In an effort to collect more tax and bear down on evasion, HM Revenue & Customs (HMRC) has gained new powers which require UK based digital platforms to report information about people selling goods or services on their sites.

I thought HMRC was already actively focusing on e traders?

Yes, it has been. HMRC has targeted sellers on digital platforms for some time now. Back in March 2012, HMRC launched the E Marketplaces Campaign and encouraged people to come forward and make voluntary disclosures, if they had been selling on sites like eBay and Amazon.

Within 5 years HMRC had generated £27,175,038 from the Campaign.

Back in January this year, HMRC tried again with another nudge letter initiative encouraging online marketplace sellers to come forward, but widened the scope this time, by asking people who have been creating content on digital platforms to also disclose any undeclared income. HMRC was essentially trying to obtain disclosures from people generating income from OnlyFans, YouTube and TikTok.

What is going to be different now then?

HMRC has previously had to ask the digital platforms for information about people selling on their sites, but from January 2024, the platforms will have to provide this information automatically. Furthermore, the information gathered is going to be exchanged with other tax authorities.

The changes are in response to a report published by the OECD called ‘Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy’. That title is a bit of a mouthful, so it is more commonly referred to as MRDP.

Aside from clamping down on tax evasion, the wider objectives of this new approach include ensuring all data is shared quickly, in a more consistent and standardised format, so that it is easier to interpret.

How is this going to impact upon the digital platforms?

HMRC expects these new powers will mean significant work for digital platforms in the UK, as they will have to collect specific pieces of information about sellers, including details about their residency, verify that same information, collate it and then report it to HMRC, so that it can be checked against the data HMRC already holds.

What is going to happen once HMRC has received the information?

If the seller on the online platform is already known to HMRC, then HMRC will simply check whether the income reported by the digital platforms corroborates with the income already declared by the seller to HMRC. No doubt HMRC will use the merchant acquirers data it receives from credit card companies to double check any declarations.

If HMRC discovers someone is trading online, but not declaring that income and paying tax on it, then HMRC will contact that seller and ask them to make a disclosure or launch an investigation.

How does HMRC decide if someone is trading or not?

A seller is someone who is trading on digital platforms.

A lot depends on whether there is a profit motive to any such activity on the digital platform and how frequently any such activity takes place.

For example, say someone is having a declutter at home and decides to sell their unwanted items from the attic or garage, then that activity is unlikely to be classed as trading as it is a one-off, even if the unwanted items are sold on a digital platform.

However, if someone has a full-time job, but decides to pursue their passion for making jewellery in their spare time before selling it online, then HMRC would regard that as trading. Although that person might feel they are just making some money on the side from indulging their hobby, HMRC will take an alternative view because of the intention to make a profit, as well as the frequency of the transactions.

Don’t forget the VAT!

VAT is charged on most goods located and sold in the UK, or located outside the UK, then sold and imported to the UK.

Any traders on digital platforms who are earning above the VAT registration threshold of £85,000 will also need to account for VAT, as well as any tax owed, if they have not been declaring their online trading income to HMRC.

Summary

The UK tax gap – the difference between the tax HMRC expects to be paid and the total amount actually paid – is still stubbornly over £30bn a year. Unsurprisingly, HMRC is keen to take steps to reduce the tax gap and tracking down sellers on digital platforms, who are either under declaring income, or not declaring the income at all, is one of the ways HMRC can achieve that goal.

It should be noted that a digital platform is defined as any software, including a website or app, which allows sellers to be connected to the consumers of goods or services. An obvious example is Etsy, which enables lots of small independent traders to be put in front of potential buyers, the volume of which they would not ordinarily be able to attract on their own.

Online sellers clearly remain a high priority compliance target for HMRC and with more information going to be collected and shared by tax authorities, now is the time to disclose to HMRC. The primary benefit of making an early disclosure of undeclared income to HMRC is the opportunity to reduce any penalty charged. HMRC does not just expect the tax to be paid. It will charge interest on any undeclared tax and it will also seek to charge a penalty.

Matters get even more complicated if VAT is due, as VAT is calculated on a rolling basis rather than on the annual turnover and different time limits come into play.

If you, or a client, requires advice concerning notifying HMRC or needs to make a disclosure, then please get in contact by calling us on 0800 001 6686 or by email at info@independent-tax.co.uk for a no obligation consultation and for more information.

This is the type of work we at Independent Tax do day in day out. Strong by your side and strong in your defence.