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Individual Selling Goods Online, Legalities

Discussion in 'E-Commerce and Online Selling' started by jaguar65, Jan 7, 2007.

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  1. jaguar65

    jaguar65

    Joined:
    Jan 20, 2005
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    As an individual, when selling online through my personal website, do I need to declare anything - my shop is currently making nothing and does not exist, but I am about to set it up and want to do things correctly.
    Do I only need to declare tax once I am making more than £5000 or so per year?
  2. Devilwear

    Devilwear

    Joined:
    Apr 18, 2005
    Messages:
    1,054
    It's best to tell Inland Revenue straight away. If you don't make much then you owe them nothing but it's always best to stay safe. Phone the HMRC and they'll advise ;)
  3. Anthony

    Anthony

    Joined:
    Oct 17, 2004
    Messages:
    17,274
    If you haven't registered as self-employed already you must do this. You must register within 2 months (from memory) as soon as you start trading. You are liable to a fine if you do not register after this time.

    You will need to read the forms about whether you should pay National Insurance Contributions. In addition whether you need to pay any tax on your incomes. Each situation is different, get in contact with HMRC if you have any doubts. :)
    Ryanloop likes this.
  4. Supremetronics

    Supremetronics

    Joined:
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    as Anthony said, however im pretty sure you have to register within 3 months of starting trading
  5. accent

    accent

    Joined:
    Jan 7, 2007
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    Yes you do, another area to be aware of are the Distance Selling Regulations, which do apply to you even as a sole trader if you sell to consumers. You must comply with them, there are strict penalties if you dont. It does not apply if you ONLY sell to other businesses.

    http://www.oft.gov.uk/Business/Legal/DSR/default.htm

    HMRC are extremely helpful with tax matters and it's free advice, it's not complicated to be a sole trader and certainly nothing to worry about.

    Ensure you keep proper records though to protect both yourself and your customers. At a minimum keep a list of all money that comes in and out, from and to whom, dates and references. Preferably though you'll use basic double entry accounting to simplify things if you get audited (it happens).

    Brief yourself on self assessment tax returns too, as you'll need to complete one at the end of the tax year most likely. Be aware that your initial tax payment could be doubled, because you normally make two payments on account after your first year as a prepayment against next years tax liability. Good advice is to save 22% from everything you take from the business as personal income and put it in an ISA for example, that way your tax bill wont be a shock to the bank balance :)

    http://www.hmrc.gov.uk/sa/selfemp.htm

    One more thing, dont forget to have proper terms and conditions and if you collect user information, a privacy policy. Also, you may need to register under Data Protection. For this DONT use an agency as there are many scams where they try to charge a silly fee, ensure you are dealing with the proper government department if you need to register.

    This lot shouldnt put you off, plan it properly and it's no problem, just dont put yourself in a compromising position by missing things out :)

    Again, the above is only my personal opinion and does not constitute any legal or financial advice. It is a suggestion only.
  6. jaguar65

    jaguar65

    Joined:
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    Just to complicate matters, I am a full time student - can I still be self-employed?
  7. accent

    accent

    Joined:
    Jan 7, 2007
    Messages:
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    Yes you can.
  8. accent

    accent

    Joined:
    Jan 7, 2007
    Messages:
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    Can i suggest you visit http://www.shell-livewire.org/forums/ and maybe ask for advice there too, it's very helpful for startups.

    You need to verify the information you're given though as people can be wrong, including me, it's a long time since I was self employed and things change :)
  9. jaguar65

    jaguar65

    Joined:
    Jan 20, 2005
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    Any comments on that livewire forum? Everyone seems a little more down-to-earth here
  10. wragge11

    wragge11

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    Just post a post, worth a shot!!!
  11. jaguar65

    jaguar65

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    Jan 20, 2005
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    Yeh I've posted but no replies yet, like I said they all seem a little starry-eyed over there
  12. jaguar65

    jaguar65

    Joined:
    Jan 20, 2005
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    Just been on HMRC website, don't need to register for VAT unless I want to voluntarily to make my organisation look more credible - what do you think?
  13. Supremetronics

    Supremetronics

    Joined:
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    Voluntary VAT registration depends on what you are selling and who you are selling to. If you will be mainly be selling to businesses then it may be benificial for you to be registered. But if your selling to end users then not. Yes you may be able to claim back VAT on purchases however you will be selling to make a profit so the VAT you well have to pay will be greater than the VAT you will be claiming back. It will just increase your costs. Hence you would only really want to register if you reach the threshold.
  14. accent

    accent

    Joined:
    Jan 7, 2007
    Messages:
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    Hi, if I can just add my input to the above as it's not quite right.

    VAT is a neutral tax to a business that is registered and costs you nothing except administrative overhead, which is a cost of course. VAT accounting is not to be taken lightly I assure you!

    You make no profit and no loss from VAT. Basically if you register you are collecting a tax on behalf of the government, not paying it yourself.

    Here's an example.

    You buy a product for £x and pay 20p VAT.

    You resell the product for £x and the VAT is 30p.

    There is 10p excess VAT here, and this is then sent to HMRC to balance it out. Since you reclaim the other 20p from your original purchase, it becomes neutral.

    Your profit is in the amount NET of VAT. As you can see, this does not cost you anything at all, since you are having to charge VAT on to the customer, only a non VAT registered customer will ever actually "lose" money to VAT.

    Please feel free to ask if you require further advice on VAT, if I dont know myself or am unsure I can point you to the right place. Be absolutely sure never to mention or charge VAT in transactions if you are not registered. Doing so is a very serious offence.
  15. accent

    accent

    Joined:
    Jan 7, 2007
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    You are required to register for VAT if your turnover meets or exceeds £61,000. This will increase slightly in April.

    If you do register, find an accountant by recommendation as this will really simplify the whole process and ensure your accounts are properly kept. Assuming of course you are not an accountant!

    A book keeper may suffice, but personally I always preferred a chartered accountant as they have much more in depth knowledge of tax relief and should save you at least their fee etc. It shouldnt cost more than £600 per year to have someone look after all these affairs for you if you keep proper records.

    We prefer dealing with VAT registered businesses because it shows substance to a business. If a trade customer is not registered, we usually ask for more extensive identification.
  16. Supremetronics

    Supremetronics

    Joined:
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    1,598
    what i meant was that you buy an item for £10 inc VAT and sell for £15.

    if you are not VAT registered. you have no VAT to pay i.e. the £5 mark up is yours (not considering other costs)

    however you are registered:

    you claim back 17.5% of £10 = £1.75 (£8.25 cost price)
    and pay 17.5% on the sale price of £15 = £2.63 (rounded up) (£12.37 ex VAT sale price)

    £12.37 - £8.25 = £4.12

    so you left with £4.12 compared to £5 if you are not registered.

    hope this explains it better
  17. accent

    accent

    Joined:
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    Hmm. In your example you are absorbing part of the VAT charge to the consumer which is not how a business should operate, the math in the example is also incorrect.

    As a VAT registered business You add margin to your ex VAT price, the rest is irrelevant as it's neutral. Of course the price to a non-VAT registered consumer is higher, thats you collecting tax for the government on your margin.

    This is a maths question now :eek:

    Adding and subtracting VAT is done in a very specific way. Adding VAT is easy, subtracting it is not as obvious. See my example below:

    Lets break this down.

    An item costs £10 + VAT so:

    ----------------------------

    Actual price for VAT registered business: £10

    VAT of £1.75 would be reclaimed on the above from HMRC (input tax). See below.

    Adding a margin:

    £10 + 5 = 15 * 1.175 = £17.63 sale price.

    0.88p is VAT on your margin (passed to the government). (5*1.175)-5
    1.75 is VAT on your original price (which you reclaim). (10*1.175)-10

    The above two amounts are output taxes.

    As we can see 15+0.88+1.75 = £17.63

    I hope you're still with me here...

    Essentially, as well as collecting the VAT from the consumer for the amount you reclaimed you are also collecting additional VAT which is levied on your margin of £5. Either way you earn £5 net.

    -----------------------------

    Actual price for NON-VAT registered business: £11.75

    Adding a margin:

    £11.75 + 5 = £16.75 sale price.

    No vAT is involved and your margin is £5.

    ------------------------------

    Now here is the clincher.

    Try:

    (VAT registered company price) - (NON-VAT registered company price)

    17.63 - 16.75

    You'll get 0.88 which is precisely the amount of VAT levied on your margin as a VAT registered business which you charged on to the customer.


    -------------------------------

    Hopefully this demonstrates that VAT is completely neutral for those non-believers ;) If you're VAT registered, as well as collecting VAT to the amount you originally reclaimed, you're collecting VAT on your margin.

    Subtracting VAT is not as simple as it may appear. You cannot simply subtract 17.5% from the gross amount, the figure will be way out.

    To subtract VAT use this formula:

    (gross price x 7)/47

    Example:

    If an item costs £2.35 inc VAT - to identify the VAT element do the following:

    (2.35 x 7) / 47

    It gives 0.35 or 35p which is the VAT element.

    Reverse it by trying 2*1.175 to add the VAT again, you'll get £2.35

    :)
  18. accent

    accent

    Joined:
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    Just for fun I'l demonstrate why you dont subtract 17.5% from the gross to get a net figure. This is where you went wrong in your example. Using the same figures as my final example:

    17.5% of 2.35 = 0.41

    2.35 - 0.41 = 1.94

    So we can see, even on such a small figure, the result is way off the true figure of 2. Imagine this on figures with 5 digits...
  19. iain123

    iain123

    Joined:
    Dec 3, 2005
    Messages:
    350
    Yeah I understand how people can be mistaken on this, it can be complicated, I get taught x 7)/47 to subtract the VAT, at college, but I believe there are a few ways it can be done.
  20. MustHaveMobiles

    MustHaveMobiles Community Moderator

    Joined:
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    Messages:
    3,471

    What a great post and a concise explanation of the VAT situation. Well Done..
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