VAT for an online marketplace

Discussion in 'Ecommerce Forum' started by Unai, Apr 9, 2019.

  1. Unai

    Unai UKBF Newcomer Free Member

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    Hello guys,

    I'm creating a small not-for-profit online marketplace. I've been working on this project for over a year now and it's almost finished; I expect to be able to launch it in about 2 months or so.

    But the legal/business side of it is putting me off so much that I just don't know what to do. I would hire an accountant to answer my questions but I'm a broke student and cannot afford it. So I would greatly appreciate your advice.

    So, my website will basically have 3 groups of sellers:

    1- Individuals selling handcrafted products and such. Not registered for VAT
    2- Small businesses that don't make enough to be registered for VAT
    3- Businesses with a big enough turnover to be registered.

    The problem is that I don't really understand how VAT works for an online marketplace operator (AKA me). I can set taxes to be "non-applicable" for groups 1 and 2 if I want to, and set it to the normal 20% (UK) for the 3rd.

    So here is how it will work. A customer buys a product for X (incl. VAT) amount of money. The actual money goes to my account. The seller (a big company) can see that they have X money in their wallet to be requested. They request it, so I transfer it to them.

    Should I transfer the tax of said product to them, so they can pay it to HMRC by the end of the tax year? Should I keep it and pay it in their behalf myself? What if they don't pay it and they get me in trouble?

    As you probably know, marketplace operators are now liable for any unpaid VAT and stuff like that, so I really don't want to get intro trouble. But there is so little actual information about this on the Internet that the more I read the more confused I am.

    The website will be locked down to the UK at first by the way, so only selling and shipping within the UK. I think this will make my life easier. But I do want to open it to the EU eventually. How should approach this matter if I want to do that?

    And if I open it to the EU, should I charge taxes depending on the billing address? Shipping? Or what? It's just that I have read many contradictory information about this.

    Thanks!
     
    Posted: Apr 9, 2019 By: Unai Member since: Apr 9, 2019
    #1
  2. WaveJumper

    WaveJumper UKBF Enthusiast Free Member

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    How are you earning an income out of this
     
    Posted: Apr 9, 2019 By: WaveJumper Member since: Aug 26, 2013
    #2
  3. Unai

    Unai UKBF Newcomer Free Member

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    Hey,
    I will be charging a small commission for each product sold. Since I intend to make it a not-for-profit (I will be donating some of the earnings) getting rich is not really my objective. So my commission will be much smaller than other marketplaces out there, like Etsy or Amazon.
     
    Posted: Apr 9, 2019 By: Unai Member since: Apr 9, 2019
    #3
  4. Scalloway

    Scalloway UKBF Legend Free Member

    14,901 3,164
    If you set your agreements up correctly your income for VAT purposes will be the commission you charge. It will be up to your sellers to account for all their taxes themselves.

    You should set up a separate bank account for money you receive for sales.
     
    Posted: Apr 9, 2019 By: Scalloway Member since: Jun 6, 2010
    #4
  5. Unai

    Unai UKBF Newcomer Free Member

    19 0
    Yeah, I'm almost finished setting up the payment gateways so they are not related to my actual persona. Business account for Stripe, Paypal and Transferwise and a Monzo bank account (I personally use Lloyds myself).

    And yeah I intend to state very clearly everywhere I can that I do not sell anything on the website myself, and that I simply act as an intermediary when it comes to the payments. I receive the money, hold it, and then I disburse the appropriate amount. That's it.

    But my biggest problem is that I don't know how to actually go about taxes within my marketplace.

    As I understand it, sellers have to charge VAT on every product they sell (if registered etc.). Then they use this VAT money they have been collecting through the tax year and pay HMRC (or equivalent) with it. Is this correct?

    So as I see it, I could do two things about this:

    1- Only the 3rd group I talked about, the big companies using my platform, would be paying VAT. So it would make sense to "disable" tax for groups 1 and 2, right? I would collect the taxes paid by customers along with the actual payment for a product, then disburse it to the sellers when they ask for their payment. This way sellers could put the price exclusive of tax, and the system would automatically calculate it for them.

    2- Or, I could state clearly on my Terms of Agreement page that I basically don't want to know anything about taxes and that I will not be calculating it for my customers. So they should figure out if they need to pay any taxes, because all the prices must be set INCLUDING VAT, whether this VAT is 0% because they don't need to pay, or 20%. So if a big seller should have been charging taxes but didn't because he didn't bother reading the Terms and know has to pay X amount of VAT out of his pocket, then it would not be my fault. That way I could wash my hands on this issue.

    Hope this makes a little more sense. What do you think?
     
    Posted: Apr 9, 2019 By: Unai Member since: Apr 9, 2019
    #5
  6. Mr D

    Mr D UKBF Legend Free Member

    14,902 1,625
    Until you become vat registered as a business you do not charge vat at all.
    Once you do then you charge all your customers vat.

    If you have no money now you will struggle to market the business. Your biggest cost for some years to come is likely be marketing.

    Not for profit determines how you handle profits, it does not determine your pricing. Amazon for years made no profit, for years after that its profits were about 0.5 percent. Without good enough pricing you will struggle to market the business. Without buyers your sellers will find better places to spend time and money, without sellers you won't have buyers spending money.

    Who is handling the transaction? You or the seller?



    You will need professional advice regarding your terms and conditions and to protect yourself from liability.
     
    Posted: Apr 9, 2019 By: Mr D Member since: Feb 12, 2017
    #6
  7. Mr D

    Mr D UKBF Legend Free Member

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    1. - only every customer that you charge would be paying vat.
    You do not get to decide who should be charged and who should not.
    You register for vat, you become an unpaid tax collector.

    If you live in the uk the odds are you have been paying vat since you were old enough to hand money over to someone.
     
    Posted: Apr 9, 2019 By: Mr D Member since: Feb 12, 2017
    #7
  8. WaveJumper

    WaveJumper UKBF Enthusiast Free Member

    564 98
    I have to say it seems an awful lot of effort and hard work for a non profit making project, I am not sure I can call it a business.
     
    Posted: Apr 9, 2019 By: WaveJumper Member since: Aug 26, 2013
    #8
  9. Unai

    Unai UKBF Newcomer Free Member

    19 0

    Yup, marketing will be a big pain soon; but as for now, I'm focusing on polishing the platform itself.

    The thing is that it doesn't matter if I'm vat registered or not, since I won't be selling any products. Sellers will. If they are big enough to be registered, then they should charge it. If not, then they shouldn't (or that's what I have gathered).

    For the option 1, imagine this:

    - A customer (some random person buying stuff) buys a lamp from one of the big sellers. The lamp is 10 £, and it's advertised as 10 £. He goes to the checkout and pays a final 12 £. Two extra pounds for the vat (because the seller is a big company or whatever).
    - Another customer buys the exact same lamp, but from one of the small sellers. The lamp is 10 £, advertised as 10 £, and pays 10£. Because the small seller does not need to pay vat.

    In both cases taxes are "activated". The cart and the checkout show how much vat needs to be paid and from which items etc. I have manually disabled tax for small sellers because they are not vat registered, and have manually enabled the tax calculation for the big ones. When I disburse the money to the sellers, they know that taxes have been calculated.

    Now, for the option 2:

    - The same lamp, sold by a big seller. The lamp is 10. Advertised as 12, sold for 12. I told sellers that they need to take care of calculating taxes themselves, so this big seller is entering the price inclusive of tax, so he can account for it later and do whatever he needs to do.
    - Same lamp. Sold by a small seller. Advertised for 10, sold by 10. No tax calculated, no nothing. Because they know they don't have registered for vat, so they don't have to charge it.
    - Again, same lamp. But this time, the seller didn't bother reading the Terms or whatever. So he is advertising the lamp as 10 and selling it as 10. The time to account for profits and whatnot comes, and he realizes that since he wasn't charging 12 as he should have been, now he has to pay 2 pounds out of his pocket to HMRC. Blames me, but I say that I state very clearly and in several different places that they should have entered the price inclusive of tax to avoid problems like this.
     
    Posted: Apr 9, 2019 By: Unai Member since: Apr 9, 2019
    #9
  10. Unai

    Unai UKBF Newcomer Free Member

    19 0
    I just want to help people man. The only reason I want to make money is so I'm able to invest it on worthy causes. I don't mind earning just the minimum wage for myself. Been living on that for a while now. I'm a student and don't have much expenses after all.
     
    Posted: Apr 9, 2019 By: Unai Member since: Apr 9, 2019
    #10
  11. Mr D

    Mr D UKBF Legend Free Member

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    You will be charging fees. That will be subject to VAT once you register.

    And you need to figure out what your involvement with the money is - you will get chargebacks, you will get buyers and sellers disputing things, you will have items arriving broken, you will have dodgy sellers to deal with along with dodgy buyers. And how you will handle the VAT that the buyers will be paying.

    Don't presume small sellers won't be VAT registered - require the info from the seller. And take whatever action to avoid liability - amazon do it by requiring a VAT number from any business that may have liability, much to the annoyance of thousands of sellers with small UK businesses.
    There will be some small businesses that voluntarily register for VAT because its cost effective to do so or because of some of their other customers.

    Don't bet on a disclaimer as much of a shield in itself. Find out your risks regarding liability and take action to minimise them - indeed, minimise all your risks.
     
    Posted: Apr 9, 2019 By: Mr D Member since: Feb 12, 2017
    #11
  12. Mr D

    Mr D UKBF Legend Free Member

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    Be probably some years before you get the chance to do anything with profits.
    And if you are a director you aren't yourself subject to minimum wage. You can work 100 hour weeks for £20 if that's what the business can support. Or maybe no income for some time.
    Your wages are not affected by the business deciding what to do with some of its profits.

    Lots of businesses struggle to get themselves known, to stand out from the crowd when they first start - marketing takes time and effort. By choosing a business with 2 different groups to market to you increase your problems.

    Years ago there was a site called ebid. Started last century.
    Its fees were a lot lower than amazon or ebay, it struggled along for years with many of its buyers being people who were also sellers - it struggled to grow because most buyers appeared unaware of it.
    Poor marketing or simply not enough income to spend on marketing very well.

    Will yours be the next ebid? Or not even get that far?
     
    Posted: Apr 9, 2019 By: Mr D Member since: Feb 12, 2017
    #12
  13. WaveJumper

    WaveJumper UKBF Enthusiast Free Member

    564 98
    And lets not forget other fixed expenses:

    * Charges for postage, will you be responsible for tracking
    * Monthly Bank charges from various accounts (at least five from your thread)
    * Web hosting charges

    Make sure you account for all it's surprising how quickly they can all add up and hit your bottom line
     
    Posted: Apr 9, 2019 By: WaveJumper Member since: Aug 26, 2013
    #13
  14. Unai

    Unai UKBF Newcomer Free Member

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    Yeah, I meant that I don't need to be registered for VAT when it comes to selling actual products, because I won't be doing that. But if I happen to have a turnover of 85.000 or more, then yeah I will have to register and charge sellers accordingly when taking commissions from them.

    And you are right, small sellers may be VAT registered. But I only need (legally) to collect this information when and if I suspect a seller needs to be registered (because they sell a lot, for example).

    I already have a process for this. There will be (as of now) 3 membership plans, which will divide all the sellers into 3 groups.

    1- Individuals sellers.
    2- Small businesses.
    3- Big businesses.

    Entering a VAT and a company number will be optional for the first two. It is likely that most of the sellers that belong there won't have VAT numbers or anything. So I will tell them know that if they do have one, they should tell me and I will manually configure stuff for them to take tax into account. They won't be many so this won't be super difficult.

    A VAT number will be mandatory for the 3rd group. Some of them may try to cheat and put themselves in different groups than they should be. But the group thing is not random, since the fact that they are in 3 separated groups within my system will make it much easier for me to spot people selling way more than they should for their category. I will be able to catch them and deal with them.

    Besides this, I have a seller verification system. I basically have to manually approve them. If I don't, they will only be able to post a maximum of 15 products on my website. In order for me to approve them, they will have to provide information about them. They will do so by uploading certain documents, like a Passport, a company number, vat number etc. The more the better. If a seller provides just the bare minimum and something seems fishy, I can approve their account but I can require them to provide more stuff within X days. If I'm not satisfied then I will ban them and that's it.

    Actually, the information that I ask them to provide is very redundant, and I ask for pretty much everything more than once and display it in more than one place. Just in case.
     
    Posted: Apr 9, 2019 By: Unai Member since: Apr 9, 2019
    #14
  15. Mr D

    Mr D UKBF Legend Free Member

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    Oh you are so going to love business verification. You will get a lot of stick from sellers over it and woe betide if you take more than a day when snowed under with other aspects of the business.

    You weren't planning on this being a single person 9 to 5 operation were you?
     
    Posted: Apr 9, 2019 By: Mr D Member since: Feb 12, 2017
    #15
  16. Unai

    Unai UKBF Newcomer Free Member

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    Sellers will be responsible for shipping, which they in turn can charge for to customers if they want to (they can choose to do it for free). Tracking itself is fairly easy. An already established business will likely have a system in place for these kind of things, so it will be easier for big companies than for the smaller ones.

    I would like to be able to take care of shipping for them, but it's just not possible right now.

    I already have a thing in place to charge for transfers. The thing is that transferring money from PayPal or Stripe to a bank associated to those accounts is very cheap, or even free depending on the bank. So I would be transferring the money from PayPal and Stripe to Monzo, and from Monzo to the sellers. The TransferWise business account would be for international transfers if I need to do any.

    What I will do is this: Encourage sellers so set a refund policy threshold of 14 days. This is a random number and I guess they could be required by law to set it higher or whatever, but let's say 14.

    I will be paying them every 2 weeks. And I will only pay them for the total amount of money that accounts for those orders older than 14 days after they are marked as "Completed" (sellers have to do this once they get confirmation that the package was delivered). That way I will avoid paying them orders that might get a request by customers to get refunded. Sellers can of course manually request a payment before the 14 day refund threshold is over. But they would be waiving their right to get refunded for the amount if the customer is not satisfied etc. 14 days is not that much and I think that this system is pretty reasonable.

    There will also be small fees for this payments (to the sellers). But they will be minimal and intended to cover the costs for transferring the money. I might also change this system, so I pay them every month instead of 2 weeks. Depends on how busy it gets, I guess. We will see.

    As for the hosting fees, I have been paying them from my own pocket since I started this project and I don't really mind keeping doing so. It's not that expensive.
     
    Posted: Apr 9, 2019 By: Unai Member since: Apr 9, 2019
    #16
  17. Unai

    Unai UKBF Newcomer Free Member

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    I spend virtually all my free time on this project (I have already invested around 750 hours on it, for free) so nope, I never expected it to be a 9-5 job. But to be honest, I'm one of those guys that just love having something to do all the time. I really don't mind it. It would be great to make a little bit of money off this, but that's only because I want to quit my bar job and work on this project all day every day.

    But since I already have a job that (somewhat) pays the bills, the first real thing I will do with any benefits that this thing makes will be hiring people to take care of all the easy but time consuming things - like verifying sellers. Easy enough to do, but such a bummer.

    And you are right, I'm gonna get **** for sure for not verifying them fast enough and stuff like that. I'm already dreading it, but it is what it is.
     
    Posted: Apr 9, 2019 By: Unai Member since: Apr 9, 2019
    #17
  18. Unai

    Unai UKBF Newcomer Free Member

    19 0
    You might be right. At first I wanted to launch it world-wide, but realized it was too much for just myself. Then Europe. Now I'm thinking just the UK, and that seems like just about what I could realistically handle.

    You think I should just focus on big companies? Like, already VAT registered companies. Charge normal VAT for every transaction and forget about small businesses and individuals (which by the way would have a reduced commission because they would not be making as much and I would feel bad for charging them the same).

    I don't really like the idea, but that would take most of the cheating out of the equation, and would reduce my workload and verification processes. And if happen to do well, then I could implement those things in the future when (if) I can afford to have more people on board.

    What do you think?
     
    Posted: Apr 9, 2019 By: Unai Member since: Apr 9, 2019
    #18
  19. Mr D

    Mr D UKBF Legend Free Member

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    750 hours is around a third of a working week for a year.
    Once you go live you may well be closer to 7500 hours a year. Running a business is annoying, painful, expensive, tiring, exhilarating, satisfying and there's nothing like it for training yourself.

    For each person you hire you have to recruit, get proof of right to work, train, manage - and all that paid for out of the profits you are making. So a person on say minimum wage full time, call it £18k cost to the business a year, needing spare profits of that much to cover their wages plus for 28 days of the year (and probably 2 days a week too) you get to cover them. Because they won't be working.

    You will have problems. Part of what makes a business is anticipating the problems and taking steps to reduce the chances or minimise the impact.
     
    Posted: Apr 9, 2019 By: Mr D Member since: Feb 12, 2017
    #19
  20. Mr D

    Mr D UKBF Legend Free Member

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    The problem is at first you cannot handle big companies. You won't have anything to attract them.
    Get a million buyers (for example) and you can perhaps start trying to get big companies. By that time your processes and policies will have been refined and you will have a handle on your time.

    You will likely find that bigger companies want to be charged lower price per unit due to volume. Worth trying to sort something out to encourage more use of the site.

    For instance ebay the bigger sellers upgrade shop to Featured and later Anchor - both more expensive than basic but per unit cost drops considerably. A small business with 10,000 listings will get reduced cost to list on ebay and if selling all of them will get reduced cost on paypal too.
    Some small companies may list a few million items - small by every definition except number of items they are selling. Dropshippers, listing a few million to sell a few hundred a day.
     
    Posted: Apr 9, 2019 By: Mr D Member since: Feb 12, 2017
    #20