HMRC are paying more attention than ever to online sellers, and the draft Finance Bill 2016 includes new measures to tackle “the hidden economy” of online trading. The policy specifically targets business intermediaries and electronic payment providers, such as eBay and Paypal. It’s important to ensure you’re paying the correct amount of tax and have clear records for your business.
HMRC investigating online sellers
UK retail ecommerce sales are expected to reach £60 billion this year, and HMRC are increasing their powers to investigate online sellers that aren’t paying tax in an effort to tackle what they call “the hidden economy”. HMRC predicts that by 2020 these new powers will help them collect an additional £285 million.
These new powers will allow HMRC to gather data from business intermediaries who facilitate transactions online and electronic payment providers who operate digital wallets; Amazon, eBay and Paypal etc. They will then compare the third party data with their own information to identify those businesses who are failing to register with HMRC or are not declaring the full amount of the tax they owe.
For more details on HMRC's new powers, read the full policy paper, "Tackling the hidden economy: extension of new data-gathering powers".
When does it come into effect?
The new powers will come into effect when the Finance Bill 2016 receives Royal Assent and secondary legistlation will be made by the end of summer 2016.
How does this affect you as an online seller?
Even as a small online seller, if you’re selling frequently for a profit then you probably should be paying some sort of tax. It’s important to understand what you should be paying, and when - failure to pay tax can result in stressful investigations, fines and even prison sentences.
At what point does selling online become a business that you have to pay tax on? You’ll be considered to be trading if you fit one or more of these descriptions:
- you want to make a profit
- you buy goods to sell them on
- you sell things often/regularly
- you're registered as a business seller on an auction site
- you buy wholesale or through trade suppliers
- you adapt items before selling them on
- you sell things you've just bought.
If you are ‘trading’ then you need to register with HMRC here.
What taxes should you be paying?
As an online business you could be eligible to pay a number of different taxes, including income tax, corporation tax, and VAT.
VAT: If your business's turnover exceeds £82,000 a year then you will need to be VAT registered, paying VAT and providing VAT receipts. Once you’re registered you’ll charge VAT on sales to your customers, and you can normally reclaim any VAT charged to your business.
Zenstores users can quickly and easily print VAT invoices in the correct format.
Learn more about adding VAT onto your invoices using Zenstores.
Corporation Tax: If you’ve formed a limited company then at the end of your financial year you will have to file a corporation tax return and pay tax on any profits you have made for that period. It's important to note that tax usually needs to be payed 9 months and 1 day after the end of your accounting period and the return 12 months after your accounting period. Keeping up to date on your bookkeeping throughout the year is therefore crucial as selling online is stressful enough without having to go through an entire year's worth of sales data from eBay and Amazon just to workout that you owe the tax man a small fortune.
Find out more about corporation tax here.
As well as paying the correct tax, you need to keep accurate business records and keep hold of tax records for at least 5 years after a year's tax return deadlines (31 January following the end of the tax year).