When does your hobby become a business? You better find out before HMRC checks your Etsy account...
Your £1,000 free pass
Good news if you’re a new Etsy trader bringing in less than £1,000. The HMRC’s Trading Allowance means you don’t need to register with them or file a tax return. Of course it’s not quite as simple as that (it never is!). If you take up the Trading Allowance – which is based on income, not profit – then you can’t claim for expenses. It’s either one or the other. So you’ll need to figure out which option best suits you, depending on the type of business you’re running and your plans for growth.
HMRC is watching you
OK – so that’s hardly news... but with the rise of online selling HMRC is keeping a special eye on traders who use platforms like Etsy. With the power to check sellers’ income, HMRC can weed out anyone who isn’t paying their due and hit them with back taxes and late payment interest. So – unless you’re only doing an itsy-bitsy bit of trading and you qualify for the £1,000 Trading Allowance – you need to register your business from the get-go.
Business versus hobby
As a start-up, chances are you’re keen to scale up from selling a few odds and sods to making some serious money on Etsy. Just be careful that in all the excitement you don’t go from hobby to fully-fledged business and fall foul of HMRC. Your Etsy trading is classed as a business if it can be proved that you’re doing ‘anything in the nature of trade’. The taxman will determine this by looking into things like how you carry out a sale, the number of transactions made over a period of time and if you’re buying and storing stock.
Registering your Etsy shop
You need to register by October 5th in the second tax year of opening your Etsy shop. The crucial information here is ‘tax year’ – which don’t forget runs from April 6th to April 5th. So don’t get caught out thinking you have two whole years to register. Worth popping a note in your diary if you don’t want to be penalised for missing the date.
Sole trading on Etsy
Just like off-line sole traders, you’ll need to fill in a Self Assessment form and pay your taxes – unless you’re earning less than your personal allowance – and National Insurance. And just like off-line traders you can claim for allowable expenses such as marketing, accounting, insurance and car mileage along with your Etsy fees.
Do you need to consider Capital Gains Tax in your business? Is your Etsy shop doing so well that you should be VAT registered? How are you dealing with VAT and non-UK customers? And what’s the process for setting up as a limited company or partnership? Just a few things an accountant can help you with...
* Find out more about how Duport’s online accounting package can help your online business. Call us on 0845 308 1454 or email us at firstname.lastname@example.org