17 Jan 2024
By Kevin Winters, Personal Tax Expert, Brodies LLP
The beginning of a new year is generally met with enthusiasm by most, often in the hope of making good on their resolutions for the year ahead. It can however elicit a distinct feeling of dread in others, specifically those that submit their own tax return: the 31 January is the deadline for all taxpayers that submit their personal tax returns i.e., those registered for ‘Self Assessment’ (SA), to have it lodged with, and any tax liability paid to, His Majesty’s Revenue & Customs (HMRC).
Notwithstanding that the tax rules will already be at the forefront of the minds of those registered for SA, January 2024 has additional importance following the entry into force of new rules on the reporting of income streams of taxpayers derived from the sale of goods or services via use of digital platforms.
What are the rules on how income is taxed?
The key point to note is that there are rules and they are, in the main, contained in three distinct pieces of legislation: the Income Tax Act 2007; the Income Tax (Earnings and Pensions) Act 2003; and the Income Tax (Trading and Other Income) Act 2005. These distinct pieces of legislation set out how different kinds of income – and there are many – are to be taxed, if at all.
For the majority of UK taxpayers, their interaction with the income tax rules will be relatively simple (albeit not always welcome). Where a taxpayer is employed, their employer will deal with their tax obligations on their behalf through the 'Pay As You Earn' ("PAYE") system. If a taxpayer is perhaps retired and supports themselves through a pension, their pension provider can take the relevant deductions before the pension is paid over to the taxpayer.
The situation can become more involved where a taxpayer's financial affairs are 'complex' e.g., they are self-employed or perhaps they are employed and have a 'side hustle' i.e., they receive an income that is not from their employer. Where that happens, then the taxpayer may find themselves needing to register for SA to tell HMRC about that 'additional income' and pay tax on it.
How do you tell HMRC about additional income?
The rules for telling HMRC about additional income depend on whether or not a taxpayer is voluntarily disclosing additional income to HMRC, or HMRC suspects that a taxpayer earns a separate income which has not been previously disclosed. The distinction is important and is something that needs to be borne in mind (more on that to follow).
What does all of this have to do with digital platforms?
Through the internet, many individuals have discovered opportunities to convert often unwanted property or goods into cash following the birth of digital platforms like Vinted, eBay, AirBnB and others. That all sounds like good news for the 'supplier' – more money for them! However, the question then arises, is the money that they receive 'taxable income' under the rules? If so, has that been reported, and tax paid to, HMRC? It all depends on the circumstances.
Historically, the question of whether or not an individual needs to register for SA and whether or not income needs to be reported and tax paid to HMRC has been delegated to the taxpayer i.e., the taxpayer 'self-assesses' their tax position either alone or with the support of a professional advisor. Through digital platforms taxpayers can enjoy additional income, but they may not know to report that income to HMRC.
Against that background, and the broader objective of tackling tax evasion generally, the UK has introduced The Platform Operators (Due Diligence and Reporting Requirements) Regulations 2023 which oblige digital platforms to gather information on the income that users receive from the use of their platform. From January 2025, the digital platforms will be required to supply that information to HMRC.
What 'income' is caught by the regulations?
The regulations are, intentionally, drafted broadly. They can cover several different kinds of income including that from selling goods the renting of properties (for short or long term), a 'personal service' e.g., delivering goods, providing transport (a taxi service), providing a professional service e.g., tutoring, amongst other things. It is important to note that certain 'suppliers' are excluded under the Regulations i.e., there will be no need for a platform to submit a report to HMRC on them. That said, the exclusions are limited.
A key point to note is that taxpayers' reporting obligations have not changed with the introduction of the regulations. If a taxpayer is a 'trader' using a digital platform to sell their goods / services, then they would need to report that income along with any allowable expenses on their SA tax return. That is not likely to be the case where an individual is not carrying on a 'trade', and is simply selling unwanted property that was previously purchased, perhaps, for a higher price.
Remember that the regulations impose a duty on platforms to gather information on the income streams of their users, and supply that information to HMRC. HMRC officials will then use that information to cross reference the information they hold on taxpayers and be able to identify any gaps in terms of the reporting and payment of tax. Certain platforms, specifically Vinted, have made clear that they will work with users to help them comply with the new rules.
What happens if there is a gap?
If taxable income from a digital platform is reported, and tax thereon paid to, HMRC by the taxpayer under SA, and it transpires that there is a discrepancy between that income and the information that HMRC receives on a taxpayer under the Regulations, or indeed any other existing reporting regime – do not forget that already HMRC draws information from a number of sources, including other tax authorities – then HMRC will have the right to carry out a check into the taxpayer's tax record.
However, where a taxpayer does not disclose and return taxable, trading income from digital platforms and HMRC is furnished with details thereof by a third party i.e., the digital platform, then HMRC may raise a formal investigation into the taxpayers' affairs.
All too quickly it becomes clear that there may be a need for individuals that have perhaps not had to consider SA previously to think about whether they need to take a more active role in managing their tax affairs. Tax rules are complicated and, as can be seen here, constantly evolving to keep pace with modern life. It is the role of lawyers and tax advisors to help taxpayers understand the practical implications of those rules to ensure that their affairs are structured appropriately, and that they observe their obligations. The best advice to anyone grappling with how these or indeed any of the tax rules apply to them is simple: if in doubt, seek advice!
