Do you actually need to register?

The question behind the question

People usually ask "do I need to pay tax on this?" when the question that actually matters is "do I need to tell HMRC about this?". They are not the same. You can easily be in a position where no tax is due but a return still is, and that is where penalties come from.

The test HMRC applies

HMRC is looking for whether you are trading. Trading means buying or making things to sell, or providing a service, with the intention of making a profit, and doing it with some regularity.

If you are trading, when must you register?

The UK tax year runs from 6 April to 5 April. If you start trading during a tax year, you must register with HMRC by 5 October following the end of that tax year.

You start freelancing        June
Tax year it falls in         6 April that year to 5 April next
Tax year ends                5 April
Register by                  5 October that same year
First return covers          the whole tax year you started in

That gives you six months after the tax year closes, which sounds generous and is exactly why people forget. Register as soon as you know you are trading, not when the deadline approaches.

Trading income under £1,000

If your total trading income for the year is under the trading allowance, you generally do not need to register or file at all. Note that this is measured on income, not profit. £1,400 of turnover with £600 of costs is £1,400 of income for this test, not £800, so it is over the line even though the profit is not.

The next lesson deals with the allowance properly, because it is the single most misunderstood rule in this whole area.

The bit HMRC does not spell out

Registering does not create a tax bill. A great many people delay registering because they are frightened of what it will trigger, and end up with a late-registration problem on top of whatever they owed. If your profit turns out to be below the personal allowance of £12,570, and you have no other income, your income tax will be nil. You still file. Filing a nil return costs you nothing and closes the year off cleanly.

The reverse also happens: people register "just in case" when they sold a sofa and a bike. Once you are registered, HMRC expects a return every year until you tell it you have stopped, and a missed return is a penalty even when nothing was owed.

Common mistakes

• Assuming a platform tells HMRC for you. Some platforms do report seller data, but that does not file your return or discharge your obligation.
• Testing the £1,000 against profit. It is income before expenses.
• Waiting for HMRC to get in touch. The duty to notify is yours, and the penalty regime assumes you knew that.