Wednesday, 10 September 2014

Here is a list of the questions I most commonly encounter on the Ebay business board and their answers.
The answers come from my personal experience and from others on the board : this page is also now in use on Mumsnet and Money Saving Expert pages - with my full consent.
A pinned thread would be nice but they are hard to keep up to date, this is the next best thing.
If you spot any real clangers, let me know and I will update

Last updated 3rd February 2014

No. Question Answer
1 Do I have to register with the Revenue? If you are selling your own belongings bought for your own use and surplus to requirements, NO.
If you are buying stuff to sell, YES
1.1 Tax Return Dates Tax returns demand letters for 2013/14 will be issued in early April. The deadline will be 31 January 2015 to file online, paper deadline is 31 October 2014.
Paper tax returns are no longer routinely issued, everybody is meant to file online.
If you started your business after 6 April 2013 your first return will be 2013/2014, due January 2015.
1.2 Submitting a return If you have been issued with a Self Assessment Return, you have to submit it - even if all the numbers are zeroes.
The very best way is online - the system leads you through which boxes to fill in, adds it up and tells you what you owe, automatically. It can cope with mixed employment, self employment, capital gains and savings.
Getting your codes for that takes about two weeks.
Completing the form takes a matter of minutes.
1.3 Late filing penalty The late filing penalty regime is onerous. It starts at £100 and rises by £10 every day until you submit and pay, regardless of how little tax you owe. Penalty interest of up to 100 percent of the tax is charged on top of the penalties.
If you are owed a refund, you are a fool to leave it late.
If you do not file your return on time, the penalties and interest quickly clock up!
1.4 Where do I get a paper return? Either from your tax office or you can download and print the whole thing out here sa100.pdf
For reasons best known to HMRC, the system to register to file a return online is still based on posted letters and takes several weeks. Give yourself leeway
2 Am I exempt as a "Hobby Seller" This is a term I have only come across on the Ebay boards.
It does not appear anywhere on the HMRC website.
Yes, the Revenue don't want everybody to be registered as self employed, but if you are buying on a regular basis, even on a small scale, you are trading.
Guidance on this can be found here ; Selling Examples
On the other hand, they will deregister self employed people who persistently make a tax loss to offset against their PAYE job - see here
3 How do I register ? Download and fill out this form cwf1.pdf
4 How much tax will I pay? If you have a PAYE job already, it is likely that your Personal allowance has already been used so you will be taxed on all your Ebay profits at your top rate, be that basic or higher rate.
The rates and allowances are here www.hmrc.gov.uk/rates/it.htm
4.1 What about tax credits? Tax credits are an excellent system for the self employed. Do your accounts every six months, estimate your earnings upwards and your hours downwards. That way if there are adjustments they are in your favour.
5 What about NI? Self employed people pay Class 2 at a flat rate (unless they earn below the limit) which gives state pension entitlement. This is "stamp" and is best paid quarterly or (from July 2011, half yearly) by direct debit.
They also pay Class 4 which basically just more tax.
The rates and allowances are here www.hmrc.gov.uk/rates/nic.htm
NB : since the shambles of the abolition of the 10p tax band, Tax and NI limits are not the same. Be warned if you are not using the HMRC RTI Basic Tools to do your payroll and be VERY WARNED if you are a director of a limited company playing the dividend game.
5.1 NI extra

NI used to work on a system that there was an upper limit of weekly earnings,
however since 2006/07 this has been abolished, but the rate drops to 2% for high earnings on both Class 1 (PAYE) and Class 4 (self employment).
There is case law of highly paid salaried people getting all their SA NI for 6 years back.
If you have a full time job, check your total NI bill.

6 What about VAT? You do not have to register for VAT until you reach the threshold.
The current thresholds can be found here VAT Thresholds - prior years
7 Do I have to charge VAT? If you are not VAT registered, it is an offence to charge VAT. You are deemed to have stolen from the tax man.
If you are VAT registered you have to charge VAT. Same logic applies.
If you are selling to the general public and have a small business, not being VAT registered has its advantages.
If your turnover is nearing the limit, SEE AN ACCOUNTANT.
7.01 What about postage? If you are VAT registered, you have to charge VAT on post and packing.
Here are the rules : VAT on P&P
7.05 What effect will VAT registration have on my profit?

20% VAT figures

Not VAT
registered

VAT
registered

Sale price : goods

100.00

83.33

P&P : goods

10.00

8.33

Total turnover : net

110.00

91.67

VAT on turnover

18.33

Total turnover

110.00

110.00

Cost of item : goods

42.00

35.00

Postage cost

5.00

5.00

P&P materials

3.00

2.50

Cost of sales : net

50.00

42.50

VAT on cost of sales

7.50

Total Cost of sales

50.00

50.00

Gross profit

60.00

49.17

Overheads:
Phone, stationery, advertising web etc

15.00

12.50

Fuel, vehicle costs etc

25.00

20.83

Accountants, legal etc

15.00

12.50

VAT on overheads

9.17

Net Profit

5.00

3.34

VAT to pay over

1.66

7.06 VAT on second hand goods There are regularly people on Ebay and elsewhere complaining about VAT on second hand goods.
So long as an item is being sold by a VAT registered trader, they will have to charge the correct rate of VAT on it.
If you buy a "new item" in a shop, it has already been bought and sold several times by the wholesale chain.
The same principle applies to a slightly or much older item.
7.1 Should I use the Flat Rate Scheme? The VAT Flat rate scheme is a simplified accounting system for small (under £230,000 turnover) businesses.
In it you do not account for VAT on purchases at all. You merely pay a proportion of your turnover to the VAT people.
Your VAT invoices will look the same to customers but costs are not accounted for individually
(for VAT - note that they still are for tax.....)
The HMRC manual for the flat rate scheme is here
VAT Flat Rate Scheme

Important points:
You can be removed from the scheme if HMRC deem that you have gained "unfair advantage" - unfair to them that is!!
You have to check annually whether the rate you are applying is still correct as HMRC change the classifications regularly.
If your scheme classification is not obvious (which is the case for many internet businesses) you have to justify your choice of scheme and can be forced to change it by HMRC
If they think you fiddled your rate, you will be penalised.
7.2 So... should I? My personal opinion is no.
You cannot claim back the vat on specific big purchases up to £2,000 per item. It is inflexible and my suspicion has always been that HMRC promote it because they have less checking to do and they get more money.
8 What is turnover? Turnover is the amount your item sells for plus the amount of postage you charge.
It is NOT the amount you receive net of paypal.
9 What is "cost of sale"? The cost of purchasing the item + listing and FVF fees + paypal fees + postage paid + packaging costs
9.1 extra

I have been asked for my views on what should go in here.
Possibly the best split is the "direct" "indirect" split
Direct costs are directly related to your sales. If sales go down they go down.
For an internet trader, that means listing and FVF fees, packaging, postage, goods purchases, fuel to deliver / collect, wages time taken to pack sales.
but see 11.1

10 What is Gross profit? Turnover less cost of sale
11 What are allowable overheads? Whatever you can justify to the tax man as having been incurred in the course of your business.
11.1 extra And here's where it gets fun. What is an allowable expense?
I have tried as far as possible to keep this page as a factual reference point for anybody to access and place some reliance on.
But when it comes to allowable overheads it comes down to the length of pieces of string.
I'm into tax management/planning/avoidance (all legal) and against evasion (illegal)
but the line between legal and illegal is made of elastic and I can dig my heels in hard.
If I thought the tax system was fair I would not play the qualified games but it isn't so I do.
Small businesses are expected to jump through the same hoops as large without the resources. The least their advisers can do is make the hoops as wide as possible.
If you think what I say is valid, check your business circumstances with your accountant.
I know nothing about your businesses so cannot give specific advice
11.2 Allowable overheads - the creative version
Premises costs Gas, electric, phone, internet : the extra cost of working from home rather than elsewhere
Premises costs I do not claim for rates, water rates etc because they are not affected by the use of the property
Premises Rent - if you rent a unit, those costs are allowable
Vehicle Mileage at up to 45p per mile; if you use the car a lot outside the business.
If you are using mileage claims, keep an accurate diary of when, where and why you go.
The mileage allowance is designed to cover all the costs of using your own car for business.
So if you claim mileage you do not claim fuel and repairs.

If it's essential for the business, most costs except for purchase are allowed.
If you buy a vehicle as an asset of the business then you have to account for private mileage.
Insurance An essential cost and entirely deductible
Office Consumables for all stationery and computer equipment.
Most capital items are now included within the Annual Investment Allowance - see below
Wages If you employ people (legally) their wages plus their ERS NI is a cost.
If they are self employed, ask for their UTR and a letter confirming that they do their own tax, showing their UTR, NI number and date of birth.
Bank charges Pretty self explanatory but don't push it on overdraft fees 'cos you took out too much cash.
Travel and Subsistence

Hotels and meals away from home.
The ultimate flexible area.
I got away with a late night Chinese from round the corner (for a client) on the basis that if the nice Revenue lady had not allowed it (£18) , from then on there would be extra night in the hotel (£100).
It all comes down to why you were there rather than at home.
I'm a great one for business planning meetings at very nice restaurants.

Entertainment No longer allowable unless directly related to increasing turnover and even then depends on the mood of the individual officer.
Except for staff entertaining where the allowance (£50/head) is more than most bosses allow.
Bad debts Have to be over 6 months old, proven that you chased them and proven unrecoverable. If by chance the money later appears, you have to add it back in.
11.3 Depreciation / Writing down allowances A business is entitled to depreciate its fixed assets at whatever rate is appropriate to the nature of the asset and business.
Fork lift trucks can be going strong at 20 years, wireless routers are less long term.
HMRC consider depreciation (in all its creativity) to be a non allowable expense.
They used to use WDA's (writing down allowances) but from 2007/08 there is a whole new system, which technically gives each business a £50,000 allowance per year for capital items.
In the real world for all of us, that means laptops, franking machines, sewing machines etc are written off in the year of purchase.
11.31 Writing down allowances I was going to write a whole section on this but frankly if you are going to be buying a lot of equipment, talk to your accountant about the best way to treat it.
Also have a look at this site which is the mortal remains of Business Link
11.4 What is net profit? This is the one that really matters because for a sole trader it's your taxable income.
Gross profit - overheads = taxable net profit
11.41 What about Partnerships? A partnership is a sole trader business where there are two or more proprietors.
The net profit is divided between the partners according to the profit sharing ratio.
The accounts are identical to those of sole trader right down to the proprietor's account in the balance sheet.
Each partner has drawings and capital introduced and profit share.
The principle that cash drawn out does not equal taxable profit is the same.
If you are thinking of setting up a partnership SEE AN ACCOUNTANT.
:-)
12 How should I keep my records? TIDILY !!
12.1 No really... Every accountant likes things their own way so these are my personal views - BUT - I have been preparing small business records from carrier bags full of receipts for over 20 years.
Get a lever arch file, some plastic wallets and some unmarked file dividers.
Sales invoices - in strict date order, newest on top in one section.
Purchase invoices - ditto. Small receipts into a plastic wallet each month filed neatly in another section.
Bank statements - Newest on top with business transactions clearly marked.
Correspondence - with the Revenue etc, again in date order, newest on top in another section.
If you have a lot of transactions then monthly dividers and separate files will be needed but the principle is the same.

And since I started writing this page, several years ago, I am a convert to PDF, photo / PDF, PDF/cloud - retreivable but not in paper form...
12.15 Here's what HMRC say This link is to the HMRC's current suggestions for what to keep and how long for.
HMRC Keeping records
12.2 Do I need an accountant? I'm biased but would always say : Yes.
We know methods, tricks and systems than can save you more than we charge.
If you really want to save on accountants fees, summarise all of the records in 12.1 into a spreadsheet.
Three pages, one for sales, one for purchases, one a summary of all of it into a set of accounts / tax calculation.
Accountants who only have to do the fun stuff charge less.
12.3 How do I choose an accountant? Not from the yellow pages.
Not somebody who you meet on the internet (that includes me).
The best accountant for you will be local and you will find them by recommendation.
Ask people you know and like / trust who are self employed who they use.
That will include your decorator, the corner shop, the car mechanic, the guys at the computer shop etc etc
Go and meet the accountant face to face, or phone them. E-mail will not do. You have to have a relationship based on trust with this person and I cannot tell if people are lying in an e-mail but usually can face to face.
They should have experience of your type of business - both internet and product.
You should get a good feeling about the meeting.
If they give you the creeps walk away. There are lots of us.
The accountant is going to find out a great deal about you over the years.
If it works well they are not just the tax return people but also business development advisers - they have seen lots of mistakes you dread thinking about!!
If it starts to go wrong, work out why and then switch.
12.4 How much should I pay?

How long is a piece of string?
For a basic sole trader tax return, from tidy records and a single PAYE, around the £300 mark
Every extra service will cost more BUT saves you having to do it.
Agree fees in advance - not just hourly rates (£350 per hour for a partner in a firm is not OTT) but per job eg VAT return, CT return, PAYE returns.

12.5 Qualified or not qualified? I would suggest qualified - but I'm biased.
There are a lot of dodgy letters people make up.
The valid accountancy qualifications are those recognised by the CCAB
listed here www.ccab.org.uk/
Bookkeepers may well be : AAT (or MAAT) Association of Accounting Technicians
Tax bods may be members of The Chartered institute of Taxation. www.tax.org.uk/
But it has to be said that there are dodgy qualified accountants as well as dodgy everything else. If you feel it's not going well, move on.
Since I started writing this page I've left the ACCA and joined a little group called ICPA : but to join them I had to prove many years membership of a CCAB body so they, in my book, count as legit!
:-)
13 What goes where on my accounts? For a sole trader it is only necessary to have a Profit and Loss account.
But when your business starts to grow and definitely once you are VAT registered, you need a Balance Sheet as well.
The basic layout is as follows:
Profit and loss account for the year to 31 March 2014
(all figures ex VAT if registered)
Description

Debit

Credit

Turnover (goods plus postage billed)

10,000

Cost of Sales

5,250

less Stock bought but not sold

( 250)

Other direct costs (ebay, postage)

1,000

Gross Profit

4,000

Overheads
Office, accountancy, vehicle, insurance etc

2,000

Net profit - that you will be taxed on

2,000


and then
Balance sheet as at 31 March 2014
Description Current Year

Prior year

Fixed assets cost - eg PC and cameras

1,500

1,000

Depreciation (25% reducing balance is easy)

703

437

Fixed assets value

797

563

Current assets

Stock bought but not sold

250

100

Bank account, money owed by customers

1,250

900

Current Liabilities

Bank overdraft, money owed to suppliers

1,250

850

VAT and PAYE due

200

150

Net assets

847

563

.
Proprietor's account
Profit from prior years

563

400

Profit from this year

2,000

1,500

Capital introduced - money you have lent the business

3,000

0

Drawings - what you've taken out to live on

4,716

1,337

Carried forward

847

563

These are dummy figures pulled out of my head but they add up and show the principles.
The main thing to notice is that cash you lend the business to start it up or expand it and cash you draw out to live on are NOT the same as taxable net profits.

14 How do I value my stock?

Stock is technically valued at "the lower of cost or net realisable value"
ie what you could reasonably expect to sell it for
eg old PC games when state of the art cost you £40, sold for £60 but since the new one came out, sell for £20. Stock value is £20.
If you buy raw materials and make them up into a product, cost is easiest for the small business.
Wastage : this varies between industries and businesses. You need an adviser who has seen your actual business.
Obsolete / theft etc write off : have a code in your nominal / cashbook within overheads for write offs - only if you have already taken the stock into your accounts.
But really this is one area where you need to see your own accountant.

15 Sole Trader, Partnership or Ltd Co? If you start a business, you automatically become a self employed sole trader.
You can call it pretty much what you like eg John Smith t/a (trading as) TatFromtheLoft.
If you have a business with another person, eg your other half, it's best to register it as a "Partnership" so that you can share the tax burden between you.
This does not have to be 50:50, it depends on the nature of the business and any other sources of income - 80:20 is a common way to make use of tax bands.
16 Or Ltd Co. The next level is to register as a limited company.
The main benefit of this is that your liability to the business is limited to the share capital : ie your house is not at risk if it all goes pear shaped.
There are also distinct tax advantages once your turnover and profits get going.
Have a look at the Companies House Website for a start New Company Registration
There are restrictions on the names of Ltd Companies, detailed here Company Names
17 Import VAT and Duty These are NOT the same thing.
Duty is charged on all goods imported into the UK at rates determined by the tariff code. Import Tariff Codes
On many items the duty rate is Zero.
You can check here : Online version of the Tariff
Entirely separately, VAT is chargeable on goods imported to the UK.
The import VAT is based on the value of the goods.
Clearance charges also tend to be levied by the courier for processing the parcels that Customs pick.
Technically you should account for all import VAT but on small items in the post, if you don't get picked, thank your lucky stars.
My address has been flagged on the HMRC system and I get hit every time now!
18 General Business Advice This page is primarily an accounts resource BUT there is still a lot of valuable information on the Business Link website that I had to include it here.
DSR, E commerce rules, websites, spam, you name it.
All updated as the legislation changes.
Business Link is now managed by HMRC so the information is no longer as unbiased but still utterly reliable.
more to follow

This is the twenty seventh version of this page, spread over eight years. I will add to it as I think of things and please feel free to suggest extra bits....

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