It might not sound like a long time ago. But back in 2015, e-commerce represented just 7.4% of global retail sales.
In 2020, that figure had risen to 18%. By 2024, it’s projected to be nearly 22%.
It’s because of growth like this that e-commerce is how many people envision starting their own businesses.
But there’s one area of e-commerce trading that needs professional input: accounting.
Getting an accountant is simply vital if you want to make sense of your business accounts and aim for growth.
In this article, we look at five key areas. Here’s what we cover:
1. E-commerce: Sole trader or limited company?
Simplicity is a key reason attracting people to setting up an e-commerce business.
After all, you can start with nothing more than what you have: any room in your home can be your storeroom and office. Amazon, eBay, Etsy and other online marketplaces can be your store front. Your mobile phone can be your personal assistant.
Therefore, it might seem as if working as a sole trader is the best way forward. This means you are the business. Any profit forms your wage. You take on any risk.
But an accountant might disagree that this is the best choice for an e-commerce business.
While a limited company involves more complexity and cost to maintain, it might also mean you pay less tax on the company’s profits (and that you, therefore, take home each month).
Incorporated businesses also have limited liability, which is another way of saying they take on the risk – so you don’t have to.
For example, if you take out a bank loan to finance a large order for inventory, that loan belongs to the business and not you.
Should somebody litigate because of a fault with a product or service you sell then, again, it’s the business that’s sued, and not you.
Limited companies are popular for a reason—and an accountant will explain why this might be best for you, and how it can fit with what you do.
2. Cash basis vs accrual accounting: Which is best for e-commerce?
The most basic form of business accounting is called cash basis accounting. With this method, you only enter transactions into your accounting when you receive or send money.
You base all your accounting on this movement of cash (even if that’s via electronic transfer, debit card payments, and so on).
This makes it hard to track how much you owe for stock because the payment isn’t accounted for until you make it 30 or even 60 days after the purchase (depending on terms you’ve agreed with the supplier).
But profits are accounted for as soon as you get the cash for an item. This mismatch means you can have little idea what’s going on financially. Are you making a profit right now? Who knows?
Because of this, it’s strongly recommended by accountants that accrual method accounting is used by businesses that deal with stock.
This includes e-commerce retailers.
The accrual method accounts for purchases when the goods are received (even if payment occurs later), and accounts for sales when the order is made (again, even if you don’t get the money there are then). This allows you to match income vs expenditure, to ensure you always know what’s going on.
Accrual accounting is more difficult for beginners to business.
But an accountant will be able to get you up to speed – and ensure that it fits perfectly with the way you do business.
3. Help filling in tax returns for your e-commerce business
As your turnover gets above the tax threshold, you’ll probably need to register for VAT.
This means you have to send VAT returns on a monthly, quarterly or yearly basis.
Most businesses do so quarterly because this means that, while they have to pay the VAT they’ve collected, they can also offset the VAT they’ve paid out when making purchases.
Needless to say, accounting for VAT can be a chore but must be done on time and be accurate. HMRC may apply penalties otherwise.
While VAT must be accounted for digitally if your business is over the £85,000 VAT threshold (note: from April 2022, this will be required for all VAT registered businesses) – meaning software helps automate much of the work – an accountant can prove their weight in gold by checking and submitting the data for you.
This is especially important if you sell outside of the UK and have to deal with VAT elsewhere, as we discuss next.
But it’s not just about VAT.
There’s also the Self Assessment tax return, corporation tax returns if your business is a limited company, and payroll requirements such as PAYE should you employ people (including yourself in a limited company)…
Using the services of an accountant is just a good idea.
4. Dealing with e-commerce taxes when selling overseas
When selling within the European Union (EU). you have to account for customs fees and often VAT too.
If you sell to countries such as the US or Australia, you will need to consider Goods and Services Tax (GST), which is similar to VAT.
VAT requirements when selling into the EU via e-commerce became a little simpler recently because of the introduction of the One Stop Shop (OSS) and Import One Stop Shop (IOSS) schemes.
Whether you can use these depends on where your goods are located and also the value of the consignment you send to consumers.
But, needless to say, accountants are able to help you work out whether the schemes are right for you.
Following this, they can help you make your regular OSS or IOSS returns too.
For UK e-commerce sellers, online marketplaces such as Amazon are responsible for accounting and reporting EU VAT for sales to consumers in individual EU countries via their own IOSS registration.
This will apply to goods sold to EU consumers that are below €150, or where the goods both originate within an EU country and are sold to one there.
Effectively, the UK e-commerce retailer sells the goods to the online marketplace (zero-rating them for VAT because they’re a business-to-business sale), and then the online marketplace adds the VAT and also accounts for it.
Again, you can see why an accountant can be invaluable in both helping you navigate this and working with it on a daily basis.
5. Understanding e-commerce earnings
Selling online means there will be many deductions, of various kinds, in every payment you receive from an online marketplace such as Amazon.
There’s not only a need to know what the deductions are but also to be able to account for them for your own sake – and also to get your taxes right (such as income tax or corporation tax, and VAT).
Again, accountants can be vital in making sense of all this – and using the information to plan for growth.
Examples might include deductions from the online marketplace for shipping fees, chargebacks/refunds, and other costs if you use services such as Fulfilled by Amazon (FBA).
Other issues around handling net deposits might include:
- Getting paid in batch payments.
- Payments spanning across two months or two financial years.
- Selling across multiple countries or regions.
- Deposits made up of thousands of transactions.
- Platforms might, or might not, be collecting tax on your behalf (see below).
- Hundreds of different transaction types.
If this sounds mind-boggling, you can see why relying on an expert makes sense.
Accountants: The true superheroes
There are three key components of a fuss-free accounting process for e-commerce businesses:
- Get an accountant.
- Use the right accounting software.
- Get an e-commerce add-on that sits between your accounting software and e-commerce package to break down the complexities mentioned earlier. That’s everything from selling across multiple countries to having hundreds of different transaction types.
Some of what’s been discussed earlier in this blog might sound complicated. But you don’t need to entirely understand any set of rules and regulations.
If you have an accountant, all you need is a good working knowledge of the basics:
- To understand how the rules and regulations apply to your sales and to the markets you target
- Knowing whether you’re getting them right, especially each time you come to make a tax submission.
It’s vital to get an accountant who has experience in e-commerce businesses.
While most accountants will understand the issues discussed above, there can be a big difference between an accountant used to understanding an Amazon earnings report and one who’s never seen one before (or who doesn’t even know they exist).
Using an accountant who lacks experience in e-commerce can actually end up consuming more of your time.
In summary, e-commerce retailing can be a dream way of becoming an entrepreneur. But speaking to an accountant from the first day you go online with your offerings will repay your efforts a thousand-fold in reducing anxiety and getting your accounting right.
How to take your business online-only
Need some help starting your e-commerce business? This free guide will provide you with the inspiration and top tips to support you in your bid to build your online company.
Never miss an episode
Subscribe by email and get Sound Advice delivered to your inbox every two weeks with the Sage Advice newsletter with a ton of related articles, templates and problem solving guides for small businesses so you can put our sound advice into practice.