Despite the challenges posed by the COVID-19 pandemic, the British people's enthusiasm for retail therapy endured unscathed. The Office of National Statistics (ONS) presents captivating insights, highlighting a striking upsurge in online retail sales since February 2020. Even as the UK emerged from lockdowns, the shift in consumer buying habits has become apparent and appears here to stay.
With the ease and convenience of selling online, many entrepreneurs and businesses have now turned to eCommerce platforms to reach this audience. However, with success comes responsibility, and one crucial aspect that online sellers in the UK must address is tax.
In this article, we'll explore the tax obligations for online sellers in the UK and shed light on the important considerations for small businesses and entrepreneurs.
Selling online and paying taxes
As an online store in the UK, whether you’re a sole trader or running a small business, you have the same tax obligations as any other business. Selling goods or services online means you’re liable to pay taxes on your profits. The key to staying compliant with UK tax laws is understanding the various taxes that apply to your eCommerce business.
You may have heard that you don’t have to pay business taxes on goods sold online. This is incorrect. However, this doesn’t mean you must pay tax every time your items are sold online (i.e. on an online marketplace like eBay or Etsy). As of 2017, the UK Government provided a tax-free threshold of £1,000 for online sales.
VAT and eCommerce in the UK
VAT is one of the primary taxes that online sellers in the UK need to be familiar with regardless of which market they belong to, whether it’s business-to-consumer (B2C) or business-to-business (B2B).
If your eCommerce business meets specific criteria, you may be required to register for VAT. One of the common thresholds for VAT registration is exceeding an annual taxable turnover of £85,000 in a rolling 12-month period. It’s important to check the current threshold to determine if your business is obligated to register for VAT.
You MUST NOT charge VAT if you are not registered. There are severe penalties for doing so. Be prepared and consider that VAT registration can take up to 10 weeks.
Once registered, you’ll need to collect VAT on your sales to UK consumers, for example, eBooks, music or video downloads and remit the amount to the HM Revenue and Customs (HMRC).
If you sell to customers in other EU countries, you may also have to deal with EU VAT regulations, which can be complex and depend on the specific circumstances of your business.
If you’re an eCommerce business supplying digital services to UK consumers, these are liable to UK VAT. If you supply to consumers outside the UK these are not liable to UK VAT. However, they may be liable to VAT in the country where the consumer is based.
The treatment of VAT for the supply of services to the EU changed on 1st July 2021. Now, any goods delivered to an EU country will attract value-added tax.
The rules for eCommerce transactions with the EU have also changed simultaneously. It’s an area of some complexity. An accountant or commercial solicitor will be able to explain the rules applying to your particular business.
Do online businesses pay taxes in the UK?
Yes, online businesses, including eCommerce ventures are subject to various taxes in the UK. These taxes can include income tax, national insurance contributions and corporation tax, depending on the legal structure of your business. Whether you operate as a sole trader, partnership or limited company, you must fulfil your tax obligations.
As a sole trader, you’ll be required to pay income tax and national insurance contributions on the profits you make from your online business. For limited companies, corporation tax applies to the company's profits.
VAT returns and compliance
As an eCommerce business, it’s essential to maintain accurate records of your sales and purchases. You’ll need to file regular VAT returns with HMRC, typically every quarter, depending on your VAT registration number. This return will detail the amount of VAT you collected from your sales and the VAT you can reclaim on your business expenses.
Online marketplaces carry further conditions. You must supply your VAT registration number to any online marketplace you use for trading, which in turn, they’ll advertise and post via their website. Failure to comply with VAT regulations can result in penalties, interest, removal from a marketplace and potential legal consequences, so managing your VAT obligations diligently is crucial.
Importing goods and VAT
If you import goods from non-EU countries, you may be liable to pay import VAT and customs duties. The rules for importing goods are constantly evolving and Brexit has introduced additional complexities for businesses dealing with goods outside the EU. It's important to stay informed and ensure you comply with all the relevant import taxes and regulations.
Get legal assistance from LawBite
Paying the correct e-commerce taxes is an integral part of running a compliant eCommerce business. Familiarise yourself with the VAT rules and other tax obligations and consider seeking professional advice to ensure you meet all the requirements.
At LawBite, we understand the unique needs of entrepreneurs and small businesses and we’re dedicated to providing modern and accessible legal solutions. We’re here to support you on your entrepreneurial journey and make the legal aspects of your business journey hassle-free.
Our team can assist you with your company registration and other legal matters related to your online business. To find out how we can help your business, book a free 15 minute consultation with one of our expert commercials lawyers or call us on 020 3808 8314.
Affordable tax support
If you’re looking for affordable tax support, GoSimpleTax can provide you with tips that could save you money on allowances and expenses. Their software submits directly to HMRC and is the solution for freelancers, the self-employed, sole traders and anyone with income outside of PAYE to file their self-assessment. Unlock your free trial and start saving on your accoutancy fees.