E-commerce sales now make almost half of all retail sales in the UK. While starting an online venture can potentially be a rewarding business option, it involves more than just setting up a website and getting started on sales. If you are thinking about setting up an e-commerce company, and getting your books in order as you scale up your e-commerce business, here are some things you’ll need to consider to get it off the ground.
1. Do you need a licence to do your e-commerce business?
The short of it is this — you don’t need a licence if you’re only trading within the UK. However, you’ll need a licence if you’re selling restricted goods like alcohol, and to sell goods to the EU.
Michael has an online shop which sells toys. His customers are only within the UK. He does not need a license. Peter specialises in selling bourbon online and his customers are within the UK too. Peter needs a license. Winona sells shoes through her online shop to customers in Italy and France as well. She needs a licence.
If you’re selling within the UK, you can usually trade without a business license, but once you start, you need to make sure that your business is properly registered with Her Majesty’s Revenue and Customs (HMRC). Follow the steps to register your business in the UK here. This should be done at most three months after you start your business.
Sarah started her online jewellery company fashion in May 2020. Sarah will need to register her business by July 2020.
2. Have you thought of the importance of maintaining your books in a specific way?
When we say ‘bookkeeping’, we are talking about recording and tracking the financial transactions of your business. People who do this professionally, the bookkeepers, summarise this activity into reports to show how the business is doing. Your company is also legally obliged to do this. They compile all the financial data and turn them into readable reports, ready for future analysis. It is the first step in the accounting process.
People who want to start a new business sometimes overlook the importance of keeping records of every pound spent.
Here’s why proper bookkeeping is needed:
Bookkeeping helps you with your budget
Easily review your financial resources and expenses to plan and predict your future. This prediction helps you to make informed decisions and calculated risks.
Fulfil your tax obligations on time
Keep track of any information and documents needed to complete your tax filings and obligation. We can help you utilize government allowable deductions to reduce your tax bills.
Take control of your finances, pay your bills on time, and see outstanding invoices to receive payments for your products.
Many small companies don’t hire full-time accountants to work for them. Those can get expensive. Instead, small companies generally hire a bookkeeper or outsource the job.
3. Have you followed the UK Government’s rules for online selling?
To sell through e-commerce, you would need to follow a set of rules set by the UK government for online selling and distance selling, starting from before an order is placed, to after the order is placed. The rules cover the steps from how your customers can place an order, to giving the total delivery cost.
Here are some of the rules to follow that will affect your website design and copy, you can find the full list of rules here. There are special rules to follow if you sell digital services as well such as computer games, in-game purchases, TV and film, books, computer programs, or mobile phone apps.
Before your customers place an order you would need to:
- make it clear to customers they have to pay when they place an order (for example, a clear ‘pay now’ button)
- display clearly how customers can pay (eg: using Visa, Mastercard, or PayPal), and include delivery options and costs
- list the steps involved for your customer to place an order
- take steps to let customers correct errors in their order
- let customers know what languages are available for them to browse your website
- ensure your terms and conditions accessible for customers can store and reproduce, for example, they can download or print it
- make available your email address for customers to contact for customer service
- provide your VAT number (if your business is registered for VAT)
- describe what you are selling be it your products, services or digital content - the more information the better
- give the total delivery cost or how this will be calculated
After an order is placed, these rules are what you need to follow.
- confirm the contract as soon as possible and no later than when goods are delivered, a service starts or digital content is downloaded (for example, an email must be sent when content is downloaded even if it doesn’t arrive at the same time)
- provide a copy of the contract on paper, by email or another format the customer can save for future reference
- deliver the goods within 30 days, unless you’ve agreed otherwise with the customer otherwise
The rules above are not exhaustive. Do check with the UK government website here to find the most updated and complete list. These rules are there to protect the interests of the consumer really.
If you don’t follow the rules you could be made to provide the goods or services as agreed, pay compensation or be given an unlimited fine or a prison sentence. Take note that Distance selling applies for goods and not services.
4. Are you using multiple e-commerce platforms? Do you have a way to consolidate the accounting reports?
Being an e-commerce business, you would use many platforms to get the business running smoothly. However, that means that there are many transactions to keep up with once you have hit a number of sales per day.
Each platform follows its own reporting pattern. They have different formats, timelines and ways of compiling their financial data. Amazon statements have 150+ types of charges. Facebook sales run on Shopify. Stripe dumps receipts from your website in a different format altogether.
The main issue here is this: when the time comes for your company to prepare yearly reports, you will have to bring them all to a single standard. Doing this on your own is just majorly dreadful. Many e-commerce business owners would manually download transactions from PayPal and create invoices in Xero. There are other things you’d rather be doing. Get someone to process these for you in an automated fashion. We’ll take the work off your hands so that you can spend Sunday doing what you love best instead of reconciling your Amazon settlement statements.
5. Are you planning to sell in more than one country or jurisdiction?
There are different rules depending on the good or services you sell. On top of that, there are exemptions to think of. The HMRC will see to it that you register for VAT, and pay full liability arising from sales in the UK. Failure to keep up with VAT or other taxes and face penalties such as being removed from the online marketplaces that you trade through.
As mentioned in point 3, each platform you sell on will have a different way of sending you reports. When you have expanded your e-commerce business and your customers come from different countries, every line on the report demands a different Value Added Tax (VAT) in the UK and abroad.
Every country has a different set of tax rules. There are different VAT rules for UK sellers selling to UK customers, and overseas sellers based in the EU who sell to customers in the UK. There are different tax rules for each jurisdiction and each situation differs from one business to another. Once you start selling to a new country, you will definitely have to pay VAT there too.
Furthermore, when you start to expand to other countries, you have to pay VAT there too.
You would need to do the following:
a) Register for VAT in each specific country
b) Calculate and pay VAT returns to each specific tax office.
In short, things can get out of hand quickly as you scale up your e-commerce business. Having your accounts in order ensures that your business will grow productively and prevent you from hitting any penalty roadblock. You may have questions on the administrative side of your business:
- I am a dropshipper, how do I treat VAT?
- What do I charge my customers in terms of VAT?
- If I am a foreigner operating in UK, when do I register for VAT?
- I would like to sell in more countries but I’m not sure where to start?
- I sell in more than one European country, how do I prepare for Brexit?
- I operate PayPal in the US, Europe and UK, how can I record correct VAT treatment for all countries in the UK?
Drop us a chat help you out with these questions so that you can focus on growing your business. Tune in to our blog as we create more guides for business owners like yourselves who want to open and grow their e-commerce companies
Tip: You can turn to Osome for both accounting and bookkeeping services for e-commerce companies. We’ll be more than happy to help you grow your business by taking care of these administrative tasks for you.