Tax & Business Registration for eBay Sellers!

There are many different options available for when you want to register/set-up a new eBay and/or eCommerce business, some are very simple and free while others involve a lot of paperwork and some cost.

The main options for people in the UK are:

• Registering as a sole trader (also known as being self-employed);
• Registering as a limited company;
• Registering as a business partnership (this is basically the same as being a sole trader but for multiple people).

The structure you choose will affect many things, including how and what tax you have to pay, the profit you can personally keep, the paperwork you must fill in and also your personal responsibility for the business.

With roughly ¾ of businesses in the UK having only one employee, sole trading is by far the most popular option – especially for new start-ups. This is due to the very easy registration process, simple tax rates, and little paperwork needed. Plus as a sole trader, you get to keep all the profit your business makes after you’ve paid tax!

Compare this to a limited company, which is an organisation you set up to run your business. Any profit made after paying corporation tax is shared between its shareholders.

There are also numerous legal responsibilities involved with running a limited company or being the director of a limited company;

Every financial year (which for limited companies runs from 1 April to 31 March), the company must:

• Send HMRC a Company Tax Return;
• Send Companies House an annual return;
• Put together statutory accounts – which must include a balance sheet, a profit and loss account, notes about the accounts, a director’s report and an auditor’s report.

So as you can see – there is a LOT of paperwork involved with running a limited company! You’ll almost certainly need to hire an accountant just to keep up with everything. That’s why I always suggest registering as a sole trader unless you have a very strong reason not to… and for 99%+ of people, it will be by far the best option.

Sole Trader Overview

Being a sole trader means you’re running your business as an individual (you can still hire staff though) and you have complete control over the way it’s run plus all the profit your business makes is yours to keep after you’ve paid tax.

However when running a business as a sole trader, you’re also personally responsible for any losses your business makes or any outstanding bills in the name of your business and you have to ensure you keep full records of your business’ sales and spending.

This unlimited liability basically means that there is no legal distinction between you and the business, so if it fails and you stop trading, you’ll still be responsible for any debts.

This of course shouldn’t be a problem, as for most people looking to start a low-risk business it’s very unlikely you’re going to build up big debts, but just something to be aware of.

Registering as a Sole Trader

You need to register for Self Assessment with HMRC (HM Revenue and Customs) as soon as possible after starting your business. Technically you won’t be charged a fine unless you register later than 5 October in your business’ second tax year (the tax year for sole traders is from 5 April – 6 April) but to be safe – just register straight away to avoid any potential problems.

You can register on the phone by calling HMRC’s ‘Newly Self-Employed Helpline’ on 0300 200 3504, you can register online through HMRC’s Online Services or you can print and complete the form CWF1 and send it via post to the National Insurance Contributions Office – whichever way you prefer, though online is generally easiest/quickest.

When registering you’ll need to provide some information which includes:

• Personal contact details – name, date of birth, address, telephone number, email etc.

• Business details – nature of your business, business name*, start date of your self-employment, business address and business telephone number.

• Your National Insurance Number

*You can choose to trade under your own name or you can select a business name to trade under. There are some rules as to what you can use for a business name though, as you can’t:

• Use any misleading terms such as Limited, Ltd, public limited company, plc or anything else that might mislead someone as to the structure of your company.

• Use a name that suggests a connection to a government organisation.

• Use a name too similar to an established business in the same niche/area as your business or a name too similar to a registered trademark.

To find out if a UK, European or International trademark is identical or similar to the name you’re thinking of using, you can use the search function on the Intellectual Property Office website:

Bear in mind that if you do decide to use a trading name, you still have to display your own name on any business stationery (letterheads, business cards etc.), invoices or business letters.

Once you’ve registered for Self Assessment with HMRC you’ll receive a Unique Taxpayer Reference (UTR) number which you’ll use to send your yearly tax return.

Yearly Tax Return

Completing a yearly tax return is pretty much the only paperwork you need to complete as a sole trader and it’s actually very simple and straightforward to do – as long as you’ve kept details of your business’ income and expenses, which you should of course be doing anyway.

You’ll need these records to fill in your tax return form and you may need to send these documents to HMRC if they ask for them (though they rarely do).

Unlike with an Ltd company, there are no rules on how you have to keep your records – you can keep digital records, have them as part of your accounting software or even written on paper – as long as your records are accurate, complete and legible, that’s fine!

If you’re registered for Self Assessment, HMRC will send you a letter each year (usually in April or May) asking you to send your yearly tax return for the previous year.

You’ll need to complete the main tax return form (SA100) to give basic details about yourself (name, address, straightforward income etc.) as well as any ‘supplementary pages’ to give info on other income, for example – employment income (SA102), property income (SA105) and income from self-employment.

The self-employment pages you need depend on the amount of your turnover:

• If your annual business turnover was below £77,000 then you need to complete supplementary page SA103S and if it was above £77,000 then you need supplementary page SA103F.

Now I know this may seem a little complicated and confusing but trust me, it’s not! The forms come with all the guidance notes you need and the info they ask for is all very simple and straightforward… once you’ve completed one you’ll realise just how easy it is!

If you want to have a look at the forms, here are links to the main form (SA100) and the additional self-employment page (SA103S):

SA100 – http://www.hmrc.gov.uk/forms/sa100.pdf
SA103S – http://www.hmrc.gov.uk/forms/sa103s.pdf

Remember, the tax year for self-employed people runs from 6 April – 5 April the next year.

E.g. in April/May 2014 HMRC will send you a letter asking for a completed tax return for the year April 6 2013 – April 5 2014.

The final dates for sending your tax return depends on whether you do it online or via post but either way you have plenty of time as the deadlines are:

• 31 October 2014 – paper tax returns
• 31 January 2015 – online tax returns

And then the deadline for actually making payment on any tax owed is January 31st 2015.

There are penalties for sending your tax return late, so make sure you do it on time! You are given plenty of warning, so there’s no excuse to be late which will lead to you getting a £100 fine if it’s less than 3 months late and additional penalties of £10/day if it’s more than 3 months overdue.

And if you pay late, you’ll be charged the late penalties plus 3% interest on the amount owed.

Just don’t let that happen to you and send it in on time!

Tax Amounts & Personal Allowance

How much tax do you actually have to pay? A very important question of course which I’ll cover now as I get a lot of emails from people confused about the actual amounts.

The first thing you have to know is that tax is only paid on taxable income above your personal allowance.

What is a personal allowance? It’s simply a set amount that you’re able to earn each year before you have to pay any tax!

Your personal allowance depends on your date of birth and your total income that year. Total income means all taxable income (earnings, pension, interest on savings etc.).

Currently, personal allowance is set at:

What is income limit and how does it change your personal allowance?

Basically if your adjusted net income is over the income limit, your personal allowance is reduced by half the amount you earn over the limit. I.e., for every £2 over the income limit you earn, your personal allowance is reduced by £1.

But, very importantly – if you earn more than £26,100 but less than £100,000 your personal allowance cannot go below £9,440 as that is the basic allowance.

If you do earn more than £100,000 then your personal allowance can potentially be reduced to zero – depending on how far over the income limit you are.

Here are three quick examples to help you understand how this works:

John, born between 5 April 1938 & 5 April 1948, income of £27,100

According to the table above, John’s income is £1,000 over the income limit so his personal allowance is reduced by half of that – i.e. £500. So from £10,550 it becomes £10,050.

Peter, born between 5 April 1938 & 5 April 1948, income of £56,000

Peter’s income is £29,900 above the limit so his personal allowance should be reduced by half of that which would make it zero… however as Peter earns less than £100,000 his personal allowance cannot go below the basic rate of £9,440.

Jane, born after 5 April 1948, income of £125,000

Jane earns £25,000 above the income limit of £100,000 so her personal allowance should be reduced by £12,500 (half of £25,000) which puts it at zero. And as her income is above the £100,000 mark there is no minimum basic allowance so it stays at zero.

Again, this may seem overly complicated at first but is actually very simple and easy to work out – once you’ve understood the slightly weird system used!

Tax Rates

Now, onto the most important point, the actual amount of tax you must pay HMRC on your business’ profits!

At the moment, there are three tax rates / brackets – Basic, Higher and Additional.

Here is the amount of tax you have to pay on income above your personal allowance:

But remember, income is only calculated after removing your personal allowance.

So let’s say you earn £35,000 and your personal allowance is £9,440 – you only pay 20% tax on £25,560 (£35,000 – £9,440).

If you earn £9,000 and your personal allowance is £9,440 then you won’t pay anything as your taxable income is zero.

As you can see from the table above, personal income tax is quite reasonable up to £32,010 but any profit above that is taxed at 40% which is a very steep increase!

My personal recommendation is; once you reach the point where your annual business profit passes the 40% threshold, you should start looking at registering as a Ltd Company so that you pay Corporation Tax instead of Income Tax.

At the moment, Corporation Tax is set at 20% for profits of up to £300,000 and while it generally wouldn’t be worth the hassle and cost of setting up a company when first starting out; at this point in your business when you’re making good money, you can start to consider some other options that wouldn’t have been beneficial or cost-effective before.

How to Pay Your Tax

There are a number of ways you can pay your Self Assessment tax bill, including: by debit or credit card, by Direct Debit, through your bank or Post Office and by post.

Just make sure that you allow enough time for the payment to go through before the deadline, so you don’t get fined.

National Insurance

As well as income tax, there is something else you need to pay to the government – National Insurance. Again, the exact amount depends on the annual profits from your business.

National Insurance is split into two parts – Class 2 & Class 4, and the rates for self-employed people differs slightly to normal but basically; you pay Class 2 National Insurance if you earn above £5,725 a year and pay Class 4 National Insurance if you earn more than £7,755.

The exact amounts are:

*To not pay Class 2 NI, you’ll need to apply for an exception, which is sometimes called a ‘Certificate of Small Earnings Exception (SEE)’.

To apply, you need to complete the form CF10: http://www.hmrc.gov.uk/forms/cf10.pdf

So as you can see from the above table, National Insurance payments are not that high and only really start if you’re earning over a certain amount, and while nobody wants to pay tax for no reason – National Insurance does contribute to your pension entitlement so it’s worth it in the end!

Class 2 NI is paid via direct debit and Class 4 NI is paid along with your income tax through your Self Assessment Tax Return.

VAT (Value Added Tax)

You’ll notice that I haven’t yet mentioned VAT, and the reason for this is very simple – as I’ve already covered in a previous blog post, you SHOULD NOT register for VAT until it’s absolutely necessary.

You have to register for VAT once your turnover goes over the threshold (or if you know that it will). Currently the threshold is £79,000 (it generally goes up every year) and is calculated by your VAT taxable turnover, i.e. the total of everything sold.

But as already mentioned, I strongly suggest keeping away from VAT registration for as long as you can!

What if I already work full time?

One thing that always seems to confuse people and something I get a lot of emails about is how does registering as a sole trader differ if you’re already employed?

Well the basic answer is – it doesn’t.

The only difference is; when you fill in your Self Assessment tax return at the end of the year, you’ll have to also include the income you earned from your job – that’s it! Everything else remains the same, the two are pretty much separate and your employer won’t know about your business.

The main thing you have to consider if you want to start a business when you’re already working is your personal allowance and tax rates… as tax rates are calculated on your TOTAL INCOME, which means the salary from your job plus any profits from your business.

As mentioned above, once you pass the 40% threshold (currently £32,010) then you should start looking at registering your business as a Ltd Company which means you’ll pay corporation tax which is only 20% up to £300,000.

So I think that’s everything! I hope you find this guide useful in deciding how to register as a sole trader, and don’t be put off at all if it everything seems a bit complicated/too much of a hassle – it really isn’t and is actually incredibly simple and easy.

Of course I’m always happy to help if you have any further questions, but at the same time I am not an accountant and if your situation is very specific or you want to find out more about registering a Ltd company or registering for VAT – I always recommend speaking to a professional as they’ll have the working knowledge to give you the advice you need.

Most accountants will allow a half hour to one hour initial consultation free of charge, so don’t be afraid to speak to someone locally if you need more help.

That’s it from me for now!

Thanks,
Andrew.