Starting An eBay Business - Accounting and Tax Tips
The internet auction site eBay has become a global phenomenon in recent years. Today, an estimated 135 million users around the world currently use the service to buy and sell things as diverse as mobile homes, jewellery, and celebrity clothes.
Its popularity has also seen the site become an obvious business opportunity for entrepreneurs. With millions of potential customers just a couple of clicks away from your products, setting up an eBay store is a cheap, easy and massively appealing way to do business online. However, as with starting up any business, there are challenges involved as well particularly when it comes to tax, accounting and the legal side of things.
Predominantly, the people that trade via eBay tend not to be aware of some of the basic - but critical administrative requirements of running a business. This is particularly the case with those eBay sellers who begin by selling odds and ends and slowly become a business. Other people that sell online regularly to subsidise their income moonlighters likewise have to be careful.
For example, at what point should the business be registered as an official company? When should the Inland Revenue be contacted? What permits are necessary? Small business owners / eBay moonlighters are also opening themselves up to risk and need to be aware of when they should be paying tax on their sales. According to Sunil Parekh, PJT Accountants, the following provides a checklist for people starting an eBay business or using it frequently to sell goods.
Things you should DO when starting an eBay business:
1. Set up accounts at wholesalers, preferably a credit account. This way you buy from the wholesaler, sell it on eBay, get paid and then pay the wholesaler 30 days later.
2. Open an account with eBay and get their free listing tool for your adverts.
3. Open a paypal account, or another online banking account so you can take payment via credit card (this will open up worldwide trade). www.paypal.com www.nochex.com, www.worldpay.co.uk, are a few examples.
4. Within three months you must contact the Inland Revenue and tell them you are starting a business. You have two options here: Either form a limited company or inform them that you are a becoming a self employer. Either choice will mean differences to your VAT and class of NI. If you go for a limited company, and you employ staff then there are employer laws to be considered such as minimum pay, holidays etc
5. Look for deductions that can offset income for example: Equipment Purchases, Business Expenses, Auto Expenses, Meal and Entertainment Expenses, Travel Expenses etc
6. Keep good records of everything that is bought and sold. This will also help in keeping track of orders.
7. Invest in an accounting software package that will help with tax, payroll and other business accounting requirements.
Things you should NOT do when starting an eBay business:
1. Never mix your eBay business account with your personal spending.
2. Do not assume eBay will track or report taxes for its sellers. It's your responsibility to make sure you comply with government regulations.
3. Don't use the cash method of accounting. As a business with inventory, you will need to use the accrual basis method of accounting. This means income and expenses are recorded as they occur, regardless of whether cash actually changes hands. A sale is entered into the books when the invoice is generated, not when the cash is collected. An expense occurs when materials are ordered.
4. Don't ignore licenses and permits. For example, if you plan to sell food over the net you WILL need to abide by health and hygiene regulations.
5. Don't misrepresent what you are selling. According to the Sales of Goods Act if you misrepresent goods you are liable for a whole range of penalties.
6. Don't bury your head in the sand. If you have an increase of income it is your responsibility to put on the tax. If you expect your income to exceed £68,000 (from 1/5/2009; previously £67,000) you must also register for VAT.
7. Don't think that you can avoid paying Value Added Tax if you are selling internationally. VAT applies if you are selling goods throughout the EU. It is also likely that you will have to get an export permit and register with the Customs and Excise for international trading.
About the Author
Written by Simon Smith, General Manager, MYOB
MYOB is a global provider of solutions that liberate business owners and accountants from the burden of day to day administration, empowering them to achieve business success. MYOB develops and delivers award-winning software, services and support for more than 500,000 businesses and over 10,000 accounting practices worldwide.
