This is a guide to some of the tax implications that might apply to UK Etsy sellers.
Taxes may be tricky to understand, but they shouldn’t be ignored.
Etsy’s rapid growth has attracted a lot of attention from HMRC and with a fully automated system, it’s easy for them to track you.
As a UK Etsy Seller you should make sure you understand the following taxes and pay them if necessary:
- Income tax
- National Insurance
But your first step is to establish your tax status.
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.
How to Establish Your Tax Status
If you are trying to figure out whether or not you need to pay tax, the first step is to establish your tax status.
Etsy sellers are generally considered to be in business because they want to make a profit.
But there are some sellers who run their store as a hobby.
Businesses pay tax, people with a hobby do not.
Which Etsy Stores are Considered a Hobby?
HMRC are very prescriptive about what makes an Etsy shop a hobby or not. They don’t want people avoiding paying tax.
These are called the Hobby Business Tax Rules.
In a nutshell, under the hobby business tax rules, HMRC will ask some very specific questions to decide whether an Etsy seller has a hobby or is in business.
The questions they ask include:
- 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 decide that you are running a hobby, then you do not need to register your store or pay any tax to HMRC.
But if your Etsy store is a business, then you’ll need to make things legal and pay tax.
What is Income Tax?
Put simply, income tax is the tax you pay on the money you earn. You have to pay it once your earnings go above a certain amount known as the personal allowance.
You need to pay income tax to HMRC and they use it for things like:
- Public projects
- Roads and transport
- Social welfare and benefits
When you work for someone they calculate out your income tax for you and deduct it each time they pay you.
But if when you have an Etsy store it is your responsibility to calculate your own income tax and report your earnings to HMRC yourself.
You do this under the rules of Self-Assessment.
The amount of income tax every Etsy seller pays is different. Certain thresholds and allowances exist that means the amount of tax you pay, if at all, depends on your own specific circumstances.
How Much Can You Make on Etsy Before Paying Tax?
You can take advantage of allowances that mean you avoid paying tax until your income reaches a certain level.
The £1,000 Trading Allowance
Everyone can earn up to £1,000 without needing to register with HMRC or pay any tax.
So if your store has sales (not profit) of less than £1,000 you don’t have to pay any tax on your income or declare it to HMRC.
Using the trading allowance is not always tax efficient so you should get clear on the rules to make sure it is right for you.
Most people are entitled to earn a certain amount before they start paying tax – this is known as the personal allowance.
Here is the current personal allowance threshold:
|Personal Allowance Income Limit||£100,000||£100,000|
Even if your earnings are below the personal allowance threshold, you’ll still need to declare your earnings to HMRC.
Once you go past the personal allowance threshold, you’ll start to pay tax. You work out your tax by tax year and the amount you’ll pay is based on your:
- Etsy business profits and;
- All your other taxable income.
A tax year runs from 6 April to 5 April each year.
The current income tax rates are:
|Basic rate 20%||£12,501 to £50,000||£12,501 to £50,000|
|Higher rate 40%||£50,001 and £150,000||£50,001 and £150,000|
|Additional rate 45%||over £150,000||over £150,000|
Susan has a part-time job with a salary of £20,000. She also has an Etsy store and for the tax year 2019/2020 makes profits of £5,000.
Her total taxable income is £25,000 and her income tax bill will be £2,500 which is calculated as follows:
£12,500 x 0% = £0
£12,500 x 20% = £2,500
Susan will get credit for any tax paid in her job.
What is National Insurance?
National Insurance is another type of tax that UK individuals pay. The amount and type they pay will depend on how much they earn as well as tax status.
Again national insurance is paid to HMRC and this money protects your entitlement to:
- State pension
- Benefits like job seekers allowance
People who are self-employed must pay:
- Class 2 National Insurance and;
- Class 4 National Insurance.
The amount of each of these will depend on how much profit your Etsy Store makes (not all your earnings).
The current national insurance rates are:
|Class 2 National Insurance||£3.05 per week on profits over £6,475 per year|
|Class 4 National Insurance||9% on profits between £9,501 and £50,000|
2% on profits over £50,000
John made profits of £10,000 from his Etsy store in the tax year 2019/2020. He will pay national insurance of £297.48 which is calculated as follows:
Class 2 National Insurance £156
Class 4 National Insurance £141.84
Even if your business profits are below the class 2 national insurance threshold, it can make sense to pay voluntary class 2 contributions. That way it will protect your entitlement to state benefits.
How to Calculate Your Etsy Business Profits
Calculating your Etsy business profits is crucial to knowing how much money you have made but also getting your tax bill right.
HMRC sets out what expenses you can claim (allowable) against your income and those that you can’t
Allowable Expenses for Your Etsy Shop
Most things you need to pay for in relation to running your Etsy Shop will be allowable.
This includes things like:
- Equipment and tools;
- Marketing and advertising;
- Phone and data;
- Use of home either as a flat rate or a portion of your household bills gas, water, electricity or rent;
- 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);
- Accounting & bookkeeping;
- Card processing charges if you choose to accept card payments;
- Etsy fees;
- Bank charges for a business bank account.
Disallowable Expenses for Your Etsy Shop
After years of people pushing the boundaries and claiming for some questionable expenses, HMRC has a growing list of expenses that are disallowable.
Here are some common examples of disallowable expenses:
- Parking fines;
- HMRC penalties
- Training for new skills;
- Travel to your base of work;
- Non branded clothing;
- Entertaining Clients or Hospitality at Events;
- Lunch, unless in special circumstances.
How to Register Your Etsy Shop as a Business
The easiest way to register your Etsy Shop is to apply for self-employment with HMRC.
You must register by 5th October in the second tax year of opening your shop.
So if you became a opened your Etsy Shop on 1 April 2018 then you would need to register as self-employed by 5th October 2018.
There are penalties for missing the registration deadline, so make a note of when you need to do it so you don’t forget.
Do I Need to Register My UK Etsy Shop for VAT?
The need to register an Etsy UK Shop for VAT comes down to business turnover.
HMRC sets out rules which all businesses must follow that decides whether or not they must be registered for VAT.
That being said there are circumstances where a business can choose to voluntarily register for VAT.
Regardless of the reason, registering your Etsy UK shop for VAT brings administration and paperwork.
What is VAT?
VAT is a tax on consumers who buy goods and services in the UK.
Businesses do not pay VAT but it is their responsibility to collect VAT on behalf of HMRC.
All goods and services a consumer buys are either:
- Standard rated (20%);
- Reduced rated (5%);
- Zero rated (0%);
The rate applied depends on how the goods and services are classified but generally speaking:
- Standard Rate of VAT applies to most goods & services often referred to as ‘luxury items’;
- Reduced rate of VAT applies to some goods & services such as gas and electricity;
- Zero rated applies to essential goods & services to make it cheaper for people to buy such as essential foods and children’s clothing;
- Exempt goods and services are outside of the VAT rules such as education and insurance.
Why do Businesses Need to Register for VAT
Businesses including limited companies, partnership and sole traders are responsible for collected VAT from consumers on behalf of HMRC.
Business collect VAT from consumers by adding the applicable rate of VAT to their sales price. The business then needs to pay that amount over to HMRC periodically.
Since businesses are unaffected by VAT they can deduct any VAT they have collected from the final amount they pay over to HMRC.
Since being registered for VAT carries administrative and reporting responsibilities HMRC only require businesses to register for VAT once their turnover reaches a certain amount.
The VAT registration threshold is £85,000.
How to Calculate Turnover of Your Etsy UK Shop for VAT
Your turnover for VAT is your entire business turnover so you need to add the amount you sell from all channels.
To find out whether the turnover of your Etsy UK shop for VAT you need to check your gross sales. Thats the sales your Etsy shop makes before deducted any Etsy fees plus any other income you make in your business such as cash sales.
To check your gross sales in your Etsy UK Shop head over to:
Shop Manager > Settings > Options > Download Data
You must monitor your turnover if you feel you are approaching the threshold because the threshold of £85,000 is based on your previous 12 month period on a rolling basis.
You must also register for VAT if you are going to exceed the £85,000 threshold in the next 30 days, for example if you win a large contract and you know this will push your turnover over the VAT registration threshold.
Voluntary VAT Registration
Some businesses choose to voluntarily register for VAT even through their business turnover is below the registration threshold.
A voluntary VAT registration does bring benefits to businesses but it also has legal requirements. Depending on the industry a business operates in a VAT registration, voluntary or not, can bring disadvantages.
In many cases, Etsy shops sell directly to consumers so a VAT registration can have a serious impact on Etsy UK sellers. Here are the pros and cons of registering an Etsy UK Shop for VAT whether you register voluntarily or otherwise:
- It will give the impression that your business has a turnover of more than £85,000 making you appear larger;
- You can claim back VAT on your purchases, regardless of your sales, helping to reduce costs while you get your business off the ground (generating tax refunds).
- HMRC can ask for information before releasing any tax refunds;
- As an Etsy UK Seller your customers are likely to be individuals who cannot claim back VAT. A voluntary VAT registration will mean you need to increase your prices by 20% more which may make you uncompetitive. Or if you are unable to raise your price you will need to pay VAT from what you sell which will impact your profit margin;
- You will need to keep detailed books and submit VAT returns so you may not feel ready to deal with this level of administration.
VAT If Your Sell Physical Products to Customers in the EU
If you are sending physical product to EU Countries then you may be affected by VAT regulations known as Distance Selling Thresholds.
Distance Selling is where a UK business needs to register for VAT in the country that they sell products to.
This is only needed once the business starts to sell over a certain threshold, set by that EU country.
VAT If Your Sell Digital Products to Customers in the EU
VAT MOSS affects Etsy UK Shops who sell digital products to individuals in EU countries.
It means that the business is 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.
The Hidden Costs of Selling on Etsy
Selling on Etsy UK is certainly an attractive option for creatives searching for an online craft marketplace.
Etsy UK is
As with any marketplace the interests of Etsy are not always aligned with those of the sellers.
This means there are hidden costs to selling on Etsy UK that you must be aware of.
1. Exchange Rates
The exchange rate is the price at which £1 buys you another currency. For example £1 today buys you US $1.32.
Everyday the exchange rate changes meaning you may get less dollars for your pound.
The impact of exchange rate fluctuations is a cost few shop owners consider as part of their business planning.
Here’s how the exchange rate can affect you when selling on Etsy UK:
- Etsy automatically converts the GBP price of goods into the currency of the country the customer lives in. Etsy uses an exchange rate of their choice which may mean it could be less favourable than if you chose to set it for yourself;
- Exchange rates fluctuate every day for all sorts of reasons that are beyond your control. An Etsy UK seller can find that the amount they sell a product for on one day can be worth less on another. That’s an automatic erosion to your margin through no fault of your own;
- Etsy listing fees are currently $0.20 and are billed in US Dollars. With daily changes to an exchanges rate, listing fees can vary costing more on one day than another.
Before you launch into selling internationally take a detailed look at pricing and margins to understand how you’ll be affected by exchange rate fluctuations.
Try taking a look at historical exchange rates to help with your research and reduce your risk.
2. VAT on Etsy Fees
Etsy UK has come under much scrutiny by HMRC for avoiding VAT.
The result is that Etsy now need to charge VAT on all charges and listing fees.
When you start selling on Etsy UK you are asked to enter a VAT registration number. If you are really small or in the early stages of your Etsy business it is unlikely that you have a VAT registration number.
In this case, Etsy will be charging you VAT of 20% on top of all the charges and listing prices you see.
This hidden cost can come as a surprise to new Etsy UK sellers who then have to revisit their pricing model.
3. Waiting for Your First Sale
Many Etsy UK Shop owners will talk about how much work they put in when they first started their business.
They invested time in getting SEO right, building their following and social media before making their first sale.
A hidden cost of starting an Etsy store is the time you need to invest in getting set up, producing stock and paying for listing renewals.
To protect yourself from this hidden cost set up a cash flow forecast with reasonable estimates of costs and income.
That way you’ll know how long you need to fund your shop for before it makes its first sales.
4. Administrative Costs
Running any business comes with costs above and beyond the price of just making your products. Whilst making your product is much talked about what Etsy Sellers often overlook is the cost of just being in business.
These are things like needing certain equipment, insurance for your stock and accountants fees.
Setting up a business plan for your Etsy shop will help you prepare for all the costs of running a business.
Postage and packaging can be surprisingly expensive.
If you are selling on Etsy UK it is essential you make sure your customers receive anything they order on time and in one piece. Boxes, paper and bubble wrap all come at a cost.
Choosing for premium postage like recorded delivery can also be costly eroding your margins further.
Research the costs of postage and packing thoroughly before you begin selling on Etsy and incorporate these into your pricing structure and business plan to check that you are charging the right price for your product.
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