The number of businesses selling via Amazon and Ebay is growing but what are the tax and accounting implications?
Essentially they are the same as for any other business but there are a few common misconceptions and errors which should be considered. HMRC are closely monitoring online sales and sellers so it pays to be careful.
If you sell online you will probably need to tell HMRC and declare your income. This doesn’t apply in every case. If you are selling personal items which you already have and have used personally, you are not trading.
If you start buying items to sell, even second hand from a car boot, you are trading and will be “in business”.
If you are in business, you need to keep records because information from those records will need to be entered on to a tax return. HMRC can also ask to see the records so you better have them otherwise they can start making their own assumptions and asking you to disprove what they think. It is much better to have the records.
One common misconception is that the money you actually receive is your “sale”. Wrong! Your sale is what the customer pays. You only receive a percentage of that because Amazon/Ebay and Paypal will take their charges before sending you your share.
In a situation where your sales turnover is relatively low, it doesn’t really matter because you pay tax on your profit, which will be the same in both cases. Your profit is your sales less expenses and the Amazon/Ebay/Paypal charges form part of those expenses.
However, the requirement to register for VAT is based on your turnover – your sales. In order to determine whether or not you need to register for VAT, you must record your sales correctly – what your customer actually pays. Because of changes in legislation, Amazon and Ebay are now actively monitoring VAT thresholds and advising HMRC if a trader has exceeded the VAT threshold.
Getting your turnover wrong can be very expensive if HMRC decide at a later date that you should have been VAT registered because they will make you pay the VAT and your lovely profit will evaporate.
The statements and information produced by the online platforms can be very confusing. We are adept at understanding these and making them more easily understandable.
The whole thing becomes even more confusing if, as part of your online presence, you are selling abroad. There are “distance selling thresholds” which determine whether or not you also have to register for VAT (and other taxes) in other European countries. Depending on trade agreements and the outcome of Brexit, these may or may not remain in place. If you sell outside the UK, you need to be certain that you are not breaking any local laws or tax rules.
How you buy the items you sell is also important. You must keep records of the purchase of anything you are going to sell – and get receipts/invoices. If you buy something from a “man in a pub” for £50 and sell it for £100, HMRC won’t believe you only made £50 profit unless you can prove your purchase. Instead they will assess your profit as £100. By the time you pay the online platform’s charges and commission and the tax on the higher amount, you may not even make a profit.
If you are selling second hand goods, you are supposed to maintain a stock record showing the item, where it was purchased from and the eventual selling price.
Buying from abroad is common but you need to be careful. Something coming in from overseas may have duty and VAT imposed at the point of entry increasing your cost greatly. One of our clients buying items from the Far East suddenly received a demand for £40,000 import duty because HMRC, in conjunction with the EU border authority, discovered that the goods in question, which he had bought over 12 months previously, were actually produced in one country else and smuggled into a country with a better trade deal. Apparently an EU inspector visited the factory where the goods were supposed to have been produced and found no facilities for manufacturing the items.
Dropshipping has dangers too. There are potential VAT and duty implications and you are the seller so you are the one who can be prosecuted if something goes wrong.
Online selling can be a great way to get started in business so don’t be put off by the above. Think about your plans, talk to us to ensure you are legal – then start making your profit. Contact our team on (01509) 816150 or by the contact form below.