Selling on Amazon UK - Tax Implications & Accounting Mistakes

A large number of new sellers join Amazon UK every year to start selling on Amazon. Of these, a major portion does not survive past year one. Poor accounting and bookkeeping practices feature highly as a cause for the businesses to fail. They dive into huge losses due to Tax Implications & Accounting Mistakes done on a continuous basis due to less or no knowledge about UK Country Tax Law.

Some of the most common Tax Implications & Accounting mistakes Amazon UK sellers make are as follows:

1. Maintaining no demarcation between business and personal

   One of the major rules of tidy bookkeeping is to keep business and personal transactions distinct in separate accounts. Business owners have often get befuddled by paying for their new inventory order from their personal account, or by paying miscellaneous personal bills with their business credit card.

   A key efficiency enhancement factor for small business bookkeeping is to be able to link up business bank accounts through automated accounting software. This ensures transactions are automatically uploaded to accounting software.

   There should be clear demarcation between business and personal dealings, records going through to accounting software will be inaccurate.

2. Procrastinating

   Dilly dallying and excuses mean that critical things are missed out, seller may fail to see vital information in a timely manner or the business may find itself in complete mess and disorganized when it comes to crucial times, such as tax season.

   The best remedy for this is to go for end to end automation, including invoicing, the recording of transactions and accounts payable. There are a number of good cloud-based accounting softwares available in the market. These have integrations with other apps such as invoicing and time tracking. Reconciliation of books should be done as frequently as once every week.

3. Dependence on armchair accountancy

   Taking all of accounting advice from a website is attributed as armchair accountancy. Information gathered from internet and other public domains can help only to a certain extent and cannot be fully relied upon for authenticity. Advice from friends and well wishers can also be helpful only to a limited extent and should be used in conjunction with own knowledge.

   Own knowledge should be built by reading authentic material and relevant portals online. All these should be treated as informational only and not specific advice for business. Authentic advice can also be taken from qualified accountants or consultants.

   Following some basic advice online and using automated accounting software should be fine in day to day dealings, but it’s also possible important things that need to dealt with are missed out, such as taxes that must be paid or eligible deductions. It’s always better to get some professional advice wherever possible, at least in the beginning or at the time of filing taxes.

4. Not keeping track of expenses

   Complete digitisation means there can be items that are not automatically recorded. Any kind of cash purchases for the business needs to be recorded without fail.

   As an example, company staff or vendors are taken out for a coffee in the course of business, paying with cash. That would be a tax deductible expense which should be recorded.

   The way to ensure records are always accurate is to avoid using cash if at all possible. Effort should be made to use business credit or debit cards, or electronic methods of payment.

5. Not understanding critical parameters

   It is important to stay informed about the financial health of business to be able to create a successful business. There needs to be both a macro and micro understanding of what’s going on in the business so that there aren’t any surprises in terms of product profitability, or that there is loss of sales because of being out of stock on popular items.

   One of the biggest mistakes Amazon sellers commit is not factoring in Amazon fees properly when products are sourced and priced. It is important to know exactly what net margin is going to be for each product that is being sold — fees are frequently the major chunk of expense of the Amazon seller. Same should be calculated for each product because fees can work out to be up to 45-55%, (although around 25% is standard).

   It is important to know which key metrics (such as balance sheets and profit & loss statement, cost sheet, physical performance, cash flows) should be familiarised with and get acquainted with these numbers often. There should be focus on looking at cash flow reports in details, accounts receivable and payable, balance sheet, and income statement. Amazon dashboard is a very useful tool which can help with numbers.

   The Amazon sellers should develop a regular habit of going over the financial health of business with critical financial and physical parameters. Identifying key risks and challenges and finding ways to mitigate them early form a hallmark of the most successful businesses.

6. Unplanned and out of record expenses

   Disorganized expenses can be a big blow for any business owner. It is important to know exactly what amount of money is being spent on which activity. Missing on little things can build up and lead to huge losses which a seller may realize afterwards.

   Expenses can become disorganized when:

   • Items are purchased outside budget, even more so when the same is done by paying cash.
   • There is no clear demarcation between business and personal expenditure.
   • Micromanagement is needed in the matters of expenses and attention should be paid to every little thing that is being paid for (software subscriptions etc).

   Efforts should be made to automate as much as possible, avoid cash and reconcile frequently. One of the key features of accounting software is the ability to automatically categorize expenses. This way classification can be done immediately on different spender categories. Out of proportion items can be highlighted.

7. Tax related mistakes

   The seller should be fully prepared for tax time. There should be complete transparency and business and transactional details should be made available to accounts team.

   

   A business owner lacking enough expertise on dealing taxes can also try the DIY route for tax filing. The seller needs to take care of few important factors like:

   • Deductions should not be claimed without original tax receipts.
   • To avoid the risk of over or under-reporting of income, there should be complete control over numbers.
   • Sales tax is an important factor to consider.
   • While going for the DIY route, the business owner should be aware of all the deductions.

   In short, an Amazon seller should converse with a small business tax professional at least once if not regularly.

8. Not Adjusting For a Dynamic Tax Nexus Position

   For a seller account having a nexus tax position before, tax nexus situation may well change with the transfer to another owner. This may leave the new owner exposed to uncollected and unremitted sales taxes. Any updates to sales tax nexus should be made immediately when transfer of ownership happens. This helps to avoid accrued tax liabilities.

9. Inefficient Accounting for Liabilities From Uncollected/Remitted State Tax & Customs Duties

   Amazon sellers need to get their act together regarding state taxes. Amazon’s FBA program’s nexus tax implications are not well understood. This has lead to a lot of sellers not collecting and remitting sales tax in all states where they have generated tax nexus. The best way out is to get a tax attorney who can evaluate a target seller business before the sale so as to avoid a costly future bill for back taxes.

   Additionally, if the current Amazon seller imports overseas products, it is advisable to be aware of the import duties paid in the past two years on the account.

Accountants for Amazon seller central UK businesses

For a small business or in initial phase of trading an individual may not an accountant. Employing an accountant may incur unnecessary expenses. A small trader simply needs to keep track of day to day spending and income. Many small traders also utilize excel to keep track of cash flows in terms of expenses and income. Additionally, there are accounting software such as Sage or QuickBooks available in the market.

A medium to large business can also employ a competent accountant who has knowledge of Commerce space and specifically the distance selling, online and international online sales regulations of both the UK and the EU.

Conclusions

Running an Amazon seller business is a full time business activity. Prospective buyers often view the buying of an existing Amazon account as a smart way to get into e-commerce, or as a method to generate decent cash flow. It is important to note that Amazon-specific due diligence is required prior to purchase. Key is to develop as a quick subject matter expertise on the Amazon marketplace. This is necessary to ensure that there aren’t pricey mistakes early.

It is important to keep a tap on the enlisted parameters that need and ensure that the business owner does not miss out on any.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.