HMRC now has access to online marketplaces’ data: What your clients need to know

Whether your client makes a full-time income renting out properties via Airbnb, has a side hustle peddling clothing on DePop, or just occasionally sells an old handbag on eBay, HMRC now knows more about their activities than before.

As of 1 January 2024, online marketplaces must, by law, gather data on their users and how much they earn, and share it with HMRC.

Here’s what this means for your clients and how you can help them meet their taxation obligations – plus a set of quick questions to help them figure out whether to register for self-assessment or VAT.

What information is HMRC gathering?

Before the new law, HMRC could ask for data from UK-based marketplaces on a case-by-case basis.

Now, HMRC is demanding data about all users from all online marketplaces based in signatory nations to the Organisation for Economic Cooperation and Development (OECD).

This extends to marketplaces of all kinds and sizes, from small platforms that connect online tutors with students to global sites such as eBay on which users can buy and sell just about anything.

The data being collected includes each user’s name, address, date of birth, national insurance number, fees paid and earnings.

HMRC can then match this data with that included in tax returns – and look for discrepancies.

How will this change affect your clients?

For clients up to date with their taxes, the changes won’t have much impact. However, for those who’ve fallen behind, a significant and unexpected tax bill could be on the horizon.

There is some help at hand. To ensure online sellers meet their obligations, HMRC will provide them with a copy of the data collected. This can be used to assess how much tax is owed and prepare accurate returns.

When must taxes be paid on goods and services sold online?

The first step in answering this question is establishing how much money the client makes from selling goods and/or services online.

If the total amount earned (before deducting expenses) per year is less than £1,000, then the Trading and Miscellaneous Income Allowance applies. The client need not declare the money nor pay tax on it.

The next step is working out whether the client is trading or making a capital gain – both of which are taxable. The occasional sale of second-hand items from someone’s home would unlikely qualify. However, regularly buying or making items to sell for a profit likely would.

For example, were a client, after a spring clean, to sell a few unwanted goods online for less than the amount paid for them, then tax would not be owed.

However, if the same client proceeded to buy goods from second-hand shops, then sell them online for more than the purchase price, on a frequent basis, then the profits would be taxable.

Once it is established that a client is trading or making a capital gain, then the client should register for self-assessment.

Answer a set of simple questions to find out whether self-assessment or VAT registration is necessary:

Does VAT apply?

A client selling goods or services online must register for VAT if:

• The client is based in the UK
• Selling takes place in the UK
• Selling is a business activity
• Taxable turnover is more than £85,000 per year

Once the client has received a VAT registration number, the client must provide it to the online marketplace. The marketplace should then verify the number and include it on the seller’s webpages.

VAT must be added to all goods and services, whether the customer pays the full cost or a discounted price.

It should be noted that, for goods or services sold in the EU, VAT does not usually apply. However, in other nations, local VAT may be owed.

Different rules apply to clients based overseas.

Claiming deductions

A client liable for tax on goods or services sold online can usually claim a variety of deductions.

These generally include costs associated with operating, such as running a home office, travel, fees (for example, those paid to online marketplaces), marketing, training, and the buying and/or making of items for resale.

It should be noted that, if the client earns less than £1,000 and claims the Trading and Miscellaneous Income Allowance, deductions are not permitted.

Old rules, new scrutiny

HMRC’s new powers to collect information from online marketplaces hasn’t changed the UK’s taxation rules.

However, it has changed the level of scrutiny to be expected from HMRC.

Clients who sell online are likely to be more closely watched – and should ensure their taxation obligations are met as soon as possible.

The IFA Tax Series 2024 will share insights on tax topics and recent changes, with expert industry speakers. Find out more.