What you need to know about tax if you sell craft online
Have you registered your craft or design business with HM Revenue & Customs? Did you even know you had to? Do you know when you have to register, how to register for self-assessment and what penalties you might face if you don’t. Read on to find out more about your responsibilities when it comes to tax in the UK, as Dean Shepherd gives us the low down on bookkeeping and tax…
Pictured: Worry Ring by Becky Pearce Designs
If you have any questions about tax or self-assessment for online sellers, you can ask them at the end of this post. Please note, the information in this post is correct at the time of writing (March 2016) but may change.
Tax Advice for Designers and Makers
Am I running a business?
This is probably the first question you should ask, as it will determine whether you need to read any further. As far as HM Revenue & Customs are concerned, if you are making or buying items with the intention to sell them for a profit then you ARE running a business.
This is in contrast to people who sell second-hand items for less than they originally bought them just because they no longer want or need them.
This also differentiates ‘hobbyists’ who invest a lot of time and money into their artistic endeavour for pleasure but perhaps just sell the odd item here and there.
For many people, their passion for their craft will see them transition from hobbyist to business-owner and that is the point at which you need to consider registering your business.
In a nutshell: If you are selling with the aim of making a profit, rather than just as a hobby, then in the eyes of the HMRC you ARE running a business.
Do I need to register my craft business?
If your answer to last question “Am I running a business” was yes, then you will need to register for Self Assessment and declare any profit (or loss) made from your craft business on your self-assessment tax returns.
The first tax threshold to watch out for is the Class 2 National Insurance small earnings limit of £5,965. If your craft business profits are below that amount, then you will not have to pay any National Insurance Contributions.
If your expenses outweigh your income or your total income from all sources (your business, employment and your investments) is below the tax-free personal allowance of £11,000, then you will not pay any tax on your craft business either. This is the amount of money anybody can earn before having to pay any tax.
TIP: Keep up to date with the current tax-free personal allowance at gov.uk
Should I register my craft business if I am making a loss?
If you are genuinely attempting to make a profit from your design business but your expenses are unfortunately outweighing your income then you still need to register for self-assessment, and it is probably beneficial for you to do so. This is because you can often get a refund of tax paid elsewhere by reporting your business losses.
This is especially useful for people with employment earnings running alongside their craft business.
How do I register my craft business?
The simplest way is to go to the HM Revenue & Customs website at hmrc.gov.uk and follow the links to register as self-employed. There are a few sneaky questions to watch out for, but it is essentially a case of entering your personal details, confirming what the business does and when you started.
Find help, support, webinars and videos about self-assessment at www.gov.uk/government/news/webinars-and-videos-about-self-assessment
When do I need to register?
Provided you register in sufficient time to complete your tax return by the filing deadline, then there will be no penalty. If you are unable to complete your tax return on time, then there will be an immediate penalty of £100 followed by some pretty staggering penalties of £10 per day if you are three months late or more. You really don’t want to be late!
The filing deadline for the tax return is 31st January following the end of the tax year on 5th April.
So if you started a business on 1st January 2016, then your first tax return would be for the year to 5th April 2016 and the filing deadline for this tax return would be 31st January 2017. It seems a huge amount of time to get everything done, but it soon disappears if you are forever putting it on the back burner.
What records do I need to keep?
Once you have registered your business with HMRC, there’s not much for you to do tax-wise until you get to the end of the tax year, so your attention should now shift to the bookkeeping.
There are a multitude of options when it comes to keeping records of your business income and expenses. I would suggest going for something you feel comfortable with, and find easy to keep on top of, so it doesn’t become a laborious task.
Spreadsheets are a great place to start as they are quick and easy to set up, but online bookkeeping systems that directly link to your business bank account and website payment gateways are becoming ever more popular.
What expenses can I claim?
There are two types of expense you can claim: those that are incurred solely for your business and those that incurred partly for your business.
The first category includes all the obvious stuff like materials, stationery, tools of the trade, advertising, website design and hosting, seller commissions (like your Folksy fees) and payment gateway fees (eg Paypal fees).
The second category often requires a little more thought. Telephones, computers, internet connections, cars and your home are certainly all used partly for the business and so to are books and magazines that you might buy and exhibitions that you might attend.
The rule with all these items is that if you can assess with reasonable accuracy how much of the cost relates to the business, then you can claim that expense as a deduction on your tax return.
As an example of a deductable expense, when your business is based from home you can add up all your home running costs for the year (including rent, mortgage interest, council tax, gas, electric, water, insurance and repairs), divide those total costs by the number of rooms in your property (to get an approximate single-room cost) and then work out roughly how much time you spend each week working on the business in that particular room. If you work from home six days a week but only use the room for the business for half the time, then multiply that room cost by 6/7 days and divide it by two.
Everybody’s calculation will be different. HMRC just want to be sure you have given it some reasonable thought.
How do I work out the value of my stock?
Stock is a really contentious issue and a difficult one to get your head around. HMRC only allows you to set off costs that relate to the income generated by your business in each tax year. So the cost of any stock held at the end of the year needs to be set against the income generated in the following year – even though you paid for those costs in the current year.
Here is an example:
- Sarah spent £3,500 on canvases, frames and paints during the year.
- She sold £2,500 worth of those items for £7,500 and so made a healthy profit of £5,000 to report on her tax return.
- The remaining £1,000 worth of those items is carried forward to the next year and not claimed as a deduction on this year’s tax return – even though she paid out for all the £3,500 in the current year.
This may seem a little unfair as Sarah is being taxed on £5,000 profit, whereas she only has £4,000 in the bank (£7,500 sales minus £3,500 spent). However, she will get tax relief for the extra £1,000 next year, so it will all work out in the end.
You only need to do a stock take at the end of the year, and you are only concerned with the ‘cost price’ of the stock, ie what you paid for your materials. Forget about the wholesale or retail value for this purpose.
For advice on how to register with HMRC when you start a business, basic information on Self-Assessment, National Insurance, VAT and record keeping, phone the HMRC Self Employment Helpline on 0300 200 3310
Image credits: Set of stacking rings by Tripoli and Rouge, Vintage Rose Wedding Invitations by Turtle Dove Design, Rose Cowl by Woolly Knits, Handmade Oak Display Table by Kirsty MacDonald, Hand-carved Pickle Spoon by Jimmy Brunt, Small Pocket Teddy Bears by Abby Harris, Seed Cuff by Claire Gent, Embroidery Kit by Bloom and Sew, Craft Tools by Delphine & Max.
About the author
Dean Shepherd founded Tax By Design, a specialist firm of accountants just for creatives, but now spends most of his time developing the Tax Toolkit for Designers to remove the need for any designers to have an accountant!