Having been working with e-commerce business for a number of years now we have come across many stories of accounting and tax disasters (some of which had a happy outcome, but you will probably guess that they are in the minority).
Accounting in an e-commerce business is complicated. The more channels and payment processors you have the more complicated it becomes.
If you sell on Amazon for instance, you will typically receive a fortnightly settlement, from which various fees will be deducted, like selling fees and FBA fees and possibly advertising costs as well. All these different elements need to be accounted for separately and each will have a different VAT treatment. Even your sales might not all be treated in the same way as you may sell a mix of standard rated and zero-rated products. You have potentially thousands of different transactions all rolled up into one single settlement.
But that’s not the end of the story if you sell on other marketplaces. Ebay is similar, except with Ebay Managed Payments you will receive daily settlements, and unlike Amazon, their fees do attract UK VAT.
If you start adding in other marketplaces the process will be similar, but it will also be different.
You can then add your own website into the mix. How you receive your payouts will depend upon the platform you create your website on and which payment processors you use. The way that the accounting data is provided to you and how easy it is the integrate with your accounting system will vary from platform to platform and payment processor to payment processor.
Then you can add international sales into the mix. You will have revenue streams in different currencies, and you will have to comply with local VAT or Sales Tax legislation.
Given the above it perhaps won’t be surprising that, in the absence of specialist advice, it can all go horribly wrong.
- Payouts don’t equal revenue for a Canadian Amazon seller
We had an enquiry recently from a Canadian business that has a UK subsidiary which was selling on Amazon in the UK. They had been UK VAT registered for a number of years. During the discovery call it emerged that they had been accounting for their UK income based on their Amazon settlements received into their bank. They had been using Amazon FBA so the deductions from their settlements were significant. In doing so they had understated their VATable income and therefore the VAT payable to HMRC over a period of years and had an estimated hidden VAT liability of around £250,000.
We will never know what happened to that business, we never heard from them again. They may have thought they can carry on doing a DIY job and no-one will notice. But they will. There is increasingly sophisticated sharing of data between marketplaces and tax authorities and between tax authorities. It’s just a matter of time. It quite possibly means their whole multi-million pound turnover UK business model is so flawed as to be unviable. Possibly they found another UK accountant who thought what they were doing was correct and decided to go with them. You are probably thinking that’s an unlikely scenario, after all, surely no professional firm of accountants could get it so wrong, could they? That leads us nicely onto our second scenario which should have shared the same solution……..
- UK Amazon seller with understated revenue
We received an enquiry from a UK business who had been doing exactly the same thing. In this case they had professional adviser who knew exactly how the business was accounting or income and VAT and had assured the business that it was OK. It was only by chance, reading an online article, that the business owner realised their accounting was completely wrong. He even asked their existing accountants to calculate the under-recorded VAT liability. Their calculations didn’t even come close to the true liability which was £100,000. Thankfully they reached a settlement with HMRC and the business survived – just.
This business got to grips with its income and VAT reporting by implementing our recommended solution, which was to integrate Amazon with its accountings system, Xero, with an app called A2X. A2X can be connected to both Amazon and Xero. It takes the Amazon sales data, and after a mapping of all the different transaction types, creates a single sales invoice in Xero, broken down into all its component parts, which reconciles against the settlement received into the bank.
The Lessons Learned
This business realised the value of specialist advice. In both instances the businesses were not aware of the correct accounting procedures and tax legislation. There are so many aspects to running an e-commerce business and you will need specialist advice in many fields.
- A system change gone wrong
We recently took on a new client, an Amazon seller selling vitamins with a focus on the UK. We soon discovered that their bookkeeping was not quite all in order. Their previous accountant had implemented a new system which connected the business’ Amazon seller central account to their accounting system, Xero. The application pulled the data through and summarised each settlement into a single, tidy invoice in Xero which matched what came into the bank. So on the face of it, they’d implemented a great solution. It was saving the business a lot of time compared to manual processes. However, what they had failed to consider was how the previous system was accounting for revenue and how this impacted on the transition to the new system. The previous system had still been pretty good in that it hooked up to Amazon’s API to pull the sales data through. However, it didn’t pull through the data summarised by payout, it was instead summarised by month. That meant that there was a debtor in the accounts at the month end that represented part of the first payout of the next month. The full sales from this payout were then accounted for by the new system. So the sales from the part of the payout that related to the previous month were duplicated in the bookkeeping records. The duplicated sales amounted to over £10,000. These duplicated sales had all ended up on the VAT return and as a result the business had overpaid VAT by £2,000.
On taking over the client, we reviewed the historic bookkeeping data and quickly identified that the there were sales that had never been cleared down against cash received in the bank. Yet all the cash coming into the bank had been matched to revenue. This immediately sent alarm bells ringing. After picking through the sales data posted in those two months, we were able to identify that the unpaid sales had indeed all been duplicated. We reversed them out in the bookkeeping records and claimed back the VAT overpaid on the next return. We also implemented our preferred Amazon accounting app, A2X (which splits out any payouts that overlap a month end into two separate invoices, one for each month) to ensure this business never has any more VAT shocks!
The Lessons Learned
Accounting system implementations are complex and mistakes can be costly. Whilst there are e-commerce accounting apps available that will consider your circumstances and help to automate the set up as much as possible, only by making use of the knowledge and skills of a specialist e-commerce accountant are you able to avoid such headaches.
- Reporting sales in the wrong VAT jurisdiction
Our third example takes us back in time a little to before Brexit. It relates to the distance selling thresholds that then applied throughout the EU. This business had been selling to French customers but had passed the French VAT registration threshold several years before the French authorities realised and came knocking. They owed around £40,000 by then. They had been accounting for the French sales on their UK VAT returns, and they were able to recover some, but not all, of the VAT that they had incorrectly paid HMRC.
This business also implemented A2X to better track its income and tax liabilities. It also changed its accounting system over to Xero. Previously they had been using an accounting application that didn’t offer any Amazon connections.
The Lessons Learned
An e-commerce business needs to be aware of the tax legislation in every country that it trades. Some countries have a zero threshold, other have more generous thresholds that enable foreign businesses to trade without the burden of additional tax compliance. There are apps that will assist with identifying potential tax registrations required.
- Missed VAT reclaims on Amazon Advertising (this one has a happy ending)
A recent enquiry came from an Amazon seller that asked us to look over their books so that we could assess where things were up to and provide them with a quote to tidy up their records and help them to move forward. From just a quick dip into their Xero account, we were able to identify a massive opportunity for them. The seller had a very healthy ad spend and was spending close to £20,000 a month on Amazon advertising in a bid to build their brand. Which is great, it was working very well for them. However, they had been doing their bookkeeping and VAT returns themselves and thought they’d got their head around the nuances of VAT for Amazon sellers. They’d learnt all about reverse change expenses and how this mechanism is applicable to fees charged by Amazon because the bills that they raise to sellers for fees are raised from Luxembourg. What they hadn’t realised was that this is only true of FBA and selling fees. Advertising fees however are billed from the UK and are subject to UK VAT. The business had been filing their VAT returns for the past 18 months on the basis that there wasn’t any VAT to reclaim on Amazon advertising fees. As a result, they had missed out on VAT reclaims totalling £60,000.
We got access to the business’ Amazon Seller Central Account and trawled through their Amazon data to identify all the payments made to Amazon for Amazon Advertising, identifying a total ad spend of £360,000 over an 18-month period, all of which hadn’t had any VAT reclaimed. We were able to prepare a report that summarised the errors and calculated the total VAT reclaim missed out on - £60,000. So this was a big error and needed to be disclosed to HMRC. We prepared a claim and submitted it to HMRC, setting out how and why the error had occurred and what the overall impact was. HMRC were satisfied that there had been a genuine overpayment of VAT and issued a full refund of the £60,000 overpaid by the business. The business owner was delighted, it was a massive boost to their cashflow.
The Lessons Learned
VAT is complex and it’s easy to make costly mistakes. Even if you are choosing to keep your bookkeeping in house, it could pay massive dividends to get a health check on your bookkeeping and VAT returns. It only takes one small mistake to be repeated over and over again to rack up to a much bigger problem.