I’ve updated this guide on 10 November 2020
I put together this tax guide for UK Etsy sellers because as a Chartered Accountant in my previous life, I know how confusing business registration and taxes can be when you set up a business. In this guide, I’ll share some of my knowledge not just about business registration but also VAT, handling expenses and bookkeeping as well as where you can find additional information to read to help build your knowledge to make better business decisions.
Friendly Disclaimer: The information contained in this article is for guidance and information purposes only. It should not be relied upon as professional accounting, tax and legal advice. For specific advice relevant to your own situation, always contact a professional.
Do You Need to Register Your Etsy Stores as a Business?
For some, their Etsy store is a hobby. But for other people, or as a hobby evolves, they start to earn money from it and they intend to make more.
From a tax and business perspective, only businesses with the purpose of making money need to be registered and pay taxes, whether they operate online or a bricks and mortar shop. That means if your store is run as a hobby, you won’t need to register with HMRC. But if you’re making money, getting paid or planning to start promoting your shop though then most likely you are considered a business.
If you are struggling to decide whether you have a hobby or a business, then here are some questions you can ask yourself:
- Are you selling regularly to make a profit?
- Do you buy stock and hold onto it?
- Do you make items to sell on at a profit?
- Are you a registered business on Etsy?
- Do you buy things at wholesale to sell on?
- Are you working towards creating a brand?
If you answered yes to any of these, then it is likely that you are in business and will have some tax obligations.
How to Register as a Business
The quickest and easiest way to register your shop is to apply to be self-employed with HMRC. You’ll need to do this once your income (not profit) goes over £1,000 during a tax year (6th April to 5th April). You’ll need to make sure you’ve registered by the 5th October following the end of the tax year you went over the £1,000 threshold.
Even if you are currently not making any money, you must still register with HMRC and complete a tax return. Although this may feel onerous, completing a tax return means you can record all your expenses to create a tax loss. This can then be used against any money you make in the future and save you tax at this point.
There are other business structures out there including:
- Limited Company
These may offer you better tax-savings depending on your earnings and protection from creditors, but they often carry more reporting responsibilities meaning you need to engage an accountant.
For the rest of this guide I’ll assume that you are registered as self-employed.
What Counts as Taxable Income?
When it comes to taxes, usually all the types of income you receive from your Etsy store counts of taxable income. That means you’ll need to declare it to HMRC and pay tax on it, after deducting income tax allowances and reliefs as well as your business expenses (more on that later).
Tax Deductions for Etsy Store Owners
Claiming for allowable business expenses is the easiest way to reduce your tax bill when you’re self-employed. Typically most of the things that you pay for in your business will be tax-deductible like:
This includes things like:
- Laptop or computer
- Equipment and tools
- Website design, build and hosting
- Marketing and advertising
- Phone and data
- Branded clothing and protective wear
- Tools and equipment
- Travel to events of craft fairs for example, when you use a taxi, tube or bus
- Mileage for using your own car (currently 45p for the first 10,000 miles of driving and 25p thereafter)
- Training and courses
- Use of home as an office
- Travel and mileage
- Accounting & bookkeeping
- Card processing charges
- Etsy fees
- Bank charges for a business bank account.
There may some expenses you pay for that you use personally and for business, like your mobile phone. In these cases, you can only claim a portion as a business expense. So say you use your mobile phone for 60% work and 40% personal, then can claim 60% of the total bills to put against your taxes.
Whilst most things you pay for as part of being in business are tax-deductible, there are some things you may pay for that you cannot claim against your taxes. This includes things like:
- Fines and penalties eg: parking fines
- HMRC interest and penalties
- Training and courses for new skills
- Food, except in certain circumstances
- Personal expenses
How to Calculate Your Tax
The amount of tax and national insurance you’ll pay will depend on how much money is left over after deducting expenses, tax allowances and reliefs.
Income tax starts at 20% on all your income (not just from your Etsy Shop) over £12,500 and 40% over £50,000. Class 2 national insurance is paid as a set weekly amount when your earnings go over £6,475 and Class 4 is worked out as 9% on your earnings over £9,501.
When you fill in your tax return online, HMRC will automatically calculate how much tax you owe for you based on the information you enter.
Self Assessment for Etsy Store Owners
You’ll need to follow the rules of HMRC self-assessment and submit a tax return online declaring your income and expenses once a year by 31 January, as well as paying tax twice a year by 31 January and 31 July.
Keeping Tax Records
Once you’re self-employed, you are legally required to keep records and paperwork that support all your income and expenses and hold onto them for 6 years. That way if HMRC ever asks how you arrived at the figures on your tax return, you’ll be able to show them evidence.
Your records include things like statements from Etsy, invoices to your customers. cash sales and receipts for any expenses you may wish to claim, as well as bank statements.
The simplest ways to keep your records in order and speed up filling in your tax return is to:
- Open a separate bank account so all your payments are in one place and help you budget for your tax bill (take a look at Starling);
- Store your records and paperwork using a secure cloud-based storage system like google drive or Dropbox;
- Set aside time on a regular basis to check all your finances are in order and do your bookkeeping;
- Set up Quickbooks which integrates with your business bank account and Paypal.
Value Added Tax (known as ‘VAT’) is a tax added to the price most goods and services consumers buy. Only businesses with a turnover of £85,000 or more are required to register for VAT. Once VAT registered, a business must charge VAT to its customers and pay this over to HMRC after deducting any VAT they have paid to their suppliers as well as submitting VAT returns, usually quarterly.
There is VAT included on Etsy Seller Fees as well as listing fees, but all figures on Etsy are quoted VAT-inclusive to avoid confusion. The rate of VAT you are charged is based on the country that you are in, in the UK that’s 20%.
Etsy began charging VAT back in 2015 as a result of changes to EU VAT regulations that were bought in to tackle VAT avoidance on goods and digital products sold on the internet, known as VAT MOSS (Mini One Stop Shop) which affects all digital businesses not just those on Etsy.
You can see how much VAT Etsy have charged you by downloading your monthly invoice within the finance section of your Etsy Shop Manager. If your turnover is below the VAT registration threshold you can avoid paying VAT on Etsy seller fees by voluntarily registering for VAT.
Once registered you can then reclaim any VAT you pay on all your purchases, include Etsy but you’ll also need to pay over 20% VAT on your sales. So to cover that cost you’ll either need to increase your prices making you less competitive or take it out of your sales price which may erode your profit margins.
If you are registered for VAT HMRC will issue you with a VAT registration number, which you can then enter into your Etsy Account (within the Finance section) and Etsy will stop charging you VAT on seller fees.
VAT On Physical Products to Customers in the EU
If you are sending physical products to EU Countries then you may be affected by VAT regulations known as distance selling thresholds, where a UK business needs to register for VAT in the country that they sell products to once those sales reach a certain amount.
VAT On Digital Products to Customers in the EU
VAT MOSS affects Etsy UK Shops who sell digital products to individuals in EU countries, making the business selling responsible for charging VAT on the sale at the VAT rate that the buyer lives in. This has caused considerable problems for Etsy UK sellers but there may be ways to avoid being affected.
In order to ensure that all sellers on Etsy remain compliant as well as saving the sellers the hassle of reporting to HMRC under VAT MOSS, Etsy handles the VAT on digital products for you. This is why you may see adjustments. However, when your customers view your products they view the tax inclusive price, to make the buying process seamless.