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Sole Trader and Higher Rate Tax Payer

Hi. My 16 Yr old son is very entrepreneurial which I want encourage. He's keen to set up a business drop shipping. As he is under 18 I believe this will have to be in my name and I want to make sure  we do everything right. I understand that I will have to register as a sole trader with HMRC if revenue exceeds £1,000. Firstly is this income and not profit? And then as I'm a higher rate tax payer will everything earned through the business be taxed at 40% ? Thanks for any advice

Comments

  • You first assumption is incorrect - you won't need to register but he will if the income is over £1000
  • Bookworm105
    Bookworm105 Posts: 1,742 Forumite
    1,000 Posts Name Dropper
    edited 31 December 2024 pm31 11:59PM
    Hi. My 16 Yr old son is very entrepreneurial which I want encourage. He's keen to set up a business drop shipping. As he is under 18 I believe this will have to be in my name and I want to make sure  we do everything right. I understand that I will have to register as a sole trader with HMRC if revenue exceeds £1,000. Firstly is this income and not profit? And then as I'm a higher rate tax payer will everything earned through the business be taxed at 40% ? Thanks for any advice
    you are mistaken in thinking under age 18 confers some magical shift for income tax on to the parent (you are perhaps confusing yourself over rules related to "unearned" income). In the context of running a business, ie earned income, it does not

    Your child is entitled to this own 12,570 personal allowance (PA), if he undertakes self employment (ie, trading as a drop shipping business)  then he, not you, must calculate and declare his profits, ie his income tax liability
    a) He can choose to claim income - £1,000 trading allowance = taxable trading profit 
    b) or he can choose to declare income - actual costs = taxable trading profit 

    whether he actually has to pay income tax will then depend on the amount less PA. If his profits are large enough he may also need to pay self employment national insurance.

    Nonetheless, if his profits are more than the £1,000 trading allowance, (irrespective of the PA) he MUST register for self assessment tax returns in his own name. It is then up to HMRC if they require him to continue submitting tax returns after the first one if they can see he has no net tax liability as taxable income is <PA 
    Self Assessment tax returns: Who must send a tax return - GOV.UK

    Notwithstanding the above, you will need to check for yourself if he will / should have business insurance and thus whether the insurance company may have a minimum age limit for a policy.
    But from the tax perspective, he is an "adult" even when <18. For instance, the parents of children doing paper rounds or Saturday shop work do not declare those earnings on their own parental tax return! This may help you with wider context:
    Children aged under 18 and tax – a few key considerations | THP


    You may also want to examine his contractual basis with his customers. As a minor he can enforce his contract against his customer (assuming customer is >18) but the customer cannot enforce the contract against him. Therefore, an astute customer might seek to have a parental guarantee (ie you!) underpinning "the work".
    Entering Into A Contract With A Minor In The UK

    What Is The Legal Age To Sign A Contract? | Sprintlaw UK

  • noitsnotme
    noitsnotme Posts: 1,204 Forumite
    1,000 Posts Fourth Anniversary Name Dropper
    edited 1 January am31 11:42AM
    Where will he be selling?  While he can run a business at 16, most, if not all selling platforms such as eBay and Amazon have a minimum age of 18 for sellers.

    If the marketplace accounts were in your name, along with the marketplaces now reporting to HMRC, that could complicate the earnings and tax issue.

    He should also be aware that dropshipping can be problematic if selling on eBay or Amazon as his seller metrics can be negatively affected if the dropshipping company are not very good.  He should definitely avoid using overseas dropshippers because the longer delivery times would likely see a lot of unhappy customers and negative feedback.

    While eBay allow ‘proper’ dropshipping, he should be aware of this statement in their T&Cs…

    ”However, listing an item on eBay and then purchasing the item from another retailer or marketplace that ships directly to your customer is not allowed on eBay.”

    (https://www.ebay.co.uk/help/selling/posting-items/setting-postage-options/drop-shipping?id=4176

    Amazon and the other major selling platforms are most likely the same.
  • dinosaur66
    dinosaur66 Posts: 224 Forumite
    100 Posts
    i never new you had to be 18 to sell on ebay
    i like 90% of people my age who left school mid 70s to mid 80s did so at 16 and started work

    especially since todays 16 year olds know more about computers than 99.9% of politicans that set the rules.

    only found out recently that children under 16 are taxed at an adult rate and are not exempt although not applicable in this case.

    not sure how he will get round the over 18 rule





  • injectionday
    injectionday Posts: 38 Forumite
    Part of the Furniture 10 Posts Combo Breaker
    Hi. Thank you everyone for the responses. I think the issue is that as he is under 18 any Amazon or Ebay account will have to be in my name so HMRC will view the income as mine even if I immediately send it on to his bank account. As an alternative on first reading it seems that Shopify require the shopify account website to be set up in my name but will then pay income directly into his bank account so I wouldn't receive any payments.  I'm not 100% clear if that would solve the tax issue as the Shopify page for the business would be in my name although I wouldn't receive any income. 
  • noitsnotme
    noitsnotme Posts: 1,204 Forumite
    1,000 Posts Fourth Anniversary Name Dropper
    edited 1 January pm31 3:55PM
    Hi. Thank you everyone for the responses. I think the issue is that as he is under 18 any Amazon or Ebay account will have to be in my name so HMRC will view the income as mine even if I immediately send it on to his bank account. As an alternative on first reading it seems that Shopify require the shopify account website to be set up in my name but will then pay income directly into his bank account so I wouldn't receive any payments.  I'm not 100% clear if that would solve the tax issue as the Shopify page for the business would be in my name although I wouldn't receive any income. 
    The biggest difference between selling on marketplaces (Amazon, eBay, etc) and his own website (Shopify, BigCommerce, etc) is traffic.  The marketplaces will have millions of potential customers for nothing more than opening an account with them and listing his products.  The main challenge with his own website will be how to attract those potential customers.  It will be either costly (search engine optimisation) or labour intensive (social media).

    With the Shopify (or similar) website being in your name, the contract of any sale would legally be in your name so I’m not sure it fixes the tax/HMRC issue.
  • noitsnotme
    noitsnotme Posts: 1,204 Forumite
    1,000 Posts Fourth Anniversary Name Dropper
    He could be a director of a limited company at 16.  You would also have to be a director and the main contact to be able to open a company bank account.  You could split the shares so the majority (or all?) are in his name.  However this might be overkill for a very new start up business and comes with additional costs and responsibilities.

    https://www.mazumamoney.co.uk/news/can-i-start-a-limited-company-at-16/
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