Companies that operate entirely or predominantly online face most of the same tax liabilities as more traditional businesses. But they also face some unique challenges, including with how they accept and process payments, as outlined below.
Limited companies in the UK, including those operating online, are liable for corporation tax and, if they have a turnover exceeding £85,000, VAT. If they operate out of premises used exclusively for business purposes they must pay business rates, and if they have employees, they are responsible for National Insurance payments and employers’ PAYE. This applies equally to UK-based online businesses and overseas businesses that have an online presence in the UK.
Sole traders who operate online may be less aware of their liabilities than the heads of limited companies. Self-employed individuals earning over £1000 per year must complete an annual self-assessment tax return for HMRC. This also applies if you buy and sell online as a hobby or side-line to your main job but aren’t registered as a business. If you make more than £1000 over 12 months selling goods on websites like eBay, you’ll need to fill out a return and may have to pay tax on your profits.
Making Tax Digital
The way businesses and individuals are required to fill out their returns and make payments is changing. The UK government is currently in the process of rolling out Making Tax Digital, which will require all businesses, including self-employed individuals, to keep digital accounts using compatible software. Although this is intended to make assessment and payment more straightforward and more accurate, the initial setup may prove challenging for businesses, especially those transitioning from legacy bookkeeping formats.
Additional taxes and duties
The Treasury has recently floated the idea of an online sales tax to be applied to all e-commerce businesses trading in the UK. While it’s by no means certain that this will be introduced, online retailers should expect some form of additional taxation as the e-commerce sector’s overall market share increases.
Other countries may also bring in similar online taxes, which means that international sellers will need to keep track of their obligations in different territories as well. This is in addition to the need for UK online businesses selling to customers abroad, including the EU, to be aware of customs duties and restrictions over what must be declared when sending to different regions.
As of April 2020, non-resident businesses with an online presence in the UK, or that sell to UK customers, are liable for corporation tax and VAT just like UK-based companies. This change closes certain tax loopholes and is one that business owners need to be aware of if they are registered as being based abroad.
As well as tax considerations and liabilities, online businesses face additional challenges around how they receive and process payments. Although all businesses, including bricks-and-mortar retail, are having to adapt to a profusion of new digital payment methods, e-commerce sites are, by their nature, at the forefront of an ongoing digital payment revolution.
The initial hurdle to overcome is how to seamlessly integrate your website and existing software with your chosen platform. If this isn’t well managed, the results could range from unnecessary friction and delays to payments to increased admin and even the headache of failed payments.
Online businesses also need to ensure they’re not paying too much for processing costs. Look out for hidden charges, especially those related to processing orders from overseas. These costs can add up if you want your website to accept multi-channel payments, a variety of debit and credit cards and e-wallets, or even cryptocurrencies.
Multi-channel payments mean greater convenience for the customer and increase your chances of completing a sale. Still, they can lead to logistical difficulties and higher costs if this means using multiple payment platforms. Look for an integrated platform that can manage various payment options on your behalf and offers 24/7 support if you have any difficulties.
With online payment fraud hitting record levels, the other primary concern to look out for is cybersecurity. If your payment platform isn’t 100% secure, it could cost you financially and damage your business’s reputation. Ensure your chosen partner is fully compliant with industry standards and has a high level of vigilance via such features as point-to-point encryption and tokenization.
Every online business needs to balance security considerations with customer convenience when considering whether to use two-step verification or safeguards like texting buyers a one-time passcode for them to proceed. As such measures become more commonplace, customers will become more accepting of these safeguards.
No business can afford to be complacent regarding taxes and payment processing. Operating online opens up more business opportunities but also greater liability. Staying on top of your obligations and responsibilities will help your company prosper and grow.