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Online businesses

Would any practitioners out there like to share their experiences of accounting for online businesses?  Are there any common pitfalls that you have come across?  Business owners not understanding how to account for paypal transactions, etc,.

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Lots and lots of anomalies

I act for a lot of online businesses and they are very high maintenance clients.

Paypal is just one of many issues that you have to deal with.  Another is ebay fees.  In both cases, clients seem to think that the end amount of money into their bank is their "sales" and don't appreciate that the paypal and ebay fees need to be added back.  I've seen a few cases where VAT registration was missed because of this.  Also, they tend to forget to account for payments out using paypal, i.e. where they buy supplies from ebay.  The best solution is to have paypal as an extra bank account in your ledgers.  Most modern software now allows electronic data import so it's relatively easy to download reports from ebay/paypal as csv and then import them into the ledgers.

The next biggie is VAT.  Not only in regards to registration thresholds, but also on just what to charge it on, i.e. goods & services sold to UK, or within the EU, or worldwide, differing between business and domestic customers.  Then of course, reverse charge rules on goods/services bought from other EU countries.  Then there's confusion about whether to charge VAT on postage - client's can't understand why posted is VAT free to them but VATable to their customers.

Foreign currencies are always good for confusion.

There are also plenty of accounting and tax issues surrounding some integrated websites and payment processing firms - such as clickbank.  Some providers deal with VAT and actuallty pay it over themselves, paying the "net" amount after VAT and their fees to the business - others leave it to you to account for VAT.  Can be a minefield.

Of course the crux is the record keeping.  Online businesses tend to do everything online, so there's little, if any, paper.  Online reports usually time-elapse meaning they're lost if you don't save them yourself - a lot of online businesses forget to save them, or if they do save, they forget to backup, so it's quite common for them to have to suffer hefty fees to get replacement statements etc.

In my experience, there is no such thing as a "simple" online business.  When new clients approach me, I tend to quote 2-3 times higher than similar sized bricks & mortar businesses.  In fact, my highest fee earning client has a turnover of under £100k and profit of under £25k yet I charge him many times more than other similar sized busiensses - because he imports & exports different types of goods & services, has different VAT rates in play, loads of different countries, and uses a couple of different payment processors - one who pays VAT over themselves, the other that leaves it to the business to declare - all in all, an absolute nightmare to keep track of, with several hundred PDFs to wade through, loads of spreadsheets for different reasons, etc.  - it's a mammoth task to bring it all together to produce anything remotely meaningful.

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Do not know

Thanks Ken, I found your post very helpful. I thought online businesses would be easier, clearly this is not the case,

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No differences

We are an online business and so we have to deal with all the "problems", but these are no different that any other business. Most banks are pushing us to go online, and once you are happy downloading statements on a monthly basis that is fine. PAYPAL is no different you can download statements from there too.

We keep transaction reports in the same way as one keeps a till roll so really there are no major issues for us other than regular data back up. Probably helps to be VAT registered as that imparts a bit of discipline with regard to bookkeeping.

Virtual tax support for accountants: www.rossmartin.co.uk

 

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A more specific query

A web based gaming company charges users of the site a flat fee each time they play. The fees are from individuals all over the world however the payments go through a payment handler who collates a month's payment, deducts their fee and remits the balance to the company. the company has not been paying output VAT on its EU sales but I am not convinced this is correct. What are people's views?

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Paypal etc

I thought Ken's answer was excellent and mirrors my own experience.  Don't underestimate the complexities of multiple countries VAT systems and domestice versus business to business.

 

Ray

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Hi Amyaccountant

 I also fully support everything Ken has said about the potential pitfalls but I have personally found that the answer is in educating your clients. 

I have taken on a few where their previous Accountants have made a right mess of the job with many thousands of pounds having been written off on the ledgers. In all honesty I cannot see why they had to do that other than they have not taken the time to ask the client the right questions to get the answers. We have easily found the answers when we have redone them, balancing to the 1p in almost all instances and have often got refunds which have more than covered the extra fees. Even if the refunds are not available I find it starts me off in a good position with the client as they feel confident we are going to do our best to look after them. The down side is that there is definitely a time factor involved which is not always recoverable immediately but I have found it generally is in the long term as the clients have stayed with me for a very long time.

Yes they are time consuming jobs but again I have found that by asking the client the right questions you can generally gain their trust to give you relatively low level passwords which makes the information accessible. Then it is pretty straightforward. Paypal allows you to go back way more than a year and does of course record both the incoming and outgoing transactions. Most of the Merchant services we have approached have co-operated F.O.C when they know we are putting things right for the client. It helps them assess the position if they have accurate Accounts and they stand more chance of keeping the traders loyalty. We have even managed to get the charges reduced a few times which has earned us more brownie points.

Yes it is a pain when you have to gross up the sales but again it is a matter of education. Most clients can follow a logical explanation and they are getting relief on the charges anyway so at the end of the day it just moves the figures around a bit. Not registering for VAT because of these charges is a worry but then would they have registered on time anyway? If they are that close to the mark I doubt it.

I think it is up to you a lot. If you are prepared to commit the time to educate your client and even demonstrate the saving in fees if the clients does their share of the work I have found it is not much of a problem. Yes you might have several spreadsheets but you could have that with a sole trader who has lots of bank accounts (we have one who has 16 bank accounts in all plus a few building society accounts and uses them all for business!) Once we have explained things properly to our clients, with all the reasons why it needs to be done that way, I have found the client is quite anxious to do their bit. After all there is a big benefit to them in that they will now understand the figures as well! Our biggest internet trader has a turnover of x millions, made up of lots and lots of small amounts. It takes one staff member about a week per quarter to do their VAT which obviously involves writing up most of their books. Because we have written the records up the Accounts simply drop out at the year end and can take less time to do than some of our £20,000 turnover jobs.

If you are not interested in educating the client then I think you should really think hard as to whether you want to go down this route. I find it a pretty lucrative one as the client is happier paying higher fees because he recognises that it is more complicated than a straight forward service company. Well he does when you point that out to him anyway! If you don't have the time, the inclination or the staff to do this I think you would have a problem and it may well be best to steer clear.

Our clients deals with lots of different countries and of course the forces overseas but we have not found that much of a problem - it is after all the nature of the trade. I have a couple of useful iphone apps, one is a VAT registration checker which works worldwide and has proved invaluable in sussing out dodgy traders. Another one is a historical currency converter (I think that has only just come out) so you can go back to any prior date and enter the currency to get a conversion. You can get a historical currency conversion calculator on line as well. As long as you can verify the VAT Reg, know the basic rules for charging VAT and can access the settlement date for any currency you convert I don't see the problem. 

I do not have any experience of service providers who handle the VAT transactions themselves so cannot comment on that. You could always steer your client away from them! Reverse trading - well its a complication but if you know who is responsible for what it is manageable. I have tried to provide clients with basic info like which Countries are in EU and which not, summarise the legislation they are individually likely to come across and then answer questions on what is left or point them in the direction of the VAT helpline if I want/need to chicken out because I don't know the answer!

Good luck

 

 

 

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