Online businesses operating in the UK are subject to various taxes, just like traditional brick-and-mortar businesses. The main taxes that apply to online businesses in the UK are:
Income Tax
Online businesses must pay income tax on their profits, just like any other business. This includes sole traders, partnerships, and limited companies.
The income tax rates in the 2022/23 tax year are:
- Basic Rate: 20% on taxable income between £12,571 and £50,270
- Higher Rate: 40% on taxable income between £50,271 and £150,000
- Additional Rate: 45% on taxable income over £150,000
Limited companies pay Corporation Tax on company profits, currently at 19%
Businesses must file annual self-assessment tax returns reporting their income and expenses
Value Added Tax (VAT)
- VAT is charged on most goods and services in the UK
- Online businesses must register for VAT if their taxable turnover exceeds £85,000 per year
- The standard VAT rate is 20%, reduced rates of 5% and 0% apply to some goods and services
- Online businesses must collect and pay VAT on sales made to UK customers
- VAT returns must be filed with HMRC every 3 months
Business Rates
- Business rates are a tax on non-domestic properties like offices, warehouses, shops etc.
- Online businesses with a physical premises in the UK will need to pay business rates
- The rates are calculated based on the property’s estimated rental value
- Some small businesses can apply for Small Business Rate Relief
Customs Duties & Import VAT
If an online retailer imports goods from outside the UK to sell, import duties and VAT may apply
Duty rates vary depending on the type of goods being imported
Online sellers must register for an EORI number and follow customs procedures
Employment Taxes
If an online business hires employees, they must pay Pay As You Earn (PAYE) income tax and National Insurance contributions (NICs)
PAYE and NICs are deducted from employees’ wages through the payroll
Employers also pay NICs on top of employees’ wages
In summary, the main taxes online businesses operating in the UK must comply with are:
- Income Tax or Corporation Tax on profits
- VAT on sales to UK customers
- Business Rates on premises
- Customs duties & VAT on imported goods
- PAYE and NICs if employing staff
Proper record keeping and using an accountant can help online businesses meet their tax obligations correctly and efficiently. The tax rules for online sellers and other digital businesses are essentially the same as any other UK company. Staying compliant is important to avoid penalties from HMRC.
Tax Registration
To start paying taxes, online businesses need to register with HMRC:
- Sole traders – Register for Self-Assessment to file income tax returns
- Partnerships – Register for Self-Assessment, partners pay income tax on share of profits
- Limited company – Register for Corporation Tax within 3 months of starting up
- VAT – Register for VAT when turnover exceeds £85,000 per year
- PAYE – Register as an employer with HMRC before taking on staff
Registration can be done online via the Government Gateway. Businesses will receive a Unique Taxpayer Reference number from HMRC upon registering.
Record Keeping
Good record keeping makes tax compliance much easier. Online businesses should keep records of:
- Business income and expenses
- Invoices, receipts, bank statements
- Assets purchased and sold
- Stock and inventory records
- Payroll and employee info if employing staff
- VAT records of sales and purchases
Records can be kept digitally or on paper but should be kept secure for a minimum of 6 years. Clear, organised records will help when filing tax returns and dealing with any HMRC audits or inquiries.
Using Accounting Software
Accounting software can automate and simplify tax compliance:
- Link bank accounts to import transactions
- Generate invoices and track sales
- Log expenses and receipts
- Calculate VAT returns
- Generate reports for tax returns
- Payroll functionality for PAYE/NICs
Popular options include Xero, QuickBooks, Sage, Gusto, Crunch and KashFlow. Choosing the right software can save online businesses time on bookkeeping and make tax filing less painful.
Filing Deadlines
Online businesses must adhere to deadlines for filing returns and making tax payments:
| Tax Type | Deadline |
|---|---|
| Self-Assessment Income Tax | 31 Jan – File 31 Jan – Pay balance 31 Jul – 2nd payment |
| Corporation Tax | 9 months after year-end Pay in installments |
| VAT | File every 3 months Pay VAT due |
| PAYE/NICs | Report payroll information Pay on time |
Missed deadlines can lead to automatic penalties from HMRC. Getting a reputable accountant can help ensure all tax obligations are met on time.
Hiring an Accountant
An accountant can advise online businesses on:
- Registering for taxes
- Keeping proper records
- Using accounting software
- Preparing and filing returns
- Minimizing tax liability
- Navigating HMRC inquiries and audits
The cost of hiring an accountant may be tax deductible as a business expense. For small online businesses, the time savings and peace of mind can make the cost worthwhile.
Tax Deductions and Allowances
There are various deductions and capital allowances that can reduce taxable income and VAT liability for online sellers:
- Business expenses – e.g. inventory, packaging, advertising, software, phone/internet, insurance, bank fees
- Office expenses – e.g. rent, utilities, stationery
- Vehicle expenses – e.g. fuel, maintenance, insurance (portion of personal vehicle used for business)
- Capital allowances – portion of cost of equipment, machinery, vehicles
- Research & development – costs of developing new products/services
- Employee costs – wages, pension contributions, training, uniforms
- Freelancer costs – fees paid to contractors
- Accountancy fees
Claiming all deductible expenses and allowances can optimize taxes for online businesses.
Keeping receipts and invoices is key.
eCommerce Sales Tax Regulations
Online retailers selling to customers in the UK and EU must charge VAT at the appropriate rate based on:
- Where the seller is located – e.g UK seller charges 20% VAT on all UK sales
- Where the customer is located – e.g. UK seller charges local VAT for EU sales
This can get complex for bigger eCommerce sellers:
- May need to register for VAT in multiple EU countries
- Use tax automation software to calculate VAT by customer location
- Geo-blocking technology to restrict sales by location
- Appoint fiscal representatives to handle VAT in some EU countries
Dropshipping products from third party suppliers also has VAT implications.
Overall, online sellers must understand the sales tax regulations for their markets.
Summary Points
- Online businesses in the UK pay income tax or corporation tax, VAT, business rates and employment taxes
- Must register for the appropriate taxes with HMRC
- Keep detailed records of income, expenses, VAT on sales/purchases and payroll
- Use accounting software to simplify tax filing
- Hiring an accountant advisable for guidance and tax minimization
- Many business expenses and capital allowances can be claimed
- eCommerce sellers must charge the right VAT rate based on customer location
- Staying compliant with tax laws is crucial for any successful online business
In conclusion, online businesses have the same fundamental tax responsibilities as UK companies.
Meeting filing deadlines, using accounting tools, claiming deductions and getting expert advice can help minimize the tax burden and keep online businesses on the right side of HMRC.
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