HM Revenue & Customs (HMRC) has an obligation to ensure we all pay the correct amount of tax. But with many UK taxpayers now earning money from various ‘side hustles’, like eBay, Etsy or Airbnb etc, there’s a growing need to widen the net and review all sources of income.

HMRC’s new initiative aims to weed out taxpayers who aren’t fully declaring their income sources, with detailed investigations to prosecute any wrongdoing.

So, what does HMRC see as a ‘source of additional income’, and what could the impact be on your tax bill if you fall within the scope of HMRC’s new initiative?

How does HMRC know what you’re earning?

If you’re making a bit of extra cash on the side, HMRC needs to do a bit of detective work to ascertain how much additional income you’re bringing in.

HMRC gathers information from a variety of sources to check whether or not taxpayers are declaring all their income. Although some enquiries and investigations are purely random, over 90% are triggered by an HMRC system called Connect.

Connect is a major part of HMRC’s crackdown on undeclared income. Over 3,000 people are employed on Connect, which is a data-matching and risk-analysis platform that enables the cross-referencing of masses of data from HMRC and external sources.

What does HMRC now see as an ‘undeclared source of income’?

From 2024, HMRC has made it a requirement for digital platforms to report how much income individuals are making through their site.

These platforms include eBay, Airbnb and Vinted. Although trading income from these sources has always been taxable, HMRC believes that significant profits are not being declared by some individuals.

So, will you be affected by HMRC’s new initiative?

If you earn £1,000 p.a. or less in additional income, you won’t be affected – if you sell through eBay and similar platforms, HMRC are now much more likely to become aware of this income. If your total sales are below £1,000 per annum then that’s covered by the annual trading allowance, so it can be ignored and HMRC won’t bother you.

If you earn more than £1,000 in additional income, you should register as self-employed – if your income is more than £1,000, it’s sensible to register as self-employed. This will mean ensuring that you keep adequate records, so you’re able to report the results of your trading activities to HMRC in a tax return, if required.

Where does Connect draw its information on taxpayers?

Although HMRC has never revealed all the sources that Connect draws information from, it taps into over 30 databases, including tax returns, bank accounts, social media and even data from sites like Amazon, Google Street View, Zoopla and Rightmove.

It’s been quoted that Connect now holds 55 billion items of taxpayer data, so the chances of any undeclared income being tracked down are relatively high.

The information from external sources is compared against tax returns and other information. HMRC operatives look for discrepancies across various taxes such as income tax, VAT, and even areas like child benefit claims and can trigger investigations accordingly.

HMRC intends to integrate further artificial intelligence (AI) tools into Connect, further enhancing its ability to help close the estimated £30 billion plus tax gap.

How can you reduce the chances of a tax investigation?

If you want to minimise your chances of being subjected to a lengthy and costly investigation by HMRC, consider the following:

• Maintain comprehensive records – Good record-keeping is essential, not just for tax purposes but for the health of your business.
• Voluntary disclosures – if you have undeclared income, consider making a voluntary disclosure to minimise penalties. This will be looked on favourably by HMRC.

Talk to us about your income sources and tax planning

HMRC is in the process of opening more ‘intelligence led’ enquiries. Working closely with your accountant can help you ensure your records are in order and can even assist if you are selected for an investigation.

If you believe you have undeclared income sources, please do get in touch so we can talk through your specific circumstances and how to make a voluntary disclosure.

Get in touch to discuss your income sources