The digital age has offered businesses a new way to operate: eCommerce. Through this model, businesses are more connected to their customers than ever before – including those living in a completely different country.
But running an eCommerce business can be tough given all the taxes you need to sort out, especially when you sell overseas. Today, we’ll go over the key taxes you as an eCommerce startup need to be concerned about, and what you can do to handle them in the best way possible.
Income and corporation tax for eCommerce businesses
The profits you make as a business are taxed. If you’re a sole trader or partnership, you’ll pay income tax; if you’re a limited company, you’ll pay corporation tax. Which should you choose? That depends on your preferences and the business itself.
If you pay income tax, you need to file a self-assessment tax return. The deadline is the end of the January following the tax year you’re filing for. Companies file a corporation tax return, due 12 months after the end of your company’s accounting period.
VAT
The other main tax that eCommerce businesses need to be aware of is VAT. This is a sales tax added to the price of goods and services that a business sells. You need to apply it to your goods and services if your turnover exceeds the VAT threshold, which is currently £90,000.
VAT rates in the UK include:
- Standard Rate (20%): Applies to most goods and services.
- Reduced Rate (5%): Applies to certain goods and services, such as children’s car seats and home energy.
- Zero Rate (0%): Applies to goods like books, newspapers, and children’s clothing.
If you’re registered for VAT, you need to file an online VAT return every quarter, detailing the VAT you’ve charged and the tax you want to reclaim from business purchases.
Tax on international sales
For eCommerce businesses with international customers – and in Northern Ireland – things can be difficult. Let’s go over the key things you need to know.
Post-Brexit VAT rules
Following Brexit, the UK is governed by its own VAT rules but businesses in Northern Ireland remain aligned with EU VAT rules for goods – but UK VAT rules apply to services.
So, if you offer digital services to customers in Northern Ireland, you’ll have to follow UK VAT rules; if you send goods there, you’ll need to comply with the EU system.
Trading with the EU
When selling goods to someone in the EU, businesses generally do not have to charge VAT. This is because VAT is a consumption tax: taxing a good or service that is consumed outside the UK would defeat the purpose of VAT.
However, the customer in the EU may be liable for VAT and customs duties upon arrival in their country. Businesses must keep detailed records and complete the necessary customs declarations.
When you sell a service to a business in the EU, the reverse-charge mechanism usually applies. This means the UK business does not charge VAT, and the EU business accounts for VAT in their own country. When the service is provided to consumers, the rules vary from country to country, and you may need to register for VAT in the customer’s country and charge the tax according to local rates.
Trading with other countries
Again, when you sell a good or service to a non-EU state, you usually do not charge UK VAT. Instead, you follow their rules, which will vary from case to case. We obviously cannot explain all of them here.
When a UK business sells goods overseas, to avoid charging UK VAT, the UK business must obtain and keep proof of export. Documents that may act as proof include:
- The customer’s order details, including their name, VAT number, and delivery address for the goods.
- Correspondence between companies.
- A copy of the sales invoice, showing the description of the goods, invoice number, and the customer’s EC VAT number.
- The advisory note.
- The packing list.
- Commercial transport documents from the carrier handling the removal of the goods from the UK, such as a fully completed International Consignment Note (CMR) signed by the consignor, haulier, and receiving consignee.
- Information on insurance or freight charges.
- Bank statements to prove payment.
- A receipted copy of the consignment note as proof of receipt of the goods abroad.
- Any additional documents relevant to the shipment of the goods, typically collected during intra-EC transactions.
Tips to manage your duties and stay compliant
Tax is difficult, but you can learn to manage yours and stay compliant. Here are some tips to keep you going:
- Implement robust record-keeping: Use accounting software integrated with your eCommerce platform to maintain accurate records of all transactions, including sales orders, invoices, and shipping documents.
- Register for VAT where necessary: Ensure you’re registered for VAT in countries where your business exceeds the threshold or if you offer digital services to international customers.
- Understand customs regulations: Familiarise yourself with customs requirements for both the UK and destination countries. Obtain and keep proof of export and complete necessary customs declarations.
- Leverage technology: Utilise tax management software to automate VAT calculations and reporting, streamlining compliance processes.
- Regularly review your strategy: Adjust your tax strategy to reflect changes in laws and business conditions. Conduct periodic audits to ensure ongoing compliance.
- Stay informed: Regularly update yourself on VAT rules and international tax regulations. For expert guidance, consult with tax professionals who specialise in eCommerce.
If you need advice on running your eCommerce startup smarter, contact Blue Shore. We’ll do our best to help you.
