Selling items online through platforms like eBay, Depop, Etsy, or Gumtree has become a popular way for individuals to earn extra income or even establish full-time businesses. As accessible as these digital marketplaces are, the tax implications of online selling are often misunderstood or ignored. Understanding how HMRC views these activities is essential to avoiding penalties and ensuring compliance with UK tax laws.
HMRC differentiates between casual selling and what they define as a business. If your selling activity suggests you’re operating as a trader, then you’re legally required to declare your income and pay tax accordingly. This doesn’t mean that every occasional sale leads to a tax bill, but if your activity meets certain criteria, HMRC may consider it a trade.
The Legal Framework for Online Selling
In 2016, the Finance Act granted HMRC the authority to request information from digital marketplaces. This means platforms like eBay, Etsy, and Depop are required to share data about sellers who might be generating income. The intention was to catch people earning from online sales without declaring it.
This monitoring power has brought many online sellers under scrutiny, especially as HMRC now has the ability to cross-reference data from PayPal and similar payment providers. It’s important to be aware that if you receive income online, the possibility that HMRC is already aware of it is quite high.
When Does Online Selling Become a Business?
HMRC uses specific criteria to determine whether your online sales constitute a business. These are known as the “badges of trade,” and include several indicators that help identify commercial activity. If any of these badges apply to your situation, you may be considered a trader and therefore must report your earnings.
Intention to Make a Profit
If your primary goal is to make a profit from the items you’re selling, rather than simply offloading personal items you no longer use, this is a strong sign that your activity could be considered a trade. Profit-driven sales, especially when repeated, are rarely seen as casual.
Frequency and Regularity of Transactions
Occasional sales don’t usually concern HMRC. However, repeated sales of similar items over short periods are a red flag. Selling ten pairs of similar trainers in one month, for example, is different from selling a pair you no longer wear.
Modification of Goods for Resale
If you buy or acquire items and then alter, clean, repair, or upgrade them to sell for a higher price, HMRC is likely to treat this as a business. The work you put in to increase the item’s resale value suggests a commercial motive.
Short Time Between Purchase and Sale
Buying items and then quickly reselling them can raise questions about whether you ever had genuine ownership. If you’re not using items yourself before selling, and your activity looks more like flipping products, HMRC might treat this as trading.
Selling at Fixed Prices
A further sign of trading is selling at set prices, similar to how a business operates. Casual sellers tend to use auctions or flexible pricing, whereas traders often use fixed prices consistently.
Using Borrowed Money for Purchases
If you borrow funds to buy stock and only repay the loan once the item has sold, this again demonstrates a clear business-like approach.
Lack of Personal Use or Possession
Items that have no evidence of being used personally, or were bought solely to be sold, may be viewed as business stock. If you can’t show that the item was yours for personal enjoyment or necessity, it weakens your case for casual selling.
Understanding the Trading Allowance
To make things easier for casual or low-earning sellers, the government introduced a trading allowance in 2017. This allowance permits individuals to earn up to £1,000 annually from trading activities before needing to report it to HMRC.
This threshold is particularly useful for people who sell unwanted items occasionally. If you sell a few old clothes on Depop or electronics you no longer use, and your total sales are under £1,000 in a year, you’re not required to declare the income or pay tax on it.
However, the trading allowance applies to gross income, not profit. If you make £1,500 in total from selling online, even if your net profit is just £500, you must report the income to HMRC. You can choose to deduct actual expenses or use the trading allowance instead.
Registering as Self-Employed
If your online sales exceed the £1,000 allowance or fall into any of HMRC’s badges of trade, you are required to register as self-employed. You must do this by 5 October following the end of the tax year in which you started trading.
Being self-employed means you’re responsible for completing a Self Assessment tax return each year. You’ll need to provide details of your income and allowable expenses, and you may need to pay income tax and National Insurance depending on your earnings.
Registering is straightforward. You can do it online through HMRC’s website. Once registered, you’ll receive a Unique Taxpayer Reference (UTR) and access to your personal tax account. It’s a good idea to set reminders for important deadlines to avoid late filing penalties.
Keeping Accurate Records
Regardless of whether you hit the trading threshold or not, keeping accurate records is a crucial part of managing your online selling. Maintain logs of sales, receipts, invoices, and bank transactions. It’s helpful to separate personal and business finances, possibly even using a separate bank account.
Recordkeeping helps you track your profits and stay organised for when it’s time to file your Self Assessment return. If HMRC ever asks for proof of your income or expenses, having clear and accurate documentation will protect you.
Online Selling and Platform-Specific Considerations
While the principles of taxation are the same, different online platforms come with unique features and challenges. Understanding how each operates can help you stay compliant.
eBay
Many eBay sellers begin by listing personal items but may grow into more structured businesses. eBay tracks your sales, and frequent activity may prompt them to share your data with HMRC. If you’re selling regularly and using the platform’s shop features, you’re likely running a business.
Depop
Depop is popular among younger sellers, particularly for second-hand fashion. If you’re sourcing items specifically to resell them, making customisations, or running a curated shop, HMRC will likely see this as a business.
Etsy
On Etsy, handmade and vintage goods are the main product categories. If you’re producing items to sell, managing orders, and offering customer service, there’s little doubt that your activity is business-related. Even small-scale creators need to declare their income.
Gumtree
While often used for one-off sales, frequent Gumtree sellers—particularly those flipping used furniture, electronics, or vehicles—may also meet the criteria for trading. Repeated listings and rapid turnaround times are key indicators.
Facebook Marketplace
Like Gumtree, Facebook Marketplace attracts both casual users and traders. Repeated sales of the same type of product can draw attention. If your profile resembles that of a business page, it increases the chances that HMRC will consider you a trader.
Common Pitfalls Online Sellers Face
Even well-meaning sellers can make errors when it comes to tax. One of the most common is assuming that only large amounts of income are taxable. In reality, if you exceed the trading allowance or fit HMRC’s trade criteria, even modest earnings must be declared.
Another mistake is failing to report income simply because no tax was withheld by the platform. Unlike employees, online sellers don’t have tax deducted at source. It’s your responsibility to calculate and pay any taxes due.
Lastly, failing to file a return on time can result in penalties. Even if you owe no tax, late filing can incur fines. Stay aware of deadlines and ensure your return is submitted correctly.
Calculating Your Taxable Income from Online Sales
Understanding how to calculate your taxable income is vital once your online selling activity exceeds the trading allowance or is considered a business by HMRC. Taxable income is not just the amount you receive from buyers—it’s the profit remaining after subtracting allowable business expenses from your total revenue.
Your total revenue includes all money earned from selling items online. This includes:
- Direct sales from platforms like eBay, Etsy, Depop, or Gumtree
- Shipping fees paid by customers (if included in the price)
- Any income earned from repeat customers or direct sales outside of the platforms
To determine your profit, deduct allowable business expenses from this revenue. You must ensure your records are accurate and comprehensive to support your figures during the Self Assessment process.
Allowable Business Expenses for Online Sellers
HMRC allows self-employed individuals to deduct certain expenses incurred wholly and exclusively for the purpose of running their business. These expenses reduce your taxable profit and ultimately lower your tax liability.
Common allowable expenses for online sellers include:
Cost of Goods Sold (COGS)
This includes the purchase price of items that you bought specifically to sell. If you purchased inventory in bulk, only the portion sold within the tax year should be claimed as an expense.
Postage and Packaging
Costs for postage, packaging materials, and shipping supplies can be deducted. If you pay for postage on behalf of customers, those fees count as business expenses.
Platform Fees and Payment Charges
Online selling platforms usually charge listing fees, final value fees, and subscription charges. Payment processors like PayPal or Stripe also take a cut from transactions. These costs can be deducted from your total income.
Marketing and Promotion
If you invest in advertising, such as promoted listings or social media ads to drive sales, those costs are deductible. Branding materials, logos, and photography services also fall under marketing.
Home Office Costs
If you use a part of your home exclusively for managing your online sales—such as inventory storage or administrative work—you can claim a portion of household bills. This includes electricity, heating, internet, and rent or mortgage interest.
Equipment and Tools
Purchases like computers, label printers, cameras, or crafting tools used exclusively for your business can be claimed either as capital allowances or allowable expenses, depending on their value and lifespan.
Business Insurance
If you’ve taken out insurance to protect your stock or to cover liability for the items you sell, the premiums can be deducted as a business expense.
Travel and Mileage
If you travel to purchase inventory or to deliver goods, you may claim mileage or travel expenses. This includes public transport, fuel, and parking—provided they are strictly business-related.
Keeping Proper Records of Your Online Business
Maintaining accurate records is not just good practice—it’s a legal requirement. HMRC expects self-employed individuals to keep clear documentation of their business income and expenses for at least five years after the 31 January submission deadline for each tax year.
Your records should include:
- Sales invoices or screenshots of platform transactions
- Receipts for business purchases
- Bank statements showing relevant transactions
- Spreadsheets or accounting software logs
If you use personal accounts for both business and non-business transactions, it’s essential to clearly identify and separate your business income and costs.
Using Accounting Software
Many online sellers find it helpful to use digital tools to manage their accounts. Accounting software can help automate income tracking, calculate profits, and generate reports for your Self Assessment return.
Some tools are even designed specifically for sole traders and integrate with platforms like PayPal, Etsy, or eBay, making it easier to import and categorise transactions automatically.
Understanding Self Assessment and Deadlines
Once you’re registered as self-employed, you’ll need to file a Self Assessment tax return each year. The UK tax year runs from 6 April to 5 April the following year.
Key deadlines include:
- Registering as self-employed: by 5 October following the end of the tax year you started trading
- Filing paper tax returns: by 31 October
- Filing online tax returns: by 31 January
- Paying any tax owed: by 31 January
If your tax bill exceeds £1,000, you may also be required to make payments on account—advance payments towards your next year’s tax bill. These are due in two installments: 31 January and 31 July.
National Insurance for Online Sellers
In addition to income tax, self-employed sellers may need to pay National Insurance contributions (NICs). There are two main types:
Class 2 NICs
If your profits are above the Small Profits Threshold, you may need to pay Class 2 NICs. These are usually a flat weekly rate and contribute towards your eligibility for the state pension and certain benefits.
Class 4 NICs
If your profits exceed the lower profits limit, you will also pay Class 4 NICs, which are calculated as a percentage of your earnings above that threshold.
These NICs are assessed and collected through your Self Assessment return, so it’s important to include them when budgeting for your total tax bill.
What Happens If You Make a Loss?
Not all online sellers make a profit every year. If your expenses exceed your income, you’ll incur a business loss. It’s important to report this loss accurately on your Self Assessment form.
You may be able to carry this loss forward to offset against future profits, reducing your future tax liability. In some cases, you might be able to offset it against other income (such as employment income), depending on HMRC rules.
However, HMRC may scrutinise repeated losses. If your business never makes a profit, they might question whether you are genuinely trading with the intention of profit, which is a condition for being allowed to claim certain reliefs.
Paying Your Tax Bill
Once you submit your Self Assessment return, you’ll receive a tax calculation outlining what you owe. This will include income tax, National Insurance, and potentially payments on account.
You can pay your bill through various methods:
- Direct debit
- Online bank transfer
- Debit or corporate credit card
- At your bank or building society (if you receive a paper bill)
Ensure payments are made by the deadline to avoid penalties and interest charges.
Penalties for Late or Incorrect Submissions
HMRC takes tax compliance seriously. If you submit your return late or pay your tax bill after the deadline, you may incur the following penalties:
- An initial £100 fine for missing the deadline
- Additional fines after 3, 6, and 12 months
- Daily penalties for ongoing non-compliance
If your return is found to contain inaccuracies, whether due to carelessness or deliberate evasion, HMRC can apply penalties based on the severity of the mistake and how quickly you correct it.
Being proactive, honest, and keeping detailed records is the best way to avoid these issues.
Online Selling as a Side Hustle vs. Full-Time Business
Some online sellers earn a small side income while working full-time elsewhere. Others operate full-time businesses with high sales volumes. Your tax responsibilities depend on the scale and intention of your activity, not just the income amount.
If your online selling is a side hustle:
- Use the £1,000 trading allowance if applicable
- Combine your earnings with other sources of income when submitting your Self Assessment
- You may still need to pay additional tax if your total income pushes you into a higher tax band
If your online selling is your main source of income:
- Monitor your profits and tax thresholds carefully
- Ensure that your NICs are paid to maintain state benefits eligibility
- Consider budgeting for VAT if your turnover approaches the VAT registration threshold
Considering VAT as Your Business Grows
If your turnover from online selling exceeds the VAT threshold (currently £90,000 per year), you must register for VAT. Once registered, you need to:
- Charge VAT on applicable sales
- Submit VAT returns to HMRC
- Keep VAT records and invoices
Even if you’re below the threshold, you can voluntarily register for VAT if it benefits your business—for example, by allowing you to reclaim VAT on business purchases.
Keep in mind that VAT adds another layer of complexity, and not all products or services are VAT-liable. Make sure you understand what’s expected before registering.
Seeking Support and Staying Informed
Managing the financial side of your online business doesn’t have to be overwhelming. Numerous resources are available to help you understand your responsibilities, from HMRC guidance to online business forums.
You may also consider hiring a professional accountant if your business is growing rapidly or if you find tax calculations difficult to manage on your own. Accountants can offer tailored advice and ensure that you’re maximising allowable deductions while remaining compliant with the law.
Turning Your Online Sales into a Full-Time Business
As your online sales grow beyond casual or side income, you may find yourself transitioning into running a full-time business. This transition brings additional responsibilities, not just operationally but also in terms of tax compliance. Running an online business at scale means dealing with higher income, increased expenses, more complex records, and possibly new tax categories.
Your tax obligations do not fundamentally change when you become a full-time seller, but the scale and scrutiny of your operations might. Larger income can push you into a higher tax band, expose you to VAT registration thresholds, or make you eligible for certain business reliefs or deductions.
Formalising Your Business Structure
Most online sellers begin as sole traders. This is the simplest form of self-employment and involves registering with HMRC and filing a Self Assessment tax return each year. However, as your income and risk exposure grow, you may want to consider other business structures.
Sole Trader
Being a sole trader offers flexibility and minimal paperwork. You report your earnings and expenses directly through your Self Assessment, and pay income tax and National Insurance on your profits.
Limited Company
Incorporating a limited company can provide liability protection, meaning your personal assets are separate from business debts. It also allows different tax planning strategies, such as paying yourself through dividends and salary. However, running a company comes with more regulatory requirements, including filing annual accounts and paying corporation tax.
Partnership
If you’re running the business with someone else, a partnership may be appropriate. Profits are shared and taxed individually, but partners are jointly liable for business debts. You’ll still need to submit tax returns for both the partnership and the individual partners.
Choosing the right structure depends on your sales volume, profit margins, risk tolerance, and long-term goals.
VAT Registration and Implications
Once your business reaches the VAT registration threshold, currently £90,000 in annual taxable turnover, registration becomes mandatory. Registering for VAT means you must:
- Charge VAT on most sales
- Submit regular VAT returns
- Maintain detailed VAT records
- Pay VAT due to HMRC and reclaim VAT on eligible purchases
Many online platforms allow you to add VAT to your listings, but it can affect your pricing strategy and customer expectations.
There are also different VAT accounting schemes to consider, such as:
Flat Rate Scheme
Designed for small businesses, this scheme simplifies reporting by applying a fixed percentage to your gross turnover. However, you can’t reclaim VAT on purchases (with limited exceptions).
Standard VAT Accounting
This is the default method, where you report VAT charged and VAT paid each quarter. It requires accurate records but allows full recovery of input VAT.
Choosing the appropriate VAT scheme is essential for cash flow management and long-term sustainability.
Scaling Operations: Hiring Staff and Outsourcing
As your online business expands, you may need help with daily operations. This might include hiring employees, contracting freelancers, or outsourcing certain tasks like customer service or fulfillment.
Hiring Employees
If you employ staff, you’ll need to register as an employer with HMRC. You must also:
- Operate PAYE to collect income tax and National Insurance
- Provide payslips and issue P60s
- Make employer contributions to National Insurance and workplace pensions
Hiring staff also means staying compliant with employment laws and keeping proper payroll records.
Outsourcing and Freelancers
Outsourcing can be a flexible way to scale. For example, using a virtual assistant to manage customer queries, or a fulfilment centre to handle packaging and shipping.
Freelancers and contractors are typically responsible for their own taxes, but you should keep records of payments and ensure contracts clearly outline their self-employed status.
Expanding to International Markets
Many online sellers start by targeting UK buyers but eventually branch into international sales. This expansion presents new tax considerations and logistical challenges.
Customs and Duties
Shipping goods overseas may require you to handle export documentation and customs declarations. Depending on the destination, your buyers may also be subject to import duties and VAT.
Overseas VAT Rules
Selling to EU countries post-Brexit has become more complex. You may need to register for VAT in the buyer’s country or use an import one-stop-shop (IOSS) system to simplify reporting.
Each jurisdiction has its own thresholds and rules, so it’s critical to research and comply with international tax obligations if you ship abroad regularly.
Dealing with HMRC Investigations or Audits
As your online sales grow and your income increases, your visibility to HMRC does as well. While many traders operate compliantly, occasional audits or investigations can occur—even without suspicion of wrongdoing.
Common Triggers
- Large or sudden increases in income
- Discrepancies between tax returns and platform data
- Reports or complaints
- Random checks
What to Expect
If HMRC launches an investigation, they may request:
- Bank statements
- Invoices and receipts
- Sales data from online platforms
- Proof of expenses
You should cooperate fully and provide clear documentation. Keeping well-organised records will make this process smoother and reduce the risk of penalties.
Penalties for Errors
If HMRC determines that income was underreported or that expenses were overstated, penalties may be applied based on the nature of the mistake:
- Careless errors: up to 30% of unpaid tax
- Deliberate errors: up to 70%
- Concealment: up to 100%
Prompt disclosure and cooperation can reduce these penalties.
Insurance and Risk Management
A growing online business faces increasing risks—from lost parcels and data breaches to customer complaints and stock damage. Insurance helps protect against financial losses that could disrupt or endanger your business.
Types of Insurance
- Product liability insurance (especially important for handmade or modified goods)
- Public liability insurance (for markets or in-person events)
- Stock and contents insurance
- Cyber insurance for online businesses
Some platforms may require sellers to carry specific types of insurance, especially if you operate in regulated categories.
Intellectual Property and Brand Protection
If you develop a brand, design custom products, or sell original artwork, protecting your intellectual property is essential. This prevents others from copying or exploiting your work.
Trademarking
Registering a trademark for your business name or logo protects your brand identity. It gives you the right to take legal action against copycats.
Copyright and Design Rights
Original images, content, and designs are protected by copyright automatically, but registering these rights provides stronger enforcement power.
Preventing Counterfeiting
Monitoring marketplaces for counterfeit versions of your products and reporting infringements helps maintain your reputation and customer trust.
Sustainability and Ethical Selling
As consumers become more environmentally conscious, sellers who prioritise ethical practices can gain a competitive edge. Integrating sustainable policies can also prepare your business for future regulations or industry changes.
Sustainable Packaging
Switching to recyclable or compostable packaging reduces waste and appeals to eco-minded customers.
Ethical Sourcing
Working with responsible suppliers and ensuring fair labour practices not only benefits your brand but can be a legal requirement when selling in certain jurisdictions.
Carbon Footprint
Calculating and reducing your carbon footprint through carbon offsetting or using local suppliers can further distinguish your business.
Planning for Long-Term Growth and Exit
If your online business becomes profitable and stable, planning for future expansion or an eventual exit becomes important. Whether your goal is to build a long-term source of income, sell your brand, or diversify your product line, having a strategy in place will support growth.
Diversification
Adding new sales channels (like a standalone website), expanding your product range, or introducing subscription services can reduce reliance on a single platform and stabilise revenue.
Succession or Sale
If you plan to exit the business, consider preparing financial statements, improving operational systems, and documenting procedures. These steps increase the value of your business to potential buyers.
Staying Informed with Evolving Tax Laws
Online commerce evolves rapidly, and tax laws continue to adapt. Staying current with legal requirements ensures continued compliance.
Monitoring Changes
HMRC regularly updates its guidance, thresholds, and policies. Subscribe to updates or follow trusted sources to ensure you remain informed.
Professional Advice
Even successful sellers can benefit from occasional professional support. An accountant or tax adviser can help optimize your tax strategy, ensure compliance with complex regulations, and free up time for business growth.
In a fast-moving digital landscape, proactivity is your best defence. Understand your obligations, invest in systems that support transparency, and never assume that ignorance will protect you from penalties. A well-managed business with a strong foundation can thrive and scale responsibly within the boundaries of the law.
Conclusion
Navigating the world of online selling comes with exciting opportunities, whether you’re clearing out unwanted items, creating handmade products, or running a full-scale e-commerce business. However, with opportunity comes responsibility, particularly in the realm of tax compliance.
Throughout this series, we’ve outlined the key distinctions between casual sellers and those operating as traders in the eyes of HMRC. Understanding these boundaries is crucial to staying on the right side of the law. If your online activity shows clear signs of trading, such as repeated sales, an intention to earn profit, or modification of items for resale, you’re likely considered self-employed and must report your income accordingly.
We’ve explored how you can legally earn up to £1,000 a year through the trading allowance without needing to register or file taxes. But beyond that threshold, it becomes your legal obligation to register as self-employed and complete a Self Assessment tax return. Avoiding these responsibilities can result in steep penalties, interest on unpaid tax, and in extreme cases, prosecution.
For those growing their online ventures into full-time businesses, additional considerations come into play. Choosing the right business structure, understanding VAT rules, maintaining accurate records, and scaling responsibly with staff or freelancers are all vital aspects of sustainable growth. Selling internationally, complying with data protection laws, and even securing intellectual property rights can shape the long-term success of your brand.
As online marketplaces evolve and HMRC’s digital capabilities grow stronger, transparency and proactive compliance are more important than ever. Staying informed, keeping good records, and seeking professional advice when necessary can protect you from costly mistakes and allow you to focus on what matters most, building and enjoying your business.
By treating your online selling activity with the seriousness it deserves, you not only stay compliant but also position yourself for growth, innovation, and financial security. Whether you’re a side hustler, a creative entrepreneur, or a digital retailer, being informed and prepared will always be your best strategy.