While honesty boxes have long been a part of British culture, little sheds are popping up at the end of people’s front gardens that hold a mass of homemade cakes, brownies and sourdough bread.
The latest trend across social media, honesty stands are serving the community by way of sweet treats.
However, sweet treat shed owners need to be aware that they may need to pay tax on their profits to avoid a hefty fine from the taxman.
How do I know when I need to pay tax on my cake shed earnings?
When you begin trading via a cake shed, you may need to register as self-employed and complete an annual Self Assessment tax return if you earn over £1,000 through the shed in a year.
People who earn between £1,000 and £3,000 are no longer required to complete a full Self Assessment. Instead, earnings can now be reported through a new simplified digital service.
If you earn below £1000, you do not have to pay any tax under the UK’s Trading Allowance, which allows you to earn a gross income of £1,000 on top of your typical income stream.
At the other end of the spectrum, if the shed becomes incredibly successful and achieves a taxable turnover that exceeds the £90,000 threshold, you may need to register for VAT and charge VAT on services where necessary.
How do I pay tax on my cake shed earnings?
Many people with a side hustle may have only ever worked PAYE jobs where tax is handled behind the scenes. When you start earning extra income, it’s your responsibility to stay on top of your tax obligations.
The first step is to work out your gross income. This is the total amount you earn across all of your side hustles.
If your gross income is less than £1,000, you do not need to do anything. The income does not need to be registered or reported.
If your gross income is between £1,000 and £3,000, you will need to pay tax on your earnings, but you do not need to complete a full tax return. Instead, log in to your HMRC Personal Tax Account and report your income using the new online service.
If your gross income exceeds £3,000, you must register as a sole trader, sign up for Self Assessment and submit an annual tax return.
What are the risks of not paying tax?
Many shed owners do not realise that they may be liable for tax. However, they must pay their tax as HMRC has several ways that they can determine if your side hustle is tax compliant.
If you miss or don’t pay any tax at all by the Self Assessment deadline, you can face fines and penalties, some of which can accumulate daily.
Even if no tax is owed, failing to submit a Self Assessment tax return will result in a £100 fine.
Should the non-payment of tax go on for a while, you can be forced to back pay years of taxes that you owe to HMRC.
To determine tax non-compliance, HMRC will use automated data tools to flag any discrepancies between lifestyle, bank records and declared income.
If there is deliberate, large-scale tax avoidance, you may be criminally investigated and then prosecuted accordingly.
How can I avoid these issues?
The best solution is to speak with an accountant. We can help you stay compliant with tax and ensure that you are using all allowances available to you.
This will help you to better understand your tax position and be confident that you are doing all that you need to be doing based on your current level of income.
Our team can help you with Self Assessment forms to ensure that you are following the law.
For support with tax on cake sheds, get in touch with our team.
