by Eunice | Feb 26, 2023 | UK Updates
The Importance of VAT
VAT, or value-added tax, is levied at every stage where value is added, starting from production to the point of sale. In the UK, registered entities collect and remit VAT to HM Revenue and Customs (HMRC).
VAT registration is a legal requirement for businesses with total VAT taxable turnover above £85,000 for the last 12 months or who expect to exceed the threshold in the next 30 days. Bear in mind that UK VAT is only applied to your sales in the UK.
Even if your forecasted sales are below £85,000, you can still choose to be VAT-registered voluntarily. One of your obligations would be to pay HMRC any VAT you collect starting from your registration date.
If you’re a foreign Amazon merchant selling in the UK market, know that you must register for VAT regardless of turnover. Otherwise, you will be penalised for non-compliance.
Besides being mandatory, being VAT registered promotes good business relations. When you have commercial clients, they usually ask for a VAT invoice on their purchases so they can claim input tax. But if you’re not VAT registered, some of your customers may take their business elsewhere.
VAT registration can also help improve your brand image. It makes your business look more legitimate and credible than non-registered ones since they appear to run small operations because their turnover did not breach the compulsory limit.
As soon as you are over the threshold, you must register for VAT within 30 days. Failure to do so results in penalties from HMRC, the amount depending on VAT due and the extent of delay in registering.
Why Amazon Pushes for VAT Registration
When you’re a merchant on Amazon, the platform encourages you to be registered for VAT; otherwise, they may only give limited access to your Seller Central account. They often send notifications about it, and once you receive these messages, you may be required to register for VAT. A qualified advisor can say whether you must be UK VAT registered.
How does Amazon know that you have to register for VAT? The online marketplace uses artificial intelligence to predict when a seller will most likely go over the turnover threshold based on its sales history.
Suppose your gross sales for six months are already £50,000. Amazon forecasts a steady increase in sales for the next six months. After twelve months, you would have exceeded the threshold. In anticipation, the platform advises you to apply for a VAT number for your expected taxable turnover.
There are two reasons behind Amazon’s push for registration. Firstly, they have a legal responsibility to HMRC to ensure that all sellers in the UK market exceeding the threshold should be charging VAT on taxable products.
Secondly, the marketplace wants Amazon sellers to avoid disruptions in their operations after breaching the £85,000 limit on non-taxable sales. If you opt to do voluntary VAT registration before your business reaches the threshold, you have one less worry and can focus more on operations.
Who Is a Foreign Director to a UK Limited Company?
A foreign director is a non-UK resident based overseas who holds a position in a limited company established in the UK. You would be one if you formed and structured your Amazon business as a limited company rather than a sole proprietorship.
Although classified as a foreign director and living outside the UK, you are still responsible for UK VAT and taxation compliance for your company. That includes applying for a VAT number, paying taxes due, and filing the relevant returns on time. Moreover, you must also meet any additional requirements from HMRC and Companies House.
VAT Registration for UK Limited Company: How Difficult Is It to Register for VAT?
VAT registration as a foreign director can be complicated as some of HMRC’s terms may be hard to understand. Although the tax authority has a user-friendly web portal called the Government Gateway, navigating it yourself can prove confusing.
To create an account, you must input the appropriate information about your limited company and yourself. You will need an active email address and two-step-factor authentication for security purposes. While you can follow the instructions on-screen to proceed with the registration, know that a few terms may require further clarification.
Confirm that the information you provide to HMRC is correct at the onset. Fixing incorrectly input details may be challenging or subject to penalties, which is why you must ensure accuracy.
VAT Registration Assistance
If you’re unfamiliar with the VAT registration process, including the correct codes and terms, it’s best to seek assistance from a qualified tax agent or advisor. They can register your e-commerce business on your behalf but may need more information if HMRC makes a request.
First, you must provide your tax identification number from your home country, which HMRC will record in their system. Secondly, you have to submit proof of identification, such as a copy of your ID or passport. You also need to show the UK address of your business, as evidenced by a rental or lease agreement or a mortgage statement.
In addition, HMRC may also require a copy of your birth certificate fully translated into English.
The above information may have changed by the time of publishing. To ensure you get up-to-date regulations, speak to a qualified tax agent or representative based in the UK.
Frequently Asked Questions about VAT Registration
When do I need to register for VAT?
Ideally, you should opt for VAT registration before doing business in the UK, particularly with foreign companies. But if you’re already running a full operation of your Amazon store, consider applying as soon as possible.
by Eunice | Feb 25, 2023 | US Updates
Sole Proprietorship
Also referred to as sole trader, a sole proprietorship is a business owned by one person or individual. Some sole proprietors create a trading name; however, doing so isn’t necessary. Bear in mind that a trading name is not a company but what Amazon sellers use in doing business instead of their personal name.
Most independent contractors, consultants, and tradespersons organise their business as a sole proprietorship due to ease of setting up and a lack of strict government regulations. However, there are also downsides to this structure.
Under a sole proprietorship, there is no separate legal entity created. You, as the owner, are solely responsible for everything related to the business, from operations to liabilities. When your clients file a claim against your products, you are accountable for it. The same applies to taxes—you are directly liable for them.
Limited Company
A limited company is a business formed and owned by one or multiple shareholders. As a legal structure, it ensures that a member shareholder’s liability is only up to their stake in the company, which can be either through investments or commitments. It is registered in the UK’s Companies House.
Companies that make a profit are ‘limited by shares and managed by at least one director, which can be you. As the managing director, you oversee business operations, including hiring people, allocating dividends to other directors or shareholders, and adding more members to the company.
Although setting up a limited company is relatively straightforward, it’s better to work with a professional. With their assistance, you can ensure a smooth process until your registration on Amazon’s Seller Central.
Limited Liability Company
A limited liability company is a business structure with one or multiple owners called members. Similar to a limited company, an LLC protects its owners from being personally liable for the company’s obligations because it is a separate legal entity.
Amazon sellers in the US can register their LLC in any state, unlike in the UK where registration is centralised and done through the Companies House. Since regulations governing LLCs vary for every state, some places, like Delaware, see more company registrations than others due to offered benefits.
An LLC offers the flexibility and protection of a corporation but without the complexities of setting up as one. However, hiring an expert is still recommended to ensure a fast and easy registration process.
What Is the Most Tax Beneficial?
Comparing the three business structures, sole proprietorship offers the least tax advantage. While calculating your tax due is relatively simple, you may be surprised by how much you must pay come filing season. Your earnings as an online merchant are included and taxed as part of your personal income.
Depending on their income tax bracket, Amazon sellers organized as sole traders may have significant tax burdens because of the high rates applicable to their profits, with the highest rate of 45% at earnings over £150,000. Moreover, they don’t qualify for tax benefits available to limited companies and LLCs.
The corporate tax rate for limited companies in the UK, with profits under £250,000, is 19%. As it is a flat rate, your tax due is proportionate to your earnings, making it reasonable. And if you’re a director, your personal tax depends on your residency status. While you still have tax obligations, this setup offers more savings than as a sole trader.
Since an LLC can be established in any US state, one of the best places to do so is Delaware. It doesn’t have sales tax and state income tax, or gross receipts tax for LLCs not doing business in the state.
LLCs may choose how to be taxed, don’t have to pay federal taxes on profits directly, and can pass through their profits and losses to members, which they will report on their personal tax returns. For these reasons, forming an LLC is the most tax-efficient for US and non-US residents.
Liability
Since no separate legal entity is formed under sole proprietorship, the liability extends from the business to the owner. Amazon sellers under this arrangement have no protection against complaints and claims against defective or hazardous products. Clients can go after your personal assets during settlement.
On the other hand, limited companies and LLCs minimise the financial losses when an injured or disgruntled customer makes a claim for faulty products or sues your business for damages. Because of the legal distinction, these structures segregate a company’s liability from its owners.
Scale and International Growth
Sole traders often find it difficult to scale their operations because of their relationship with suppliers. Some suppliers, especially overseas ones, often presume that individual Amazon sellers don’t run extensive operations, translating to less professional setups.
The treatment changes, however, when dealing with a limited company or an LLC. They tend to be more respectful, professional, and open to forging better business relationships. They may even offer discounts for bulk purchasing.
When you scale your Amazon business, your next step is to expand to other countries. As a company, international growth is less complicated. For instance, it’s easier to register for VAT or sales tax in overseas markets as an LLC or limited company than as a sole proprietor. Also, you have financial protections and simpler tax compliance.
Investors
If you have ever thought about getting additional capital through loans or investors, doing it as a sole trader will be challenging. Banks and investors will be wary of releasing funds to you since the proceeds will go into your personal bank account—there’s no guarantee that the money will be used accordingly.
On the other hand, investors and banks trust limited companies and LLCs more than individual sellers. Besides a company structure providing legitimacy, having a separate legal entity gives them assurance that their investment will be used for business purposes.
by Eunice | Feb 24, 2023 | European VAT
1. Learn the Basics About VAT
The simplest definition of VAT is “the European equivalent of sales tax in the US.” But in the UK, it’s called VAT as well.
For Amazon sellers, a basic understanding of VAT is critical to their market entry strategy since it will significantly impact their product pricing.
That’s because VAT is a consumption tax levied on goods and services bought and sold in the EU. It is applied at every stage of the supply chain, from production to the point of sale.
2. Where to Register for VAT
VAT is remitted to the government, so Amazon sellers must know in which country they should register for it. The rule of thumb is to be VAT registered in the place where you store and sell your products.
Suppose you keep a supply of your goods in Germany, either through your own establishment, a 3PL arrangement, or under FBA. In that case, you should apply for VAT registration in that EU member state, even if you plan to sell only in France as a UK-based e-commerce business owner.
So how do you know where your products are stored if you’re under FBA? Simple—it is the address of the Amazon warehouse in the country where you’ve sent your products for storage.
Moreover, when you meet the country’s minimum threshold for turnover, you must also be VAT-registered. However, the EU issued revised VAT rules for cross-border e-commerce, and among the many changes was that there will be one standard threshold of €10,000 across the region.
Being VAT-registered in that country is not enough; you also must calculate the correct VAT due and file the corresponding returns regularly and on time. Keep in mind that filing frequency and deadlines differ per country.
3. Most Common Issues Amazon Sellers in Europe Are Having with VAT
European accounts often get suspended due to various issues with the local tax authority. Common problems include wrong VAT amounts remitted, late payment, or delayed filing.
Most revenue-collecting bodies only give violators a few days to a couple of weeks to sort out the problem. You also have to follow procedures to maintain an active account.
The best way to avoid these drawbacks is to plan upfront and understand your VAT obligations as an Amazon seller. It’s crucial to work with a trusted accounting firm that can help you. Various services are available for Amazon sellers worldwide.
4. Understand VAT Obligations Early On
Given the complexity of VAT calculation and compliance and its significant difference from US sales tax, it is critical to work with an accountant whose expertise lies in the UK and European VAT.
When working with accounting firms to handle your VAT in the EU and UK, you must hire one that fully understands the e-commerce industry, particularly Amazon operations and statements.
They must know how to compute advertising tax, sales tax, VAT on storage or under FBA, and import duties. There are many things to consider when working with an international VAT expert. Getting the right people on board is important to ensure successful, profitable operations.
5. Develop a Strategy and Prepare to Launch
Amazon sellers must bear in mind that they must research VAT as soon as they consider tapping the European market. You can find plenty of resources online, including Google, Quora, Youtube, and online forums on Facebook.
Also, it’s best to work with an expert at the onset—they can provide valuable insights, give key information, answer queries regarding operations, and assist you at every step.
VAT will significantly impact your strategy, including pricing and fulfilment. How you price your products will affect your margins, so ensure you understand the applicable VAT rates in your target market while accounting for overhead expenses.
6. Be Agile as You Grow
Things can quickly change in terms of regulations and operations. You must be able to adapt to sustain your growth in the EU market.
When you expand through the Pan-European FBA, Amazon moves your inventory among seven European countries based on customer demand.
As a seller, you must be VAT-registered in all these EU member states. If there are changes on Amazon’s end, you must comply to maintain your status.
7. Outsource Reporting to a European VAT Service
Amazon sellers should be aware that tax filing is required monthly or quarterly, depending on the country where their buyers are.
You can handle the reporting yourself; however, it is a complicated job. Many things can go wrong, and they can affect your operations. Save yourself the trouble by outsourcing the task instead.
8. Do Not Try to Figure Out VAT Yourself
As you expand your Amazon Europe business, leave all VAT-related work to a professional. It bears repeating that mistakes and oversights regarding compliance can set you back in terms of heavy penalties, possible Amazon suspension, and even court proceedings.
9. Hire a VAT Expert That Understands Amazon in Particular
Amazon sellers know that reporting in the largest online market platform is quite complex. Countries have different rules regarding VAT payment, so computed tax due isn’t straightforward.
Working with a VAT expert is critical to ensure your tax obligations are always correct. That’s because they have actual knowledge and up-to-date information on tax-related regulations and policies.
Not all tax specialists are the same. Hire someone that understands the specific requirements of Amazon Europe sellers.
10. Do Not Ignore or Delay Your VAT Registration
Doing so may lead to your Amazon account suspension. Since processing a suspension appeal can take a long time, it’s in your best interests to begin VAT registration as soon as you learn it’s required.
Registering for VAT in your target market takes several weeks. Without VAT registration, you can’t import or sell goods in that country. So if you want your expansion strategy to go smoothly, give yourself three months to prepare. VAT registration in countries like France and Germany takes a few months.
by Eunice | Jan 8, 2023 | UK Accounting
What Should You Look for in Limited Company Accountants?
No matter how big your business is, accounting remains a crucial part of operations. It’s essential to work with a professional who can maintain your books and dispense sound accounting advice. However, choosing a team of limited company accountants that best fits your needs is quite challenging.
At whatever stage of your venture, hiring the right professional provides many more benefits than using software for bookkeeping and tax return preparation. Consider these five factors to help you find the perfect firm for solid financial management, strategic decisions, and optimum savings.
Why Outsource Your Accounting?
Some companies outsource accounting instead of hiring staff to handle related tasks. While the rationale usually varies from company to company, below are three common reasons:
1. Controls Costs
A primary motivation for businesses to get external limited company accountants is to cut down on operational expenses. Hiring employees may sometimes cost your business more than outsourcing because of salaries, paid benefits, training, and bad hires.
Since oversights tend to happen more frequently with untrained staff, you may incur unnecessary but avoidable expenses. Prevent revenue leaks from rookie mistakes by working with an experienced accounting firm.
2. Improves Efficiency
Many companies hand off accounting to outside professionals to boost productivity and efficiency. When your business has limited resources, it’s crucial to utilise them in a way that delivers the most benefits.
When you or your employees take on multiple roles to keep the business running, it leads to overworked people and underwhelming performance. Error-riddled outputs won’t do your business any good, primarily when it affects your clients. Make better use of company resources by taking non-core functions off your plate.
3. Maintains Focus on the Business
As you try to keep up with a non-core aspect of your business, such as accounting, you’re likely wasting time and effort on something that won’t bring in additional revenue or long-term growth.
Outsourcing this area to experts lets you direct your full attention and energy into running your business’s core operations. Rather than worrying about the mundane tasks of recording daily transactions, you can focus on making strategic decisions to drive earnings, be competitive, and take your operations to the next level.
Working with the right limited company accountants is worth the investment. So choose wisely with the following five considerations in mind.
1. Experience
Like any hiring process, most companies prefer employees with great work experience to get the job done. This requirement is also applicable when you’re looking for someone to manage your accounts, file tax returns, and prepare financial statements.
Hiring a professional with years of experience ensures your financial needs and goals will be met. A professional’s longevity in rendering accounting services suggests they’ve already worked with numerous clients and maintained good business relations with most of them over the past years.
Look for a firm that’s been in business for at least ten years. They’ve likely gone through several economic cycles and survived some of the worst crises, pointing to their resilience and solid experience.
2. Expertise
Not all limited company accountants are the same; some specialise in certain industries or cater to particular businesses because they’ve developed expertise in handling accounting issues related to these areas.
Before partnering with an accounting firm, identify their client portfolio to determine if your business is a good fit with them. Ask questions on their areas of expertise and core strengths. Remember—your requirements and their qualifications should be aligned at best.
Suppose you’re an e-commerce seller, and your daily volume of transactions is substantial. Plus, you also need to comply with different local tax laws. Work with an accounting firm that manages clients in the same business as yours—they’ll already have the experience and will know what’s expected of them.
3. Communication
One of the most critical but oft-overlooked considerations in hiring limited company accountants is communication. If you and the firm can’t communicate well, it will usually lead to more significant problems.
Pick a firm that responds promptly to your queries and calls for assistance—if it takes them a while to get back to you, you are not their priority. Expect this type of interaction throughout your partnership, so think long and hard about whether it’s acceptable for you.
It’s also crucial to factor in language barriers and jargon, as these two can make communicating even more challenging. Look for an accountant who converses in a language you’re comfortable with to minimise errors due to mistranslation.
It’s also better when limited company accountants can explain numbers, financial reports, and regulations at a level you can comprehend. If they can break it down in layman’s terms, you can gain insights and make strategic decisions faster.
4. Resources and Technology
Ask your prospective accounting firm about the tools and technologies they’ll use in managing your accounts and preparing reports. Also, inquire how capable their resources are in handling your requirements—some applications have limited capabilities, hindering the proper delivery of services.
Innovations like expense management software and online platforms simplify tasks; however, they require training to be used effectively. If your firm’s accountants are familiar with these tools, it means their skills are up-to-date and they can handle some of the most rigorous activities.
5. Support
Select a firm that offers prompt, quality support to its clients. A good team of limited company accountants will be proactive in handling your accounts to prevent problems from cropping up and eventually snowballing.
To determine whether a firm is a good fit for your business, ask about their risk tolerance—are they conservative or willing to take on calculated risks? How will they treat income and deductions that may impact your bottom line? If you’re on the same page on such matters, then they can provide the support you need.
It’s also reassuring to know you can reach out to them when issues arise at your end, even outside business hours, on the weekend, or during the holidays. But if there’s a significant time difference, note how long it takes for them to respond and see if the waiting time is reasonable.
by Eunice | Jan 5, 2023 | E-Commerce
How Amazon Accounting Differs from Other E-Commerce Accounting
Accounting for e-commerce is a different ballgame from the typical business accounting, even more so when you’re a seller on Amazon. There are a few extra considerations to keep in mind, such as the following:
FBA vs FBM
Some e-commerce sellers are under the fulfilment by Amazon (FBA) arrangement, wherein they pass on their entire shipping responsibility to Amazon by handing off some or all of their inventory. Such service isn’t available on other online marketplaces like eBay and Etsy, and this setup is called fulfilment by merchant (FBM).
Accounting for inventory under the FBA is slightly more complicated than FBM of other platforms since it’s harder to keep track of your products. They could be at a fulfilment warehouse, en route to buyers, or for returns.
Since Amazon only relays the information to the seller, you don’t have an accurate picture of your inventory figures compared to when you manage the entire order processing.
Taxation
VAT and sales tax are already confusing to begin with. And with FBA in the picture, Amazon accounting becomes even more cumbersome.
If you’re selling in the US via FBA, your tax nexus includes states where your products are warehoused. The same principle applies to Pan-EU FBA but not the term. Talk to an Amazon accounting expert from Sterlinx Global to determine if there’s a tax implication to your business and how you can address it.
Seller Fees
Another aspect wherein Amazon accounting is unlike accounting for other e-commerce platforms is the fees.
As the largest online marketplace, Amazon understands how powerful its reach can be. If you want to make more sales, selling on the platform comes at a higher price—commission and FBA fees are some of the expenses weighing on your margins.
How Amazon Sellers Can Scale with Accounting
Growing your online store takes more than a keen eye for business—you also need to do your Amazon accounting right. Improve financial performance by being savvy with your accounts and books.
1. Stick to the Accrual-Based Method
There are two business accounting techniques: accrual and cash basis. Of the two, it’s better to use the accrual method to see your revenue streams and expenses more clearly—you recognise sales when earned and expenses as incurred, regardless of when cash exchanged hands.
As such, you can make more strategic decisions for income growth from the derived profitability figures.
That said, it doesn’t mean you should write off the cash basis method altogether. The technique comes in handy when tracking cash flow. However, don’t fall for the trap that being cash-rich is tantamount to profitability; it isn’t since it doesn’t consider accounts payables.
2. Pay Attention to Your Inventory
If you want to boost your bottom line, one of the essential Amazon accounting items to monitor is your inventory.
The e-commerce charges fees for products under FBA in exchange for handling storage and shipping—that’s the price of convenience. However, such inventory-related costs may set you back more than they should, narrowing your margins.
Figure out which products are more cost-effective with FBA. Amazon charges a range of fees related to inventory, including storage and returns processing fees, which can then add up to your cost of goods sold. Identify items that cost you more to maintain in your store than remove altogether.
If Amazon fees are trimming your profits, consider opting out of FBA to keep inventory costs down. A good rule of thumb is to downgrade when the total number of units sold is less than 40 per month.
3. Focus on Profitable Products
Another way to increase your Amazon earnings is by identifying products with high returns and focusing efforts on marketing them.
Many vendors make the mistake of maintaining excessive inventory in anticipation of higher profits with sudden increased demand. However, betting on trends doesn’t always translate to sales and higher earnings unless you’ve researched them extensively.
Instead, determine your top-performing products based on their margins and develop cost-effective strategies, like campaigns and bundling, to drive sales. As for your poor performers, decide whether they’re worth the push or better off taken out.
4. Keep a Close Eye on Expenses
Inventory-related fees aren’t the only costs you should be worried about—your overhead expenses will also weigh on your earnings.
Understand how the platform’s seller fees impact performance. You are likely incurring other expenses necessary to run your online business, including utilities. The higher your operational costs are, the narrower your margins will be. And an ideal net profit margin is around 40%.
Break down expenses and examine them on a more granular level to identify areas for improvement. For example, you may be better off with an individual seller account, purchasing stock with lower shipping fees, or streamlining operations.
5. Calculate the Correct Tax
Whether you’re collecting VAT or sales tax, it’s your responsibility to remit these taxes to the proper authorities. But with different local tax regulations in every market you’re in, it’s easy to get confused with compliance.
Paying the incorrect amount on your tax liabilities results in unnecessary costs to your e-commerce business. When you overpay, you cannot refund, but when you remit less than the tax due, you’ll be fined. Aim to compute the correct tax amounts to improve your bottom line.
6. Work with Professionals
If you want your store to gain traction and increase earnings but are unsure where to begin, it’s better to consult an Amazon accounting expert from Sterlinx Global. They have the expertise and experience in managing and analysing accounts, as well as providing accurate financial reports so you can make sound business decisions.
By handing off accounting services to professionals, you can focus more on growing your business instead of figuring out what the numbers mean.
