Not everyone that goes into business means to go into business, or not in a significant way.
We can all earn a £1,000 per tax year from trading without worrying about a tax return but some social media businesses are so successful so quickly that their owners who are often inexperienced in the tax implications, are swept along with the momentum and before they know it they have responsibilities but not the knowhow, time or possibly even awareness to deal with the them.
I’m concerned here in this blog with owners such as young influencers who’s TikTok activities for example culminate in high volume, relatively low value sales of goods all over the world.
The simplest form of calculating profit for income tax purposes is the cash basis which can be used for most sole trade businesses (not limited companies) with a turnover no higher than £150,000. The scheme is intended to help people that complete their own tax returns, and I am not concerned with the pros and cons of the scheme in this blog.
If you have high volume sales running into thousands of transactions, you are likely to be using PayPal or like collect the income. You may also be using PayPal to pay suppliers and other expenses. You may also be using your personal bank account, personal PayPal account and credit card to run the financial side of your business. Analysing the business transactions from your personal transactions over several bank accounts is not an easy task and it isn’t easy to ensure there are no errors. Remember the income is not just the transfers you make from PayPal or like your bank.
I am going to assume that the reader is in a relevant business and that once you have had a go at your own tax return in year one you then decide to appoint an accountant and that the accountant decides in his or her wisdom that cash accounting doesn’t work for your business and that the traditional model is more appropriate.
This may be because: –
- The most accurate record of your sales is the report from your website
- You are holding stock which cash accounting ignores
- You are likely to need to register for vat or have already exceeded the threshold and must register asap. In the case of reclaiming purchase vat reference must be made to valid vat invoices or receipts, not just the bank transactions.
- You are going to need a solution to deal with your multi-currency sales payments
He or she is likely at this point to throw you a curveball as you are selling all over the world and should have been dealing with your vat responsibilities in the relevant countries from the start.
Your accountant will at this stage also implore you to arrange a business bank account, credit card account and PayPal account.
So back to processing. We have thousands of sales transactions as reported from your website and we need to know the following: –
- Date of sale
- Country the goods are being shipped to
- Vat rate – depending on country and type of goods.
- Currency of payment
The answer can only lie in automation. To get this information into your accounting software you need to be using an API or Application Programming Interface such as Auto Entry, Receipt Bank (now called Dext) or ‘other’. Your accountant will be able to provide that at the relevant cost which you will need to factor into your sales price.
From the API, once the Sales transactions are fully analysed, they can be forwarded on to your accounting software such as Sage, Xero or QuickBooks. You are then ready to apply the actual money received to the sales.
Purchases are also dealt with in the API before being sent to your software to be dealt with in the various ways.
You need to be careful with the setup in both the API and your accounting software to get all this working as it should be and I strongly recommend this is done with an appropriately skilled accountant.
Personally, I’m nervous of full automation but when you have thousands of transactions in this way a human being cannot check each single one and an audit-based approach must be applied to accuracy i.e., checking samples.