Taxes Nexus & The Dull Stuff

[landed]

This is not the best place for this question but I think it will end up being a valuable thread. So of course move me mods.

This is a general thread to help us understand how taxes work for our own scenarios.

How to setup for tax correctly?

I can only tell you about my understanding given it is Q4 2020 right now. I am a UK resident running a coupe of stores with modest profit. If I scaled which I may be able to soon I know I would quickly get to the 85k turnover to force me to charge VAT to my customers.

If you turnover more then 85k per tax year then you need to become a LTD (Like an LLC in the USA.). Before that you can operate as a sole trader.
I am liable for personal taxation only in this way it is a much simpler calculation. I think I understand the situation as I sell to UK people no problem.

If an item in my shop is 10 pounds I add 20% VAT and charge to the customer. I send the 20% (£2) to the GOV. The customer now sees an increase of 20% which is something I must plan for. Given the lower and lower margins some kinds of drop shipping become non viable.

85k is around 7k per month so you can quickly reach this figure if you spend a lot on ads.

But if like me you sell globally how do you then charge the tax? Let us assume we only sell to the UK and USA to simplify. The USA seem to say that over again a threshold we would have economic nexus depending where the customer buys from so now the US GOV also wants some tax...this is the part I do not understand.

It could be the location of the customer determines the tax chargeable. So 2 problems (if this is correct)
a) how to setup the shop to calculate the tax based on customer address.
b) how to register in all the different countries to pay tax and make sure to pay that tax to each state/country.

It's very quickly outside the realms of a soloprenuer.

I am happy to hire an accountant but would like to conceptually understand if I got things right.

 

[chris37]

I am happy to hire an accountant

I am happy to hire on two ....
if you have the money better hire an accountant is an very complicate question and you need an professional to give you an appropriate answer!

This is not the best place for this question but I think it will end up being a valuable thread.

yes is not the right place.

 

[the_lyall]

This is not the best place for this question but I think it will end up being a valuable thread. So of course move me mods.

This is a general thread to help us understand how taxes work for our own scenarios.

How to setup for tax correctly?

I can only tell you about my understanding given it is Q4 2020 right now. I am a UK resident running a coupe of stores with modest profit. If I scaled which I may be able to soon I know I would quickly get to the 85k turnover to force me to charge VAT to my customers.

If you turnover more then 85k per tax year then you need to become a LTD (Like an LLC in the USA.). Before that you can operate as a sole trader.
I am liable for personal taxation only in this way it is a much simpler calculation. I think I understand the situation as I sell to UK people no problem.

If an item in my shop is 10 pounds I add 20% VAT and charge to the customer. I send the 20% (£2) to the GOV. The customer now sees an increase of 20% which is something I must plan for. Given the lower and lower margins some kinds of drop shipping become non viable.

85k is around 7k per month so you can quickly reach this figure if you spend a lot on ads.

But if like me you sell globally how do you then charge the tax? Let us assume we only sell to the UK and USA to simplify. The USA seem to say that over again a threshold we would have economic nexus depending where the customer buys from so now the US GOV also wants some tax...this is the part I do not understand.

It could be the location of the customer determines the tax chargeable. So 2 problems (if this is correct)
a) how to setup the shop to calculate the tax based on customer address.
b) how to register in all the different countries to pay tax and make sure to pay that tax to each state/country.

It's very quickly outside the realms of a soloprenuer.

I am happy to hire an accountant but would like to conceptually understand if I got things right.

You don't ever HAVE to register as a limited company regardless of turnover. In fact, unless you have to I would avoid it. I've done it twice and it's a f***ing nightmare.

In the UK you need to register as a business within 12 months of your first sale, but you can register as a sole trader and stay as a sole trader even if you make literal millions. Most plumbers and carpenters who earn way more than the vat threshold are sole traders. That way it makes taxes simpler.

You also don't gave to wait to the threshold to become vat registered, you can register voluntarily before that which is also something I've done. However again I wouldn't recommend it because the forms for the returns are complicated.

VAT follows the goods. You can only charge VAT if it's being delivered to the UK. VAT is zero sum, it flows through you as you say. Being vat registered means you can itemise the vat on sales it doesn't mean you have to add it to existing prices. If you wanted you could say that 20% of the current sale price is VAT, or you can add it on as a tax line if it's being delivered to the UK. In WooCommerce there are various tax settings about including it in product prices etc. But chances are you'll need to add it as a separate line for UK purchases which isn't ideal for a consumer site.

If I recall correctly you have to be vat registered to charge vat but just because you're vat registered doesn't mean you have to charge it. As long as you don't claim vat back where its not due (tax fraud) then it's fine, but check that with a tax lawyer.

For the woocommerce tax settings first enable tax rates and calculations in the main settings and then you'll get an extra tab for tax zones. Create a zone with GB or UK as delivery country (can't remember which) and put 20% and call it VAT. You can add other rates for other countries if you want but if you're not registered in those countries you shouldn't need to. You'll then see 20% added to the checkout page after entering a UK address.

 

[the_lyall]

I should add, you only need to register for taxes in the countries you trade from. Huge multinational companies with offices in different regions have to register in each region. But the company I work for (as one example) is based in the UK. They sell millions overseas and have a huge global presence, but they only need to be tax registered in the UK as they're a UK company.

That's why so many big companies register their offices in a tax haven, as they then only need to pay taxes in the country they're registered in. You don't have to register in every country you trade in unless you have a physical presence there.

 

[landed]

I am confusing being limited with VAT registration. Thank you for clearing that up I did check here - https://www.gov.uk/vat-registration/when-to-register it's 85k turnover i.e. sales when you have to start collecting it.

It's very good news there are zonal controls as if you hit the VAT threshold I will also probably hit the USA state limits too which can be 200 sales in a particular state...in this case I then need a zone and also to register in the state. Seems quite a lot to register for each state and then have to do all the accounting for each state.

Then there is every other country.

I am pretty sure that most dropshippers are doing none of this! Hence the little info on it. I am going to back over all which you have put the_lyall as I think it's very concise. Where most online articles caveat saying you need to talk to a professional..

This has all come about due to printify starting to collect tax today. I'm not selling many Tee's though so shouldn't be an issue for me. My other shop yes it is a very pressing one. It may pay to look at one of the online solutions they might be doing all this for me....TaxJar etc...

I was looking at the estonian route for incorporation but don't feel the benefit for my situation.

 

[landed]

I should add, you only need to register for taxes in the countries you trade from. Huge multinational companies with offices in different regions have to register in each region. But the company I work for (as one example) is based in the UK. They sell millions overseas and have a huge global presence, but they only need to be tax registered in the UK as they're a UK company.

That's why so many big companies register their offices in a tax haven, as they then only need to pay taxes in the country they're registered in. You don't have to register in every country you trade in unless you have a physical presence there.

I have read that economic nexus puts ANY e-com business in a nexus if 200 sales are made in that state.

 

[the_lyall]

I have read that economic nexus puts ANY e-com business in a nexus if 200 sales are made in that state.

Maybe not if the business is already registered for tax in the UK (i.e. is not a US based business or an eCommerce business which isn't registered for tax). Worth checking with a UK business accountant. I know our US partner business is registered in many states for that reason but we aren't, even though we sell a lot there directly. And we have tax lawyers etc. who do loads of things I don't understand as it's not my specific area of expertise.