HMRC targets the self-employed for side hustle tax

These new rules mean digital platforms such as Airbnb, Etsy, Deliveroo, Uber, Upwork and Fiverr will be responsible for collecting and reporting information to HMRC. The information will include a customer's name, address, bank account information and total sales. This information is crucial for HMRC so it can find unreported income and ensure taxpayers are complying with tax regulations.

The platforms must start collecting this information from 1st January 2024 and report it from January 2025.

Individuals receiving income through digital platforms who are not declaring or under-reporting their income from these platforms will be impacted by these changes.

What is a side hustle?

Side hustles prove attractive to individuals who want to supplement their income, learn new skills, and meet new people. They can often be the first step towards turning a hobby into a business –as they provide an opportunity to test the waters.

As part of “the gig economy”, side hustles have become an integral part of the UK's economic landscape. More people are choosing side hustles because they offer flexibility and opportunities that match work preferences. In the UK there has been a considerable growth in this sector, as well as an increasing need for clear taxation and regulatory guidelines.

Why are the new side hustle tax rules being introduced?

HMRC is keen to bridge the tax gap, which is the amount of tax not collected because of errors and omissions. HMRC has invested in sophisticated computer software, known as Connect and is set to invest nearly £37million in this initiative, employing 24 full-time staff to launch and enforce the new rules.

These rules also place a new level of accountability on these platforms to ensure proper tax reporting. Online platforms could face fines and penalties for failing to submit accurate and complete reports. This gives the platforms a good incentive to meet their reporting obligations.

HMRC will compare data from digital platforms to what taxpayers report through the self-assessment system. This will identify discrepancies and result in investigations into self-assessment tax returns.

Who needs to complete a tax return?

If you are self-employed, a partner in a partnership, or renting out a property, you may need to complete a tax return. If you are employed and have a side hustle, you may need to report this income to HMRC. To determine whether this needs to be reported you first need to establish if you have a trade. This is established by looking at the badges of trade which include:

• Motive – For example, is it profit-seeking, are you selling products to make money?
• Number of transactions – The higher the number of transactions, the more the sales will appear to be a trade.
• The way the sale was carried out – Was the sale typical of a trading organisation or was it sold as a necessity to raise cash for an emergency?

If your annual income from your side hustle is less than £1,000, you will not need to report this to HMRC. This level of income firstly deems the sales may not meet the badges of trade criteria. For example, if you happen to buy a lot of clothes for your personal use which you ultimately sell on sites such as Vinted, the sales of these personal items should not generally be regarding as trading activity. Secondly, you may be able to deduct the trading allowance of up to £1,000 from the income, resulting in no tax to pay.

 

Date published 13 Dec 2023 | Last updated 29 Jan 2024

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