When things go well it seems like the government is trying to stall your progress by adding more and more costs to your business. We’ll this is how if feel for a small online company who sells physical products.
Before I go on I have to mention that I am not an accountant, and therefore if there are blatant inaccuracies in this article I apologies. This are the experiences I have had and I expect others have had too.
Corporation Tax for small UK businesses
Corporation Tax is a tax on profits. Each year when my accountant files my accounts I get a bill based off my profits. This seems reasonable and every company pays these (although some of the bigger earners have clever ways for reducing their tax bills).
One BIG issue for me it that i am re-investing virtually all of my profits into the business to buy more stock. I have paid myself a minimum out of this business so that I could grow it as quickly as possible, however at every stage the government seems to be trying to stall my growth.
Because e-Commerce businesses need to buy stock a lot of their cash is tied up in stock. For my business I place an order in China and pay 30%. This starts the manufacturing process and around 1 to 2 months later I the products are manufactured and I pay the remaining 70%. I then arrange shipping and a month or 2 later the shipment arrives by sea at a UK port (normally Felixstowe). I then pay import VAT, Duty, and all other shipping costs. All of this cash is tied up in stock and effectively out of the business.
For the purposes of Corporation Tax this stock is classed as profits and I get taxed on it, even though the money is out of the business and not in the bank accounts. So my account could show a negative number (in terms of profit because there are director loans in there to help buy more stock), but I still get charged tax on profits, which means another director loan to pay these taxes on profits. It seem a little crazy but it is how it works.
So if I did not have director loans available I would need to stop ordering more products so I could pay my Corporation Tax, which would stall growth in the business, which would reduce future sales. It is so frustrating but I have grown to accept it.
Here’s an example of a recent order just to show you how long cash is tied up out of the company.
VAT for UK Businesses
So my sales grew to over £83K in a 12 month period, which meant I had to get VAT registered. For some UK compaines this is a positive thing but for me and my e-Commerce business is definitely was not. It basically hit me with a 20% tax on sales. I sell a lot on Amazon.co.uk where competition is high and therefore profit margins are tight. Adding 20% to my sale price is in most cases not possible, so I need to absorb these extra 20% VAT charges.
Apart from my import VAT when my products arrive in the UK from China, I have very little other VAT to claim back, but a hell of a lot to pay. Here’s an example of a recent order and the potential VAT needed to be paid.
Units Ordered (from China): 4032 units
Total Cost: £10989
VAT (paid when landed in UK): £2479.96 (they charge VAT on product cost + shipping fees + import duty)
Total Cost of Order: £13468.96
If I sell them all at £10/unit (which is my lower price limit at the moment)
Total Sales: £40320
VAT @20%: £8064
So £40320 – £8064 = £32256 after VAT is taken off. I can claim my £2479.96 Import Tax back, so this number goes up to £34735.96.
On the face of it this number seems reasonable, but there are more costs involved in selling on Amazon. Amazon take a fair chunk in fees (that include shipping & packaging costs), then there are advertising costs and customer returns, plus Amazon seller fees.
A rough calculation shows that I would make less that £1 per sale at a sale price of £10 when VAT is included. Maybe around 7% margins, which are low.
To make matters worse I get hit with a VAT bill each quarter. For the quarter ending in May 2017 I owed around £8000 in VAT, which is a huge chunk of my profits for that quarter, and it is really hurting my business.
Overnight I suddenly get this additional tax on my business when I hit the VAT threshold, which just seems like another way for the government to stall the growth of my business. It is like they want it to be as difficult as possible rather than helping small and new companies succeed.
If VAT is necessary to fund the economy then fine, however it should be a little more complex than just taxing on sales. Companies like mine have a lot of cash tied up in buying and shipping the products in the first place so profits are significantly lower than sale prices. Compare this to software where once created the costs of the product are virtually zero. This includes shipping costs too.
A MUCH fairer solution would be to base VAT on profits, so I suppose another tax similar to Corporation Tax. As it stands having to pay VAT could very easily eliminate profits and even mean that companies like mine make a loss on every sale. I could put prices up of course and pass the VAT on to the customer, which is what you are suppose to do in theory.
However, on Amazon sale prices are so competitive that a sudden 20% price increase means you are now more expensive than other sellers, your sales fall, you sales rank falls, less people see your products and then suddenly you make even less money and your business stops growing and even goes backwards.
Surely this is not what the government wants?
Flat Rate Scheme for VAT
There is another way of paying VAT where you pay less on sales. It is called the Flat Rate Scheme. This means you pay VAT on all sales and cannot claim VAT back, but the rate you pay is lower than 20%. For my business I would pay a flat rate of 7.5% on sales.
So to compare to the previous example:
Sales = £40320
VAT Paid: £8064
VAT Claimed: £2479.96
Difference: £5584.04
With the Flat Rate Scheme I’d pay:
Sales = £40320
VAT Paid: £3024
This is £2560.04 less that with the traditional 20% VAT. Of course I cannot claim VAT back on other expenses, but these are minimal in comparison. Being on the Flat Rate Scheme is definitely a better option for my business and I am currently changing over to this option.
Ideally my accountant would have recommended this for me in the first place because it would have saved me a chunk of money on this quarters VAT bill. But I cannot do anything about this unfortunately but after I did my own initial research she has helped me out and is organizing the change over from the tradition VAT payment to the Flat Rate Scheme.
The future
Ultimately what all of this means is that I need to sell more things and make more money. My Tax bills will increase but ultimately if I want to succeed I will need to forgo any initial gains in the hope of future gains. This is my mentality anyway which is why I am investing all profits back into stock and growth of the company, it is just frustrating that growth is being restrained by more and more taxes.
This is a whole new world to me and I am sure it is for other small businesses. Luckily I do not have rent to pay on a commercial unit, because this would really strain my funds.
Cheers
Neil
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