This guide is called BOOK KEEPING, TAX & BUSINESS REGISTRATION and is designed to give an overview of the proceedures of accounting, along with information on how to register as a business and where to go for advice. Every seller will have different circumstances - we can not give out specific advice to individuals only professionals can do that!! If you have any specific questions concerning your situation then please consult an ACCOUNTANT or talk to REVENUE & CUSTOMS. We will discuss
1. Business Registration
2. Business Banking
3. The Books
4. Information to Record
5. Book Keeping Procedures
6. Accounting Frequency
7. Profitability Reports
9. VAT Registration
10. More Help and Advice
Most of the information is relevant to sole traders - if you operate a limited company then some information may not be relevant.
1. Business Registration
Many people are unsure as to whether they should register as a business, or if they actually qualify as a business or not. A very simple test is:- If you buy items to re-sell then you are a business and need to register as a busines!
This does not necessarily mean you will have a tax liability but if you are re-selling then you are running a business. It has nothing to do with how much money you are making or how many items you are selling. It has to do purely and simply with buying to resell. Regardless of what that item is.
You also need to understand if you are self employed as regards your business. If you are a part time eBayer you may be employed in your main job and self employed as an eBayer. Some eBayers are actually employed by their company to handle the company's eBay trade and their company should handle all tax affairs in those circumstances.
It is important to register as a Business on time as there are financial penalties in the form of fines and interest on any tax owed for late registration.
So how do you register as a business and who do you register with?
Firstly the Inland Revenue - you can either telephone them on 08459 15 45 15 or download a form from their website. There are a few questions you'll be asked regarding your business and they'll register you for tax and national insurance purposes. If you have an accountant they can handle all the registration requirements for you and all you'll have to do is a couple of signatures! There is a £100 penalty for failing to register within three months of starting your business - the Inland Revenue does NOT want to apply this penalty, it's intended to encourage early registration!
The second thing you should do is to register your eBay account as a Business account. This signifies to buyers that they are dealing with a business and not a personal seller. As businesses have certain responsibilities such accepting returns this in conjunction with your feedback can reassure buyers. You can register as a business on eBay in My eBay - My Account -
You become a business when you buy to sell, you need to register with Revenue and Customs, and should change your eBay registration to a Business User
2. Business Banking
Many of you may have started on eBay and used your normal bank account for both personal and eBay transactions. You should however separate your business funds from your personal funds and run separate accounts.
Some people simply open a second current account to use for business purposes, however there are advantage of having a business account. Firstly it gives you access to business advice and help with running your business successfully. You will usually have access to a Business Account Manager who will assist with advice on your banking. Also if in the future you need to raise finance in the form of a business loan your bank will expect you to have a track record with a business account to show you are financially sound.
It is important to remember though that business accounts are not usually free. There may be an initial period ( usually 12 months) where your bank will give you free banking, from then on you will be charged. Each transaction such as deposits and withdrawls will attract a charge. Remember though all charges are tax deductible!
Charges vary from bank to bank, so when you investigate business accounts remember to look to check costs after the free period ends. Some business banking accounts will be free forever, but they normally have limits on the amount of transactions you require and sometimes conditions like online banking only. You probably won't get a Business Account Manager either.
You should separate your business finances from personal with a Business Bank account
3. The Books
'The Books' simply refers to the financial records of a business. How you keep your 'Books' can take different forms, you may opt to use an actual book, many of you will probably prefer to use an electronic form probably a spreadsheet.
'The Books' is a term used to describe the keeping of accounts and refers to the records of your business. In the next section we'll look what records you need to keep and then how to keep them.
Remember if you fail to keep meticulous records you may end up paying too much tax! It's easy to track sales from money coming in, but if you lose your purchase invoices and forget to include expenses you may have paid cash for then it will appear you made more profit than you did!
4. Information to Record
It is important to keep accurate records and part of that is knowing the information you need to keep. The simple answer is every financial transaction associated with your business - even if you are not able to claim 100% of that expense. An example would be your home telephone bill if you make business calls on it.
There are two main categories of your records:-
Purchases - Anything that costs you money! (e.g. Buying Stock, Postage, Packaging Materials, Office Rent, IT Equipment)
Sales - Money coming into the business (e.g. from PayPal/Nochex, Bank Transfers, Cheques, Postal Orders, Cash)
You also need to keep all your bank and credit card statements for both Business and Personal accounts!
It is important to be able to cross reference everything. If you have a sale on eBay you need to be able to find it in your accounts and vice versa. If you purchase some stock for sale you need to be able to show when it was paid for. People have different methods for this - some print out every eBay sale, but if you're handling a large number of transactions that's a lot of paper! Other 'Print' their sales to acrobat .pdf files which can be stored electronically. Others choose to print their eBay invoices which summerise each sale (but don't include the postage element so make sure you enter that into your accounts also!) Certain selling tools such as SMP can also produce reports for you.
If you save paper (or electronic) print outs of each sale you will have all the information you need. If not as a minimum you need:-
Date of sale
References (One or more of:- eBay item number, Paypal Transaction ID, SMP invoice number, Buyers ID)
Cost of item
Cost of post and packaging
Total sale Price
Payment method (paypal, cheque, bank transfer etc)
You will also need to record expenses which may not involve payments, for instance if you use your car for business (trips to the post office) or ride a bike (maybe to see your accountant) you will need to record each trip you make and the distance traveled in order to claim allowances. You may also be able to claim for shared bills (eg use of your home, household bills etc but we'd recommend you seek professional advice on what you can and can't reasonably claim). Finally don't forget to record eBay fees and PayPal fees - PayPal fees especially aren't invoiced monthly so you do need to record them as well!
Revenue and Customs expect you to keep all records for six years - if they have a query they will expect you to have this information! You may think you are only doing half a dozen sales a week but even this in six years adds up to a couple of thousand transactions and there is no way you can remember what happened six years later without good records.
If in doubt record every financial transaction! In the next section we'll look at how to save this information.
5. Book Keeping Procedures.
The secret of successful book keeping is to keep it simple and find a way that works best for you but includes all the required information. There are a number of options such as an actual Book, a spreadsheet such as MS Excel, or accounts packages such as Sage or Quickbooks. Whichever method you choose the information you need to record is the same! Regardless which method you choose if you are in any doubt seek professional assistance as it's a lot easier to get it right at the start, than to try and redo your accounts at the end of the year and try to correct them at that stage!
There is no need to buy an expensive accounts book, a simple notebook or three column cashbook will suffice. Payments can be recorded daily and you simply create columns for the information you need to keep
Spreadsheets may sound complicated but they are simply an electronic version of your paper records. You will still have columns with the same headings, and still record exactly the same information.
The big advantage is that keeping electronic records allow you to total the columns automatically instead of having to add them up manually.
For either Paper or Spreadsheet records keep a separate page for your Sales Ledger (Payments to you) and Purchase Ledger (Payments to suppliers). For a physical book use one side for sales and the other for purchases - with a spreadsheet create separate worksheets for sales and purchases. Have separate sheets (Maybe the back of the book or a third worksheet) to record mileage etc.
If you choose to use an accounts package unless you are already familiar with it we'd recommend you seek training to help set it up. You may find your accountant will recommend a package and help you get started or the company supplying the program will assist. Don't simply purchase accounts software and expect it to work 'out of the box', you will need to customise it to your requirements.
Regardless of the method you choose to keep your accounts you will also need to save paperwork. This may include all receipts and invoices for expenses, and if you print each sales record those as well! File them in DATE ORDER, if they don't have a reference you have entered into your accounts number them. Either keep envelopes for each time period, or simply use a ringback folder and hole punch. The important thing is if your accountant or the Revenue ask to see an invoice that you can locate it easily.
Finally remember you need to keep records for six years. Make sure you back up your electronic records and keep a back up at a second location. If your computer crashes or your laptop is stolen and you lose your accounts you will still be liable to pay tax. In the worst case Revenue and Customs will simply make an assessment of the tax you owe!
There is another
eBay Guide which has some tips for setting up spreadsheets for your eBay Book Keeping
6. Accounting Frequency
There is no simple answer to how often you update your accounts but little and often is the key! The people that have most problems with their accounts are those that update them the most infrequently!
The very worst thing you can do is leave it until the end of the tax year as it will be almost impossible to track your sales and purchases a year down the line!
Ideally you will update your records at least every time you despatch items. We'd recommend daily account keeping for sales as a minimum, especially if you have a high number of transactions. You are likely to have fewer purchases but again update your purchase ledger at least weekly. Mileage records and other travel again update daily while you can remember!
Many people have a rule that nothing ships until the sale is entered into their accounts. There is a sense of urgency to ship items once paid, and forcing yourself to update your accounts first is a great way to ensure you stay ahead of the game. As you will have to prepare your packing slips and address labels prior to picking and packing your sales this is an ideal time to take a few minutes to update your books!
Remember a few minutes daily can save many hours of work later. Get into the habit of keeping your accounts up to date and you'll be amazed how little time they take!
7. Profitability Reports
Keeping up to date records for your business allows you to assess your profitability and whether your business is viable. Each month you should look at your income and expenditure which will highlight areas with hidden costs.
A common mistake is to sell an item for say £10 plus £2 postage which cost £4 and think that you've made £8 profit, but this isn't the case. Lets look at the costs:-
Item cost £4.00
Listing fee £0.15
Final Value Fee £0.53
PayPal Fee £0.54
Actual Postage cost £1.52
Jiffy bag £0.14
That's £6.82 of direct costs to sell the item. However it doesn't take into account the cost of business premises, IT equipment, ink, paper, accountancy fees, taxes (National Insurance, Income Tax) or of course your wages! In reality you have made £5.18 LESS your fixed costs and tax liabilities.
Many eBayers forget to account for their own time. If there is money in the bank they simply withdraw it to their personal account. You should account for your own time and budget for paying yourself a set amount per hour. Many businesses fail as soon as they take on their first employee simply because their business model can not sustain paying wages, or because the time required to purchase, sell and process transactions is unsustainable.
At the end of each month you should examine your accounts, set aside money for future bills (eg your tax) and the balance will tell you your profit or loss. Deduct from this amount your hourly 'wage' and that will instantly show you if your business is sustainable.
It is likely in the early stages you will make a loss, this isn't unusual, but by attributing an hourly wage for your work and discounting set up costs you will easily see if long term you are running a viable business. Consider if you employed someone to do all your listing, picking and packing - after paying for their time would you still be profitable?
Following on from profitabiltiy cashflow is probably one of the areas which cause most businesses to fail. Control of your cashflow is key to success!
It is likely that you will have certain outstanding bills owed by your business; you need to ensure you have funds available to meet these obligations as they become due. For instance at the end of the year you will have an Income Tax bill, you may have ordered and paid for stock from China but do you know what the Duty and VAT is due when it lands in the UK? Do you have credit accounts with suppliers, eBay fees and couriers which will need to be paid?
Cashflow forecasting is making sure that you have the money available to meet your liabilities. If for example you have outstanding bills to be paid amounting to £1000 and have £1100 in your bank account you then only £100 is available to withdraw - not £1100. Regardless of your personal income requirements if you withdraw more than your available balance (ie balance less debts) then you are putting your business in jeopordy.
Most important of all keep a contingency fund. None of us like being overdrawn on our personal bank accounts, certainly you don’t want to be in debt on your business bank account.
9. VAT Registration
There are many pros and cons to registering for VAT. These will depend on your individual situation and really best advised by an accountant.
The current threshold for VAT is £61,000. If you know that by the end of the current month that your 12 months rolling total (The total sales in, in the last 12 months – not the tax year) will meet this figure or is likely to in the next 30 days you must register for VAT. At this point it is no longer a choice but a legal requirement. There maybe fines and penalties if you do not comply.
If you think this may apply to you, then the HMRC website has more information or consult your accountant
10. More Help and Advice
There are many places you can go for additional help and advice and although Revenue and Customs is your best port of call for Tax advice, for general information and support these agencies can assist you.
Practical advice for small businesses
Local Enterprise Agencies
Advice for Small Businesses
National Federation of Small Businesses
Advice and support, membership (with fee required), many discounts and benefits for small businesses
Registering your business and keeping accounts is not complicated BUT each person has their own unique situation and the best advice is:-
See an accountant and use them to help you set up your accounts processes. Keep your records up to date frequently (preferably daily!) Use your accounts to ensure you are operating profitably and check your cash flow is sufficient to meet bills as they become due. Don't forget to set funds aside for Tax bills and contingencies
Finally a reminder that the information and general advice in this guide covers sole traders. If you are planning on making your company a limited company then you to see an accountant and get specialist advice. A good accountant will save you more money than they cost, and as well as keeping your accounts in order can provide invaluable business advice to help your business grow!
This guide was co-written by
BOOK KEEPING, TAX & BUSINESS REGISTRATION
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17 June 2006
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