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I have failed to declare my self employment status since

late 2011. I had an idea...
I have failed to declare my self employment status since late 2011.
I had an idea while at university, and started developing a small project online selling a piece of software online. The software started selling soon after launch, with a steady and consistent income. The software essentially sells itself, and handles all distribution post-purchase, meaning the only maintenance on my part would be support emails etc; less daunting with university work piling up.
Before I released it, I did look into how tax worked in the UK, if there was anything I needed to do. Information online was unclear and confusing, and I buried my head in the sand after trying to decipher HMRC. From what I gathered from the PayPal site (the site I receive purchase payments through), I gathered that the fee paypal place on every incoming transaction is essentially tax. Continuing with Uni, final exams, the dissertation, and the first fulltime job in the real world, this project has been neglected a little. Thanks to the system design, it handles payments itself, and the little money builds up.
Now I fear I have massively made a mistake in not reporting this as soon as the income became relatively consistent, even after the slow start. I am a very recent graduate, and have no savings. A large portion of this income has helped me through periods between employment, and occasionally paying bills while at uni.
I have tried finding information on if this is necessary for software sales via PayPal, and everything that needs to be done, online; but I'm not yet sure I have come across a clear solution. I'm very concern HMRC will give me a huge bill or a massive fine in this mess. I was young, and overloaded with uni work soon after the release, although this is no excuse.
In terms of key factual information:
- I have been earning from this project since August 2011.
- I have complete records of all earnings since, thanks to Paypal.
- To date, the total income from 2011 has come to £7,120.80, although this does not consider occasional refunds.
- I currently have a full-time job.
My questions:
- What is the best way to proceed?
- What could I expect in terms of possible fees/fines for the past years?
- Will I need to tell my current employer I'm also earning from this project?
Thank you,
James
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Answered in 2 minutes by:
4/12/2013
TaxVince
TaxVince, Accountant
Category: UK Tax
Satisfied Customers: 965
Experience: Chartered Accountant >20 years + Qualified IFA
Verified
MamaTax :

Hi Its MamaTax Here!

MamaTax :

Thanks for the question.

MamaTax :

Are you local or a foreign student?

Customer:

I'm german according to my passport, but I was born in Portugal, and have lived in the UK for over 10 years (secondary school + uni + time since 2012)

MamaTax :

How much were you earning annually since you started - just an estimate? Do you have records of the income and expenses since you started

Customer:

I can get them, but that can take a few minutes to calculate programatically

Customer:

just a moment

MamaTax :

Ok.thanks.

MamaTax :

As a general rule If you have a job when you’re a student you may need to pay Income Tax and National Insurance (NI).Since you were running a business -in essence self employed whether partime aor fulltime you need should have filled Self Assessment tax return each tax year, with details of your income and expenses. HMRC then work out how much tax you need to pay.

Customer:

Right, PayPal may take a while apparently to provide me with files I can aggregate properly on. Based on sales records in my database, these are estimations for the past all years:
2011: £1554.80
2012: £4301
2013 to date: £1265

Customer:

Okay, I should have filled out a self assessment tax return each year based on that income.

Since I have not done so for 2013 and 2012, what steps do I need to take from here? What can happen next?

Customer:

nor 2011.

MamaTax :

Ok there is nothing to worry about as you were earning less than personal allowance in any of those tax years. The above rules apply if are earning more than the personal allowance and will have to pay income tax. The current personal allowance is £9,440. So just as a guide if you are earning anything above this figure per tax year you should consider registering for tax. There are also other exceptions that exempt students from tax if you are resident overseas and you are working to sustain your life whilst at Uni...but i wont go into details as your incomes are too low - therefore in any case there is nothing to worry about.

MamaTax :

Let me know if you have any further concerns.

Customer:

So in this case, I have no liabilities at all for the period since I started my business?

Customer:

to date?

Customer:

and how is this calculated. Considering I'm in full-time employment, would this need to be included in my income from my fulltime job?

MamaTax :

There are no tax liabilities if the figures you are talking about are relatively accurate. Should you decide to commit more time to it and perhaps make it more business like, then you will need to register with HMRC as self-employed, regardless of whether you have other jobs or employment, and even if you expect to be earning less than the Personal Allowance. However you can argue as a hobby for now.

MamaTax :

Oh i see you are no working and left Uni...yes you will need to include the income for tax purposes. When did you start working?

MamaTax :

Oh i see you are NOW working and left Uni...yes you will need to include the income for tax purposes. When did you start working?

Customer:

I started working as soon as I graduated, late august

Customer:

although I have just started a different full time job

Customer:

can these be considered separately, since one is from full-time employment, and the second is from my own hobby start-up?

MamaTax :

Ok thanks. As said earlier if one is running a business you will need to register with HMRC as self-employed, regardless of whether you have other jobs or employment, and even if you expect to be earning less than the Personal Allowance. In most cases when one is at Uni or at home earning fairly small amounts with total income below the personal allowance, HMRC wont press you to register the business. However once you are large income or working somewhere earning another income , your total income become above the personal allowance hence even a penny will matter. The way tax works is that you are taxed on your total income - no split. If you are running some business as self employed and you an esitmate income, HMRC are sometimes happy to adjust your tax code so that the tax is deducted in your full time job. However where the income is not easy to estimate you will need to fill an annual assessment every year. Again you call HMRC and tell them about your business and they tell you to register the business for self assessment.

MamaTax :

Therefore as a way forward, you are free to disclose this income to HMRC should you wish (and thats the recommended approach). However you can justify the first few years you at Uni as hobby in which case you were not actually running a business. However now that you are working, and your total income definitely is above personal allowance, you will have to disclose this income to avoid future problems.

Customer:

Okay, so first step is I definitely need to register with HMRC to let them know I have income from an online business, and disclose this income (I can get the exact figure from PayPal records). And it's important I mention the first few years at Uni, this was a hobby, not a business. Right?

Customer:

Will I need to let my employer know I have my own business on the side, or will they find out through tax?

Customer:

That's my concern with it being taxed as one

MamaTax :

Yes- on the first step. You dont have to disclose that your employer unless your contract with your employer requires you to disclose business outside work.

HMRC have voluntary disclosures arrangements that can means you wont be too penalized if you tell them the truth. My advice would be to get tax expert online that deals with disclosures and run through with him your case. He will probably charge a fee of £200 or so but he will do all the negotiation with HMRC avoid the hassles of dealing with this.....

MamaTax :

To find one simply type "HMRC Tax Disclosure" or something similar. You see a number of firms and individuals that deal with that. If you cant afford one expensive try sites like taxaid or uktaxadvisors.com. Always agree on the fee and get a fixed fee deal. Nothing more than £200/300.

Customer:

£200 fee for another tax expert online? How much could I get penalised for not taking any concrete steps on the total earning to date, until now?

Customer:

I'm not sure I can afford an expert at that price. Could the potential fee for being penalised be above that?

MamaTax :

I cant estimate accurately how much you were supposed to pay since your total income was above personal allowances but just looking at the penalties for not registering the business and not filling a tax return for 12 months is £300 or 5% of the tax due, whichever is the higher. In serious cases you may be asked to pay up to 100% of the tax due as penalty plus the actual tax underpaid.

MamaTax :

Do you know your tax rate? 20% or 40%?

Customer:

I'm abroad on travel at the moment, so can't check. Although I'm currently on a 25k salary on my new job

Customer:

That would cross into 20%, right?

MamaTax :

Ok then you are likely to be taxed at 20%. Assuming you havent paid tax on £7,120 and done a return the following are the potential penalties:

Customer:

So the current standing in potential fees, penalties & liabilities is:
Not registering business & filling tax return for 12 months: £300 (since I'm under the tax due level for previous years)
Tax expert for Tax Disclosure: £200
and 20% tax on the £7,120 total?

I'm trying to get a clear idea of the options, am I on the right track?

MamaTax :

No sorry the penalty for not filling is staggered over the period as shown. My answer was cut:

For not filling returns the penalties along are:



  • £100 fixed penalty on day 1

  • £900 penalty for next 3 months

  • £300 or 5 per cent of the tax due - whichever is the higher after 6 months12 months is £300 or 5% of the tax due,

MamaTax :

. 12 months is £300 or 5% of the tax due.

MamaTax :

Meaning that you can pay at most £1,600 penalties on the late filing of tax returns before looking at the tax underpaid and interest and other related penalties.

MamaTax :

Again if the fee is a concern you can try the free sites above. OR if you are confident to deal with HRMC you can give it a go.

Customer:

So I could be looking at a penalty up to £1,600 for the unreported earning from 2011 up until now. Now I'm definitely worried. Are there other fines that could contribute to that further? Would a tax expert, as recommended, be able to bring this down at all, reliably?

MamaTax :

Yes..But the bulky are to do with late filling. The others are late payment which is about 5% every 3 months / 6 months. See this link HERE and HERE.

Customer:

That's scary. And since my earnings started in 2011, does that multiply it further, even though it was so little??

MamaTax :

The minimum penalty for late filling are based on those fixed charges and are not affected by amount underpaid. However interest and the maximums about is affected by the amount outstanding. Again my advice is to for an HMRC disclosure expert, most such experts give FREE initial consultation and they will tell what they can negotiate with HMRC and what they cant and the best way for you to minimize the charge before taking the matter further. Ignoring the matter further doesnt help as this postpones the issue.

Customer:
I definitely need to sort this out asap by the sounds of it. So really, find an HMRC disclosure expert, especially if they can offer a free initial consultation, and discuss this in detail.
MamaTax :

Precisely. Hope this helps.

Customer:

Not sure where the bold came from. Regardless. Do you have any recommendations on this step? Where to find someone, especially considering limited budget (and worries)?

MamaTax :

I understand. The chatting forum sometimes has bugs.

I think its worth googling for a disclosure specialist and ringing a few.I cant recommend someone as this website is against that. But try taxaid, uktaxadvisors, etc for free advice.

Customer:

Also, the tax return deadline penalties. Are these cumulative? So 1600 for 2012 + some time from 2011, plus, time from start of this year?

MamaTax :

They are cumulative - the more you delay the worse. Hope this helped. IF you are now sorted, could you please rate the question before you go.

Customer:

Right, thank you for your time.

TaxVince
TaxVince, Accountant
Category: UK Tax
Satisfied Customers: 965
Experience: Chartered Accountant >20 years + Qualified IFA
Verified
TaxVince and 87 other UK Tax Specialists are ready to help you
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Customer reply replied 4 years ago

I have one last question, and hope you can answer still. Since I have only earned a fulltime salary since July last year, bringing me over the personal allowance with the private income, does that only make me liable for undisclosed earnings from july 2012? or could I still be penalised for not reporting earnings before then?

The bulky of the penalties are to do with failure to notify HMRC that you were earning income (even if tax was not due) and failing to file a tax return. The penalties to do with payment are fairly low any underpaid tax is small. However it also depends with when did you start making this business. Surely when you were earning £7k per year its difficult to argue that it was still a hobby. As you may know, the tax return for 2011/12 is only due in Jan 2013 -and penalties start from there. Even assuming this case, your penalties from Jan 2013 are at close to £1,000 starting from Jan 2013 to day.
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