Save Money By Understanding Your Amazon FBA Seller UK Tax Obligations – A Beginner's Q&A
By the end of this article, you’re going to be able to figure out whether you’re giving your hard earned money to the UK Government. Keep reading if you want to find out what you can do to keep more money in your back pocket.
When sellers find out I'm an Accountant the topic always invariably shifts to taxes. I never cease to be amazed at how little thought owners pay to this fundamental aspect of their business.
It’s like people want to donate their hard earned money to the Government.
A little bit of tax knowledge can literally be the difference between kicking back on a white sandy beach in Barbados, working on your tan and sipping on a Mojito or being called in for an audit by the taxman. The latter being more akin to going to the doctor for a colonoscopy.
Where, just like a doctor, the tax man get’s to know you intimately, however, there are no health benefits from this examination!
What This Article Is About
This article will help new UK Amazon sellers understand their UK taxation obligations as an Amazon seller and learn ways how you can reduce your amount of tax payable in your VAT & income tax return.
If you want to find out the exact accounting tools and software that I use to run my business check my previous blog post here.
This is specifically designed for UK Amazon sellers operating their business through a UK company legal structure. For those of you wanting to know why I recommend that every seller must operate their business through a company structure check my article here.
This information will assist you with understanding how to complete your VAT & Company tax return lodgements with HMRC – the UK’s taxation body.
I’ve compiled a list of the most common questions I have received from my clients along with a general response.
This will article leave you with the confidence that you’re headed towards an appointment with the beaches of Barbados rather than a colonoscopy from the Taxman.
There’s no prizes for guessing what I’d prefer…
VAT – Value Added Tax
Q: What is VAT?
A: VAT stands for value added tax. VAT is a sales tax that is taxed at a rate of 20% on eligible taxable items. At the end of each month, Amazon will issue you with a trading invoice that details your taxable items. Listing all the VAT paid on fulfillment costs and VAT collected on Amazon sales.
Q: Do I have to register for VAT?
A: Amazon business VAT registration is not required until your business’ taxable sales (or turnover) is above £82,000 (this is the threshold at the date of posting of this article). Up until this point seller VAT registration is not mandatory.
VAT registration is not required until your business’ taxable sales (or turnover) is above £82,000.
The general rule with VAT is that VAT registered sellers must pay VAT to the UK Government department HMRC on any sales made. However, sellers are allowed to claim back any VAT paid on expenses associated with those sales.
This means that registered VAT sellers have to lodge a VAT return declaring the amount payable or refundable from HMRC. This return is generally submitted quarterly to HMRC.
Q: How do you minimise your VAT payable?
A: The easiest way for you to minimise your VAT payable is by ensuring that you keep a record of all business expenses that you have paid which include VAT.
Every receipt that you fail to include is literally you giving away your money to the government!
Here’s an example:
- Jo buys a toy for £12 including VAT from Tesco
- Jo then sells the toy on Amazon for £24 Including VAT
If Joe kept a record of the VAT paid on the purchase of his toy he would be able to claim back the VAT paid on the purchase of the toy.
The VAT liability Jo would have to pay HMRC on this sale would be £2.
For those who love maths, this is calculated as (£24-£24/1.2 ) – (£12-£12/1.2) I.e VAT received from the sale of the item less VAT paid on the purchase of the item.
As you can Jo is able to reclaim the VAT paid on the purchase price of his Tesco toy. If Joe did not keep track of the VAT paid on his Toy his VAT liability would be £4.
Again, the maths is (£24-£24/1.2 )!
Some other general handy VAT tips:
- Sellers should be aware that all Amazon UK sales prices are all VAT inclusive prices. This means the VAT portion of the sale is money owed to HMRC if you are registered for VAT.
- For sellers not registered for VAT you are able to keep all proceeds from the sale of your items.
- Sellers are also able to claim back any VAT paid on any Amazon fulfilment charges, supply purchases i.e. labels, ink, masking tape and other business related expenses. So once again if you don’t keep records of what you’re spending you are simply donating extra VAT to the taxman!
Q: Who pays Income tax?
A: Any UK seller who makes a profit selling on Amazon has a legal obligation to pay income tax. In the UK the company tax rate is 20% on all profits. However, in the UK your personal tax rate can be as high as 45%.
As you can see, through a simple change to a company legal you can save yourself having to pay tax. This yet is another reason why I believe every seller should operate through a company structure.
Once a year as a seller you have an obligation to lodge a Corporation tax return with HMRC declaring your profits. Profit is calculated as revenue (in this case amazon sales) less allowable deductions.
Q: What are tax deductions?
A: Tax deductions are expenses that are allowed to be deducted from your revenue. The general rule of thumb surrounding allowable deductions is that any expenses directly incurred in earning your revenue are deductible
Q: Why are tax deductions so important?
A: If your tax deductions are greater than your income/revenue it means you have no taxable profits to be taxed.
Having the knowledge to exploit legal loopholes or to even know what are acceptable taxable deductions is one of the key reasons why tax accountants exist. A good accountant will save you money and is definitely an investment worth its weight in gold.
Q: How do I calculate tax payable?
A: Revenue – expenses (i.e. allowable deductions) = Taxable Profits
Taxable Profit * 20% = Tax payable.
Q: Why should I care about my Tax?
A: There are the obvious legal ramifications of incorrect tax declarations such as fines, penalties and/or possible jail time.
However, if you’re not minimising your tax then you’re simply donating your hard-earned money to the government. You’re forcing yourself to work harder and longer for nothing.
Tax minimisation through ensuring you claim all relevant deductions is one of the easiest legal ways to reduce the amount of taxes you pay. This allows you to have more money to spend on yourself.
Q: Where can I lodge my tax returns and read up further about UK Tax obligations?
A: Taxation revenue is dealt with by HMRC.
Corporation Tax: https://www.gov.uk/topic/business-tax/corporation-tax
Let’s recap, the two main taxes encountered by Amazon sellers operating their business through a Company are VAT and Corporation Tax. VAT registration is only mandatory for sellers with gross annual sales greater than £82,000.
All companies must submit an income tax return annually and the company UK corporate tax rate is 20% on all taxable profits.
The amount payable of these two taxes payable can be reduced if you ensure that you claim all allowable taxable deductions.
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