot a designer watch at a car boot sale which you know will fetch a good price on Ebay then you are probably selling commercially.

4. If you buy in five watches from an auction room with the intention of selling them on for a profit then you are definitely selling commercially.

5. If you sell ten of your old watches, but on finding a nice little niche, you then start acquiring watches solely for the purpose of selling for a profit then you have probably transitioned from personal selling to commercial selling.

6. If you are - or you claim to be - a big watch fan who buys dozens of watches and loves wearing them for a week before seeing a new one the following week and putting the most recent one back up for sale then you are probably a commercial seller who is still trying to pass themself off as a personal seller.

According to the HMRC trading allowance, you can continue to sell your genuine possessions, second hand goods or unwanted items without worrying about the £1000 allowance - because you are not selling commercially. This would be the case in scenario 1) and 2).

If, however, you are creating or acquiring goods to sell online for a profit, then you do need to take note of the £1000 allowance because you are selling commercially. This would be the case in scenario’s 3, 4 and 5. It would probably also be the case for scenario 6 unless you have a very strong argument which demonstrates that you are not a commercial seller (p.s. good luck with that!).

Look at the type of item you are selling and where you got it; how long have you had it and why/ how did you buy, create or acquire it in the first place? What is the volume of your sales. Be honest with yourself about the reason and intent behind your online selling activity because it’s the only way you can be sure of doing the right thing. If you know you have crossed over into commercial selling then you need to be clear about whether the annual gross income from your commercial/ trading activity has exceeded £1000.

Remember that the £1000 Trading Allowance covers more than just selling online. For example, if you sell £500 of goods online and you also earn £600 for dog-walking services then your ‘annual gross income’ from these activities has probably exceeded the £1000 allowance.

This brings us to the second question of this lesson; namely - what is meant by ‘annual gross income’ in this context.

What is ‘Gross Income’ in terms of the Trading Allowance?

There is also some confusion about the nature of the income that needs to be assessed. Some people believe that the £1000 trading allowance is based on the profits from your sales. This is not correct. The definition of ‘gross income’ as applies to the trading allowance is fairly clear cut and simply means the total income which is generated from online sales before you have taken into account any fees, postage costs and other expenses. ‘Gross income’ is not the same as ‘profit’. In other words if, over the course of the year, you sell 55 items online at £20 each then your gross annual income is £1100. If you have selling fees of 15% (£165) to pay plus £220 in postage costs then you have a gross profit, after expenses, of £715. In this case you still have exceeded the £1000 trading allowance because your gross income is £1100 even though your gross profit is only £715.

If you do exceed the £1000 Trading Allowance then you need to think about registering for self employment/ self assessment or as your chosen business status. Please note that, once you have registered with HMRC, you will then be able to offset your expenses against your gross income to calculate your profits. Depending on your circumstances, you may be able to offset the Trading Allowance against your sales income thus reducing your reportable profit and your tax liability. (This is probably why there is confusion about whether the Trading Allowance relates to sales income or sales profit but it is clear that the initial assessment of whether you have exceeded the £1000 allowance must be based on your total sales income).

So what was the ‘change in law’ that I read about?

As mentioned above, there has been no real change to the law in terms of you as a seller. The trading allowance has been in place since 2017 but HMRC has long had the power to investigate the trading activities of individuals including the power to request trading information from marketplaces such as Ebay, Vinted, Etsy, Amazon and many others.

The change in law that you have read about actually stems from a new international agreement between OECD countries. This requires national tax authorities to exchange information with each other about the income generated by sellers who offer goods in their respective countries. This is partly in response to the huge volume of cross border sellers such as UK sellers who offer goods for sale in Spain, or Latvian sellers who offer their goods for sale in the UK. It can be easier for international sellers to hide from their tax authorities and to potentially avoid tax, but this new agreement will tackle tax evasion and encourage a level playing field.

As a result of this agreement, HMRC will now require UK online selling platforms to routinely provide details about the sales volumes achieved by sellers on their platforms. HMRC will also receive the same information from overseas tax authorities about UK sellers using sales platforms based in the overseas country. As a result, HMRC will be able to identify all sellers who achieve sales in excess of the £1000 Trading Allowance. The question of whether individual sales are classed as commercial or personal will continue to be a matter for individual assessment.

As an aside, you may also note that, under the rules set out by the OECD, sales platforms will not be asked to share data about sellers who make fewer than 30 transactions per year or who generate less than €2,000 (£1,735) per year. This may tempt some sellers to ignore the £1000 Trading Allowance and work within the £1735 threshold instead. However, please bear in mind that the £1735 threshold only relates to the reporting requirements imposed on platforms as part of the OECD agreement. HMRC will retain the power they have always had to investigate any seller and to request the information they need for that purpose.

So, in summary;

• If you are genuinely selling personal items at a personal level then you do not need to do or change anything even if you generate more than £1000 of sales in a year (although this eventually has its own limits of reason bearing in mind wider tax rules on Capital Gains etc).

• If you are selling commercially, as per above, then you may need to register with HMRC if you generate sales in excess of £1000 or if you have other trading activities which, when combined with your online sales, exceeds £1000.

• If you are doing both then you need only consider the sales income you generate as part of your commercial selling activity. If this exceeds £1000 - or combines with other off-line trading activities to exceed £1000, then you may need to register with HMRC.

For the purposes of this Guide, the lesson is intended to help new or potential sellers who are navigating their status and transition from personal to business selling. I also hope that it encourages other personal sellers to consider whether now might be a good time to think about starting your own business. Trust me, you have already built up some great skills and by registering as a business you will be free to take whichever direction you like. So what are you waiting for?!

Useful links (i.e sensible articles which offer simple, easy explanations for online sellers).

https://www.channel4.com/news/factcheck/factcheck-do-you-have-to-pay-tax-for-selling-secondhand-on-vinted-or-ebay

https://www.accountancyage.com/2023/12/08/new-hmrc-tax-rules-set-to-impact-online-sellers/

https://www.litrg.org.uk/news/new-rules-gig-economy-workers-your-questions-answered