New HMRC tax rules set to impact online sellers

From January 1, 2024, HMRC will implement new tax rules affecting individuals who sell items on platforms like Etsy, Depop, and Vinted.

The new regulations require these platforms to record and report the income of their sellers directly to HMRC. This move is part of a wider tax crackdown by HMRC on people boosting their income through side hustles.

“A huge change is coming in weeks for anyone who sells clothes or other items on Vinted or Depop,” warns Ellie Smitherman, a financial expert.

Historical context of the new powers

In July 2020, the OECD published the “Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy (MRDP)”. The UK was involved in the discussions and agreement of these model rules at the OECD.

The OECD subsequently extended the scope of the rules to include the sale of goods. HMRC’s new powers have been introduced so that the UK could implement the model rules via secondary legislation, following consultation.

At the Spring Budget in 2021, the government announced that the UK would implement the MRDP. In summer 2021, the UK consulted on the implementation of MRDP.

Draft regulations were published on 18 October 2022 to seek technical feedback to ensure they operated as the government intended and to identify any areas which needed further clarification in more detailed guidance.

Who will be impacted?

The new rules will affect digital platforms in the UK that facilitate the provision of services or the sale of goods by UK or other taxpayers. The measure will also affect UK taxpayers, including individuals and companies, who provide services or sell goods on digital platforms.

Digital platforms include apps and websites which facilitate the provision of goods and services such as the provision of taxi and private hire services, food delivery services, freelance work and the letting of short-term accommodation.

The regulations will support the government’s work to help taxpayers get their tax right first time, and to bear down on tax evasion.

While HMRC already has the power to access information from UK-based platforms on the income of sellers on the platform, implementing the OECD rules will enable HMRC to exchange information with other tax authorities to access data from platforms based outside the UK quickly and efficiently.

Implication for sellers

The power to enable these regulations to be made was introduced under section 349 of the Finance (No.2) Act 2023.

This measure introduces regulations which will require certain UK digital platforms to report information to HMRC about the income of sellers of goods and services on their platform. HMRC will then exchange the information with the other participating tax authorities for the jurisdictions where the sellers are tax resident.

The new system could potentially hit sellers with an unexpected tax bill if they fail to comply with all the necessary tax regulations. “It’s important to understand the tax rules or they could get a costly shock from HMRC in the future,” warns Miruna Constantin, tax manager at accountancy group RSM.

There is also an estimated cost to HMRC of £36.69m including 24 Full Time Equivalent (FTE) required. However, the costs to HMRC are currently being developed further.

Tax compliance and platform integration

Under the new rules, platforms like Vinted, Depop, and Etsy will be responsible for recording seller information and handing it over to HMRC.

“Platforms face hefty fines and penalties for failing to submit reports or submitting inaccurate, incomplete, unverified sellers records. This gives them a huge incentive to make sure they meet their reporting obligations,” Constantin explains.

The first reporting deadline for these platforms will be one year after the rules are introduced, on January 31, 2025.

UK platforms will have to verify that information, collate and report it to enable the seller to be identified and matched with data HMRC holds, identify the residency of the seller and the jurisdiction in which a property is located.

There will also be one-off costs which will include familiarisation with the change and could also include updating their website or software to collect more information, updating their IT and training staff to provide information to tax authorities in XML schema format, training staff to implement the new information collection and verification processes, and communicating the changes to sellers using the platform.

Continuing costs could include digital platforms collecting more information than they currently do now from sellers on their platforms and sending that information to HMRC annually.

Sellers who make no more than £1,700 for fewer than 30 sales in a reporting period are exempt from providing information to HMRC. However, Constantin warns that this does not mean they are free from tax reporting obligations.