The world of ecommerce presents business owners with an ocean of opportunities, enabling online retailers to access markets and customers that they might have never thought possible. As often is the case though, that increased opportunity can also result in increased responsibilities in particular with regard to ecommerce accounting.
As ecommerce accounting specialists we pride ourselves on the fact that we understand the uniqueness of our clients businesses which enables us to better deliver the unique service they require.
Each ecommerce business is different and will have unique requirements, often selling into multiple tax jurisdictions and sometimes with products being dispatched from multiple tax jurisdictions creating a web of authorities that need to be reported to. Luckily for us ecommerce accounting is what we know and what we do!
In todays article we will explore the basic ecommerce accounting and reporting requirements faced by ecommerce businesses and their owners.
What Is Ecommerce?
The first ecommerce transaction is thought to have taken place in 1994 and involved the sale of a CD by the well known artist Sting. Fast forward 27 years or so and it would be hard to imagine a world without ecommerce as it has become more and more prevalent in our daily lives.
Put simply, if your business engages in the sale of goods or services online where the transfer of funds is also made electronically then the business would be involving in ecommerce transactions.
Your business could be selling via it’s own website, selling directly on platforms such as Amazon, Ebay and Etsy or possibly operating under a dropshipping model. All of the transactions recorded will normally be considered ecommerce.
It is worth noting that due to the 2 part definition that not all transactions that take place via the internet would be considered ecommerce. For example where a business operates a website where customers can place orders but the transaction is completed by making payment in store or in person this would not be considered ecommerce.
Ecommerce Accounting Requirements
Many of the ecommerce accounting requirements are the same as those for a traditional bricks and mortar setup however with the ability to access an international market with relevant ease there can be some additional reporting requirements to consider as well.
Below is an overview of ecommerce accounting requirements that should be considered for your ecommerce business. We will look at each in more detail and how the accounting requirements my differ to those applicable to a more traditional small business later in the article:
- Setup – Ltd Company v Sole Trader
- Preparation of financial statements
- Self Assessment
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Like all businesses you will need to decide on a suitable legal setup. This usually involves deciding between a sole trader or a ltd company setup. Each has it’s own distinct benefits over the other but depending on the size of your business, the activity that you undertake and your own personal preferences there may be one that is more suited to your particular circumstances.
It is always important to speak to an accountant when deciding on a setup for your business to ensure the right decision is taken from the start. Changing the setup at a later date is certainly possible but it will often result in further costs and administration.
You can learn more about the differences between business setups in our article limited company v sole trader but the key attributes of each are considered to be:
Sole trader setup:
- Considered to be the most basic business setup available with the fewest filing requirements
- Unlimited liability from a legal standpoint for the business owners
- No/low cost of setup just a simple registration with HMRC
- Increased privacy as no details are kept on public record
- Gives it’s owners less control over how and when income is subjected to tax which can result in this option being comparatively less tax efficient
- Simple close down process if the business reaches it’s end of life
- Slightly more expensive setup process often involving the use of an accountant or formation agent
- Owners benefit from limited liability from a legal standpoint as the ltd company is considered a separate legal entity and the owners are only risking the capital introduced
- More control over timing and type of distribution the company makes to shareholders which can result in greater tax efficiency
- Increased filing requirements as the company needs to report to both HMRC and Companies House. This can also result in increased costs
Bookkeeping has been considered a burden for many small business owners in the past but luckily software advancements are making this previously time consuming task a lot more manageable.
You will need to ensure your ecommerce business is maintaining accurate records of all income and expenses in order to ensure accurate reporting. You will also need to maintain those records for a number of years. The exact duration will depend on the legal setup of the business.
There is a difference between accounting v bookkeeping and the two should not be confused. The main function of bookkeeping is to organise financial information into a format that is understandable and digestible whereas the main purpose of accounting is the present and report the financial information is a way that meets all of the businesses legal requirements.
The requirement of your business to prepare financial statements will depend on the legal setup that you settle on.
A limited company is required to report on it’s financial performance by preparing and submitting annual accounts and tax computations. It would then need to report some of this information to both HMRC and Companies House. There are strict guidelines detailing what information should be included and how it should be presented.
A sole trader would only be required to report financial performance via the annual self assessment which only requires the individual to provide figures detailing total income and total allowable expenses. This process is therefore considered to be less time consuming although some sole trader businesses may opt to prepare more structured financial statements to help them better understand their numbers.
Up until this point the ecommerce accounting requirements have been comparable to that of a more traditional business model. When it comes to VAT though the ecommerce accounting requirements and amount of “red tape” can increase dramatically for some ecommerce businesses.
As with any setup if business exceeds the VAT registration threshold (20/21 £85,000 of taxable turnover) in a 12 month period then you will need to register for VAT. It is also possible to register voluntarily for VAT if the businesses taxable turnover is below the threshold.
Due to recent changes in the way VAT is recovered. If your business is sending goods directly to customers in the UK where the goods are not sold via an online market place (i.e. you sell on your own website) and are sent from an overseas location. You may need to register for VAT immediately irrelevant of the usual thresholds mentioned above.
You will usually be able to choose between a number of different VAT schemes including the flat rate scheme. Again it is important to speak to a professional to help you decide which scheme will be the best fit for your business.
Where your ecommerce business is selling overseas the VAT filing requirements can be somewhat complicated. For example a business that is registered for Amazon’s pan EU fulfilment service may have additional registration and reporting requirements that involve registering for VAT in every European country you sell into. The VAT is usually collected at the point of entry (the customer will pay this on delivery). This means that UK exporters sending goods into Europe and the rest of world should not include any VAT in the cost of the product otherwise the customer will be paying VAT twice.
Where your business is importing goods to the UK from overseas VAT will usually be charged at the point of entry and reclaimed by the business on a later return but providing the goods are for use in the business, you have a VAT number and display this on the customs declaration and you also have an EORI number displayed on the customs declaration then you may be able to use postponed VAT accounting which allows you to avoid the charge and simply record a double entry on your next VAT return.
You can learn more about this in our article huge ecommerce VAT changes in 2021.
- Sole Trader – is required to report profits via the self assessment as well as any other sources of income. Income tax will then be payable on the business profits at a rate that is decided based on the individuals total income.
- Limited Company – As the director of a limited company you will automatically be required to register for and complete a self assessment tax return. Unlike the sole trader though, the businesses profits will not be taxed under income tax (they will have already been taxed under corporation tax rules). Instead it’s the distributions from the company that will need to be declared on the self assessment. Usually this consists of a tax efficient mix of salary payments and dividends.
- Businesses exporting goods to the EU will now need to complete customers forms. The form required depends on the value of the product being exported. Form CN-22 will be used for items with a value under £270 and form CN-23 for items with a value over £270.
- Where goods are moving between Great Britain and the EU a business will need to obtain an EORI number (economic operator registration and identification number). The EORI number will usually need to be displayed on customs documentation to ensure a smooth export.
- UK sellers will need to consider VAT registration in each European country they sell into (at least until 1st July 2021). Sellers will not charge VAT at the point of sale, instead the customer will be charged VAT on delivery.
- UK sellers of digital goods will no longer be able to use the VAT MOSS return to report EU sales to HMRC and instead will register for the EU non union MOSS scheme.
- Tariffs will be payable on goods imported from EU countries in the same way that they always were for imports from outside the EU.
Choosing An Accountant
Working with the right accountant should add value to your ecommerce business. The landscape for ecommerce accounting is constantly evolving with barriers being introduced and then removed on short notice.
As ecommerce specialists we pride ourselves on being proactive for our clients and preparing for all outcomes. Ensuring all reporting requirements are met from day one but at the same time looking for ways the business can be more efficient and seize upcoming opportunities.