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Online selling and ecommerce tax, the complete guide
This is part of our full guide to online selling and ecommerce tax. Start with undefined, or read on:
This case study is based on genuine client work carried out by our practice. Names, figures and identifying details have been changed to protect confidentiality, and the numbers shown are representative of the situation rather than the exact amounts. Your own position will differ.
The scenario
Someone sells online across a couple of marketplaces. Stock is bought in bulk, listed, and shipped. Money comes in from the platforms net of fees, and goes out to suppliers, couriers and packaging. They have never done stock take and they work out profit by looking at whether the bank balance went up.
Why the bank balance is not profit
This is the central problem for anyone selling physical goods, and it is why online sellers are so often surprised by their tax bill.
Money spent on stock that has not sold yet is not an expense yet. It is an asset sitting in your spare room. You only deduct the cost of goods when you sell them.
So a seller who spends £20,000 on stock in March and has £12,000 of it unsold at the year end cannot deduct the £12,000. Their taxable profit is £12,000 higher than their bank account suggests. The cash has gone, the tax bill has not, and that gap is exactly where growing sellers run out of money.
The harder truth is that a rapidly growing seller can be profitable on paper and out of cash simultaneously, because growth eats working capital.
The other things that go wrong
Net platform payouts. Turnover is the gross sale price, and the platform fee is an expense. Declaring only what landed understates both sides and, again, the platform reports the gross to HMRC.
Fees are not one thing. Listing fees, final value fees, payment processing, advertising, subscription. They are all deductible and they are all buried in a statement nobody downloads.
Postage and packaging. Allowable, and often substantial, and often paid from a personal card and forgotten.
Mileage to the post office. Small each time, meaningful over a year.
Home as a workspace. If you store stock and pack orders at home, there is a claim there.
What is worth doing
Do a stock take at the year end. Count it and value it at the lower of cost and net realisable value. It is tedious and it is the number that makes your accounts real.
Download the full transaction reports from each platform rather than relying on the payout figure. The gross, the fees and the refunds are all in there.
Separate the business bank account. Sellers do a very high volume of small transactions, and untangling that from a personal account a year later is genuinely awful.
Watch the VAT threshold on gross sales, tested rolling monthly, not on your payouts.
The point of this example
Selling goods is the one business where cash and profit diverge most, and it is the reason online sellers get caught out. The stock in the spare room is money you have spent and cannot deduct yet.
If you sell online and your figures have never been put together properly, get in touch.
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