Tax Implications for E-Commerce Businesses in the UK

Over the years, there has been a dramatic shift in the way people do their shopping and the COVID outbreak simply accelerated this trend, the trend of online shopping. As a result, more and more people are now coming up with ideas of starting an e-commerce business across the world and the United Kingdom is not an exception. While, this can be an exciting opportunity due to low entry barriers, understanding the tax implications is crucial for ensuring compliance and avoiding unexpected liabilities. So whether you are planning to sell intricate handmade soaps or some electronic devices; read the blog and know the tax implications for ecommerce businesses in the UK.

Income Tax

If you planning to start an e-commerce business as a sole trader or in a partnership, you are required to pay Income Tax on the profits your business earns as your legal obligation. The profits are considered personal income and are taxed based on varied income tax rates i.e. basic (20%), higher (40%), or additional rates (45%).

Corporation Tax

For entrepreneurs, running their e-commerce business as a limited company means that they are liable to pay the Corporation Tax. This tax will be on their taxable profits including the revenue generated from their sales and capital gains. You must pay your corporation tax within nine months and 1 day after the end of your accounting period.

Value Added Tax (VAT)

It is a key consideration for e-commerce businesses as it has a significant impact on your pricing as well as profitability. While the standard rate of VAT is 20%, some of the products such as nicotine patches and gum or mobility aids for the old aged people attract only 5% VAT. Several goods and services are exempted from this value-added tax. If your taxable turnover for the last 12 months is over £90,000, you must register for VAT. It is vital to note that non-compliance with VAT can invite severe penalties. This may include fines and interest charges.

Additionally, there are also the following types of VAT applicable to e-commerce businesses:

Import VAT-This applies to your e-commerce business if it involves importing goods from outside the UK. For example, if you are sourcing goods from India or the European Union, you have to pay the import VAT at the point of entry based on the value of your imported goods, customs duties and shipping costs.

VAT on Digital Services (OSS Scheme)-This is applicable if you are selling digital goods or services such as software downloads or streaming services to customers in the European Union.

Marketplace VAT (Reverse Charge)-Today, a lot of e-commerce businesses are using online marketplaces like Amazon or eBay for more visibility and greater reach. In such a scenario, these marketplaces collect and remit VAT on your behalf for sales to UK customers, but you must account for these transactions in your VAT return.

Tax Reliefs and Allowances

It is not that there are only taxes and no reliefs or allowances for e-commerce businesses. There are various tax reliefs and allowances that can decrease their tax liability. These are as follows:

• Annual Investment Allowance (AIA)
• Research and Development (R&D) Tax Credits
• Trading Allowance

Obviously, at first glance, it may seem to you that navigating these tax implications can be very tough, especially if you are venturing into an e-commerce business for the first time. However, with time and the guidance of an expert, you will eventually learn to sail smoothly.

As a UK-based accounting firm, CoreAdviz has a team of experienced accountants who can help you identify tax-saving opportunities, submit tax returns, and let you focus on your online store without any worries of penalties for non-compliance.