If you are starting your own online shopping business, then you should be aware of what taxes you’ll need to pay, and when you must pay them.
Depending on how you’ve set your business up, these taxes can include:
- Income tax (PAYE or Self Assessment);
- Dividend tax;
- Corporation tax; and/or
- National Insurance (NI) contributions.
In addition, in certain circumstances, you will need to charge ecommerce VAT (value added tax) and complete a VAT tax return.
If you’ve started up your ecommerce business as a sole trader then you’ll be liable for income tax on your business profits.
Fortunately, the tax system for sole traders is fairly easy to understand. First, you must register for self-assessment with HMRC. This is the system HMRC will use to collect your tax.
Once you’ve registered, HMRC will send you your Unique Taxpayer Reference (UTR), which is a 10-digit number, and set up your online account for the self-assessment service.
You must register with HMRC as a sole trader. If you fail to do this, you can face a fine.
- As a self-employed sole trader, your current personal allowance for tax year 2021-2021 is £12,570. Anything you earn above this, but under £50,270 you’ll have to pay a 20% income tax rate.
- For earnings between £50,271 and £150,000, you must pay the higher rate of tax, at 40%.
- The additional rate of 45% applies to earnings above £150,000.
As a sole trader, you’ll also need to pay Class 2 and Class 4 National Insurance contributions through your self-assessment tax return. If you employ staff, you must also pay employee NI contributions via payroll.
If you’re a self-employed sole trader, you’ll need to complete an annual tax return (self assessment or SA100) and submit it to HMRC.
Want to learn about whether you should be sole trader or Limited company?
If you decide to run your ecommerce business as a limited company from the start, then you’ll be liable to pay corporation tax.
- Corporation tax applies to the profits you earn after you’ve paid business expenses and salaries.
- It’s different to income tax, as it applies to all profits, without there being any personal allowances. However, there is no sliding scale of charges. With corporation tax, you pay a flat 19% rate (2021-2022 tax year)
Each company’s accounting year will be different, depending on when you registered your company, and this will determine when you must file your annual accounts and company tax return with HMRC. This return provides details of your company’s income and deductions for allowances and expenses.
You must pay your corporation tax bill within nine months and one day after the end of your company’s accounting date.
As with income tax for sole traders, you risk a fine if you pay your corporation tax late, if you file your return after the deadline, or if you provide information on your return that’s inaccurate.
If you employ people in your limited company, you must pay the employer’s portion of your National Insurance contributions (NICs) directly to HMRC.
Employees’ contributions are taken automatically through payroll.
When you’re an ecommerce trader, you must charge VAT on your goods if your turnover reaches the £85,000 threshold in a rolling 12 month period.
When you reach this threshold, HMRC requires that you register for VAT.
VAT, or value added tax, is then chargeable on the goods you sell to customers online.
The only exceptions are:
- Music downloads, and
These types of goods have different VAT rules that apply to them, and we’ll come to these later.
For most items you sell online in the UK, the VAT rate you charge will be 20%, but some items are charged at 5%, and some are zero-rated, but even these aren’t completely exempt from VAT.
Where an item is zero-rated, you must still include it in your sales record and on your VAT tax return. If you sell to Europe, you also need to be aware of the rules paying VAT when selling into the EU.
You should include VAT in your prices once you’ve become VAT-registered. Your ecommerce website should make your VAT status very clear, then you can show your prices as VAT-inclusive.
When you’re VAT-registered, you must collect VAT from your customers at the point of sale (POS). This applies to whichever payment method you use, such as PayPal, Klarna, Shopify or card payments.
You must submit your VAT tax return every three months, even if you have no VAT to pay or reclaim. VAT can be quite tricky navigate, get in touch with our specialists to see if we can help you.
Ecommerce Taxes and Dropshipping
The dropshipping model of ecommerce has grown in popularity. Basically, it allows online retailers to sell products without actually storing these items themselves.
What happens is that when an ecommerce store sells to a customer, it purchases the item concerned from a third party, who delivers it to the customer.
This model makes it relatively easy for ecommerce startup businesses to launch themselves and offers a low-risk approach. However, there are tax issues involved too.
When it comes to income tax, you must be clear on your overall earnings. If your dropshipping income is below £12,570 a year, but you’re also in some form of employment, then this combined figure may take you over the threshold.
The same applies to the higher income tax band threshold. You have to make it clear, in your accounts, what total income you’re bringing in.
Then there’s VAT to consider. It still applies at POS to dropshipped items, if you’re VAT-registered (which you must be if you reach that £85,000 threshold).
If you’re selling goods online that come from outside the UK, then you may also be liable to pay customs duty. The current rate is 2.5% of the value of the item.
This doesn’t apply to goods with a value under £135, but special rates will apply to items worth more than £630.
Are you an Amazon business? How to convert from a sole trader to limited company on Amazon
Why Worry About Ecommerce Taxes?
The right expert advice about your accounts, and what your ecommerce store will have to pay in taxes, can give you the space to focus on growing your online business.