From Wardrobe to Property Deposit

From Wardrobe to Property Deposit

Declaring Income from Online Sales, and Why It Now Matters to Your Conveyancer

An article for buyers, sellers and professional advisers, by David Pett, Solicitor and MLRO, MJP Conveyancing Limited.

 

The Side Hustle Has Grown Up

There was a time when clearing out the wardrobe meant a black bin bag, a charity shop, and a polite nod of thanks. Today it means a smartphone, a few well-lit photographs, and an account on Vinted, eBay, Depop or Etsy. The household clear out has become a marketplace, the marketplace has become a profession for some, and the line between the two has blurred to the point that even the seller is no longer always sure which side of it they are standing on.

That blurring matters to HM Revenue and Customs, which has launched a substantial enforcement campaign aimed at sellers who have crossed the threshold into trading without realising it. It matters to platforms, which since 1 January 2024 have been under a statutory duty to collect and report seller information directly to HMRC and it matters very much to conveyancers, because the cash that funds a deposit increasingly carries with it a story that begins with a parcel posted from a kitchen table.

This article is written for two audiences. The first is the client who is preparing to buy a property and who has, over recent years, accumulated a meaningful sum from selling personal items online. The second is the practitioner who must assess that money and decide whether the explanation given is consistent with the client profile, the level of risk, and the firm's obligations under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017. Both audiences are dealing with the same underlying question. Where, exactly, did this money come from.

The New Rules in Plain English

Platform reporting - the change that has already happened

From 1 January 2024 the Platform Operators (Due Diligence and Reporting Requirements) Regulations 2023 (SI 2023/817) brought the United Kingdom into line with the OECD model rules on digital platform reporting. Operators of qualifying platforms are now required to collect, verify and report to HMRC the details of sellers using their platforms. The first reports were due by 31 January 2025 and reporting now occurs annually.

The reportable information is not trivial. Platforms must capture the seller's name, address, date of birth, taxpayer identification number and, in many cases, National Insurance number, together with quarterly sales totals, the number of transactions, fees charged and the bank account into which proceeds are paid. The same information is provided to the seller and to HMRC, which then matches it against self-assessment records.

There is a de minimis exception. Sellers of goods who complete fewer than 30 transactions in a year and receive less than approximately £1,700 (the sterling equivalent of €2,000) in gross sales are excluded from reporting. Above either threshold, the data goes to HMRC. The exception does not apply to lettings, and the threshold is not a tax allowance. It is a reporting filter only.

The £1,000 trading allowance, and the myth of the thirty-item rule

The £1,000 trading allowance, available under sections 783A to 783AR of the Income Tax (Trading and Other Income) Act 2005, allows an individual to receive up to £1,000 of gross trading or miscellaneous income in a tax year without any obligation to register, report or pay tax on it. Above £1,000 of gross income from trading, the seller must register for self-assessment and either claim the allowance against gross receipts or deduct actual expenses, whichever is more favourable.

The so called thirty item rule is a piece of internet folklore that has no basis in tax law. It is a confused echo of the platform reporting threshold, repeated often enough that some sellers have come to believe that they may sell up to thirty items a year tax free. They may not. The thirty-transaction figure is the point at which a platform must report a seller to HMRC. It says nothing whatsoever about whether the seller owes tax on those sales. Tax liability is determined by the trading allowance and by the badges of trade, not by transaction count.

When selling becomes trading

HMRC distinguishes between two activities. The first is the disposal of personal items. If a person sells clothes, books, furniture or gadgets that they originally bought for their own use and sells them for less than they paid for them, that is not trading. There is no income tax liability and, in most cases, no capital gains tax issue either, because of the chattels exemption that excludes gains on personal items sold for £6,000 or less.

The second activity is trading. The classic indicators, drawn from a long line of authority going back to the 1955 Royal Commission, are known as the badges of trade. They include the profit motive, the frequency of transactions, whether items are bought specifically with a view to resale, whether the seller has improved or modified the goods to enhance their saleability, the length of ownership, the way the seller is organised, and the source of the goods. No single badge is decisive. The whole pattern is what matters.

In practice, a person who clears out a wardrobe once a year and lists fifty items is unlikely to be trading. A person who buys vintage handbags at car boot sales, refurbishes them and sells them on Depop with professional photographs is almost certainly trading, even if the volume is modest. A person who buys wholesale stock and resells it online is plainly trading. The same goes for someone who sells the output of a hobby (handmade candles, ceramics, prints) on Etsy with any regularity.

Why This Matters to Your Conveyancer

The AML framework, briefly

The position under the Proceeds of Crime Act 2002 is straightforward in principle, however uncomfortable it can be in practice. Section 327 makes it an offence to convert, transfer or remove criminal property. Section 328 makes it an offence to enter or become concerned in an arrangement that facilitates the acquisition, retention, use or control of criminal property. Section 329 makes it an offence to acquire, use or have possession of criminal property. The threshold for criminal property is low. Property is criminal property if it constitutes a person's benefit from criminal conduct, and the person knows or suspects that it does.

Tax evasion has been a designated predicate offence to money laundering since the Financial Action Task Force amended its recommendations in 2012, a position carried into European law by the Fourth Anti Money Laundering Directive in 2015 and reflected in the United Kingdom regime. The practical consequence is that income on which tax is deliberately not paid, when tax was due, is capable of constituting criminal property. The unpaid tax is the benefit. The retained funds are tainted to that extent. Where those funds then make their way into a property transaction, every conveyancer in the chain has a problem to think about.

Why this is not a small problem

It is tempting, and dangerous, to dismiss undeclared online sales income as too trivial to warrant attention. Three points argue against that view.

• First, scale. HMRC has launched a £40 million enforcement programme directed at online sellers, supported by data feeds from Vinted, eBay, Etsy and others. The exposure is no longer hypothetical. Sellers who have built deposits over several years from undeclared trading income are now being identified by data matching.
• Second, the structure of the offence. There is no de minimis exemption under the Proceeds of Crime Act. A small amount of unpaid tax is still unpaid tax, and the resulting funds are still capable of being criminal property. The conveyancer who suspects that some part of the deposit is funded by undeclared trading income cannot simply ignore the suspicion because the sum is modest.
• Third, the regulatory direction of travel. The Solicitors Regulation Authority and the Office for Professional Body AML Supervision continue to treat conveyancing as a high-risk sector for money laundering. Source of funds work is a recurring theme in disciplinary outcomes and in supervisory feedback. A weak file, on a small matter, is a substantial problem when the regulator looks at it.

How Practitioners Should Approach the Assessment

Start with the question, not the document

The temptation, particularly in a busy conveyancing practice, is to begin with documents. A bank statement is requested, the funds are visible, the matter proceeds. That is not source of funds work. It is proof of funds work, and the two are not the same. Source of funds requires the practitioner to understand how the money came to be in the account in the first place, and whether that explanation is consistent with what the client has told the firm and with the level of risk the matter presents.

Where a client volunteers, or where bank statements suggest, that part of the deposit is funded by online sales, the right starting point is a question. What were you selling. How long have you been doing it. Were the items your own personal possessions, or did you buy them with a view to resale. Roughly how much have you received in each of the last three tax years. Have you registered for self-assessment, and if not, why not. The answers, taken together, allow the practitioner to form a view as to whether the activity is decluttering, casual trading, or a business.

Calibrate the evidence to the risk

The Law Society's source of funds guidance is clear that the level of evidence required is a function of risk. A retiree selling a few items of inherited furniture on eBay over the course of a year is unlikely to be trading and unlikely to require detailed documentary support beyond a credible explanation and a bank statement showing the credits. A first-time buyer who has accumulated a £30,000 deposit over three years, almost entirely from sales on Vinted and Depop, is in a different category. There the practitioner should expect to see a more substantial picture.

A proportionate evidence pack for a meaningful online sales income will typically include a written explanation from the client setting out the nature of the activity and how long it has been going on; a download of the seller's annual statement from each platform used (Vinted, eBay, Depop and Etsy all offer this, and the platform reporting figures themselves are now available to sellers); bank statements showing the credits as they were received; and, if the client has crossed the trading threshold, evidence that the income has been declared, by way of a self-assessment confirmation, an SA302 or a recent tax return.

Where the client has not declared the income but ought to have done, the practitioner is in a sensitive position. The right course is rarely to refuse to act on the spot. It is, almost always, to pause, to invite the client to take tax advice promptly, and to make a contemporaneous note of the conversation. The client may regularise the position by way of HMRC's voluntary disclosure facility, after which the income is no longer tainted in the same way. The practitioner should consider, with care and with the benefit of internal advice from the MLRO, whether a suspicious activity report is required, and should not rely on the client's promise to make a disclosure as a substitute for that internal consideration.

Watch for the warning signs

Certain features of a matter ought to sharpen attention. Round sum credits described as personal sales, particularly if frequent and of similar size, are more consistent with retail trading than with personal disposals. A pattern of credits from a payment service provider such as PayPal, Klarna or a platform's own wallet, without corresponding evidence of underlying sales activity, deserves enquiry. A client who is reluctant to identify the platforms used, or who cannot or will not produce the platform statements that are now readily available to every seller, is telling the practitioner something important. Inconsistencies between the volume of credits and the client's stated activity (for example, a claim of occasional decluttering that turns out to involve hundreds of transactions a year) are red flags.

None of these features automatically implies money laundering. Each, however, takes the matter beyond the standard pathway and into territory where additional questions, additional evidence, and a contemporaneous file note are needed to demonstrate that the firm took the question seriously and reached a defensible view.

Guidance for Clients

If you sell online, three things to do now

• Keep records as you go. Every platform now provides annual statements and transaction histories. Download them at the end of each tax year and keep them with your other financial papers. Five years is the minimum, longer is better.
• Understand the trading allowance. If your gross online sales income in a tax year exceeds £1,000, you must register for self-assessment, even if you ultimately owe no tax. Registration is free, the form is short, and the protection it gives you is considerable.
• Be transparent with your conveyancer. If part of your deposit comes from online sales, say so at the outset. The information will emerge in any event when bank statements are reviewed. Volunteering it allows the firm to deal with it efficiently. Concealing it creates the very problem the firm is bound to investigate.

If you have not declared income that should have been declared

This is more common than people imagine, and there is a settled route through it. HMRC operates a digital disclosure service which allows individuals to bring their tax affairs up to date, usually with significantly reduced penalties when the disclosure is voluntary. The right time to use it is before HMRC writes to you, not after. Anyone who has received a so-called nudge letter from HMRC about online sales income should treat it as urgent and take advice without delay.

From the conveyancing perspective, a voluntary disclosure that is in progress, supported by correspondence with HMRC and evidence of payment of any liability arising, transforms the position. The funds, properly characterised, cease to be tainted. The matter can usually proceed, with the file properly documented, and the client moves into their new home without an unresolved tax problem hanging over them.

A Closing Thought

There was a time when source of funds work in residential conveyancing was largely about salaries, savings, sales of previous homes and inheritances. That time has passed. A generation of buyers is arriving at the conveyancer's door with deposits assembled over years from a mix of sources, and online sales income now sits firmly within that mix. The practitioner who treats it as a curiosity, or as a low priority because the sums seem small, is looking in the wrong direction. The platforms are reporting. HMRC is matching. The Proceeds of Crime Act applies in full force regardless of the modesty of the underlying offence.

The good news, for clients and practitioners alike, is that the answer is straightforward. Records, allowances, registration where required, transparency at the outset, and a proportionate enquiry calibrated to the risk. Done properly, the wardrobe to deposit journey is no harder to evidence than any other source. Done carelessly, it is the place where small problems become substantial ones, for the buyer, for the firm, and increasingly for the regulator who is watching both.

 

About the author. David Pett is a Solicitor and the Risk and Compliance Director and Money Laundering Reporting Officer at MJP Conveyancing Limited, an independent CQS accredited residential conveyancing firm based in Norwich and acting for clients throughout England and Wales. David writes regularly on conveyancing risk, AML, and the future of the profession at conveyancingnews.blogspot.com and on LinkedIn.

Disclaimer. This article is provided for general information only. It is not legal, tax or regulatory advice and should not be relied on as such. Specific matters should be referred to a suitably qualified adviser.

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