When dealing with handmade, antique, or creative things, Etsy is likely to be your major internet marketing and selling platform. However, maintaining the accounts involved in such transactions can not always be simple. Marketplace commissions, VAT, currency conversion, and tax accounts must be managed correctly. This guide explains how to perform correct accounting for Etsy merchants and when engaging with an Etsy accountant can be advantageous to you.
Sales Revenue Tracking
Etsy sellers receive orders from the United Kingdom, the European Union, the United States, and several other areas. This implies you must keep track of your sales in connection with nations and their currencies. Etsy takes money from consumers, deducts the appropriate fees, and sends the remainder to your bank account. As a result, your accounts should show your gross sales, Etsy fees, and the net amount received in your bank account separately. Do not consider this bank payment to be income. If you do transactions in various currencies, convert each one to GBP based on the exchange rate.
VAT Compliance for Etsy Sellers
When selling on Etsy to various countries, it can be tough to keep track of VAT responsibility. In the UK, the threshold for VAT registration is £90,000 in taxable turnover in the previous 12 months, or if the turnover is expected to exceed £90,000 during the following 30 days. Overseas sellers do not immediately get the UK £90,000 barrier. In most situations, firms situated outside the UK must register for VAT in the UK if they make any taxable UK supply, subject to some specific limitations for marketplace sales and low-value consignments. For Etsy merchants, the following elements are critical in establishing VAT liability:
- Goods in the UK: The overseas merchant who sells products in the UK is normally required to register for and account for UK VAT.
- Goods imported from outside the UK: For consignments up to £135 sold through an online marketplace, the marketplace can normally account for UK VAT at the moment of sale. For consignments over £135, standard import VAT and customs procedures would apply.
- Marketplace VAT: The application of VAT can differ depending on whether Etsy levies VAT on behalf of the buyer or the seller in accordance with online marketplace guidelines. As a result, sellers want documents that show how each transaction is treated under VAT requirements.
- VAT Invoices: VAT-registered retailers must comply with HMRC’s VAT invoice standards whenever an invoice is required. A seller cannot presume that an order record on Etsy fulfils all VAT invoice criteria.
- VAT-registered traders must keep digital records and submit VAT returns using suitable software, unless exempt.
- Import VAT and customs duties: You must properly account for both. If you are a VAT-registered business, you can recover import VAT if the standard input VAT regulations are followed. However, customs duty is not the same as VAT.
For Etsy sellers operating internationally, proper VAT calculation and accounting are a must. You need an expert accountant who can assist you in segregating your marketplace fee, sales, VAT, and import charges so that your records are always up-to-date for your VAT return.
Expense Tracking
Good expenditure bookkeeping allows Etsy merchants to account for all company expenses that are tax-deductible and save money on taxes. List the expenditures for Etsy listings, purchases, transactions, payments, and ads. This makes it easy to calculate the expenditures incurred when doing business. Differentiate between direct and indirect expenses involved in the production of the item, such as material and packaging costs.
COGS and Inventory Management
The Cost of Goods Sold (COGS) is the cost of producing the items sold during the accounting period. One of the most popular formulas for businesses with inventories is Starting inventory + Purchases – Ending Inventory = Cost of Goods Sold. You can calculate the Gross Profit Margin by subtracting the cost of products sold from the revenue. Inventories are essential in this sense, especially for Etsy merchants who manufacture their own items.
The technique used to examine inventory can also have an impact on profitability. The seller must use the proper technique for inventory assessment, taking into consideration accounting rules and the type of business. Unsold stock is not recognised as an expense simply because they have not yet been sold. However, outdated inventories need adjustments.
Income Tax Obligations
The way you set up your Etsy business determines your tax liability.
If you run your firm as a sole trader, you normally disclose your earnings on the Self Assessment tax return. Typically, the deadline for online filing and payment is January 31 of the year after the end of the tax year. Registration as a self-employed individual is normally necessary by October 5 of the year after the end of the tax year.
Limited firms pay Corporation Tax on their taxable profits. Corporation Tax returns are due one year after the end of the accounting period, whereas Corporation Tax is typically due nine months and one day after the end of the accounting period. Withdrawals from the corporation in the form of compensation or profits can result in personal tax liabilities.
Reconciliation and Record Keeping
The website provides account data for payments, transaction fees, and other transaction reports that can be utilised to reconcile your Etsy activity with your accounting records and bank accounts.
Reconciliation is a critical step that can assist you in identifying any missed payments, payouts, or other errors before they influence your records. If you are registered for VAT, you must keep your VAT records digitally and file VAT returns using software compatible with HMRC’s system under Making Tax Digital, unless an exception applies. Typically, HMRC requires you to keep your company records for at least 5 years following the 31 January deadline of the relevant tax year. You must keep your records for different periods of time depending on the circumstances.
Accounting Software Integration
Having an efficient accounting system can save you time and prevent you from making mistakes while accounting for your Etsy shop. Common ones include:
- Cloud-based accounting software: Programs like Xero, QuickBooks, and FreeAgent can link with Etsy via either a direct or third-party integration, allowing information about sales and fees to be transferred to your accounts.
- Ecommerce accounting software: Link My Books and A2X can organise sales, fees, refunds, and VAT data before exporting it to your accounting program. However, you must manually examine the VAT consequences.
- Inventory management software: If you have a large Etsy store, inventory management software such as Cin7 can help you manage your inventory and purchasing operations.
Financial Reporting
Financial documents can help you decide whether your Etsy business is profitable. The profit and loss statement shows your sales, cost of products sold and other business costs. The balance sheet shows the business assets, liabilities and equity.
Cash flow reporting is also useful. It shows how much money enters and leaves your organisation, which can help you prepare for future expenses and tax payments. Etsy sales reports can help you identify your best-selling goods.
Practical Tips for UK Etsy Sellers
- Automate your repetitive bookkeeping procedures: Use Etsy reports together with appropriate accounting software, but ensure that your VAT and tax payments are entered correctly.
- Have a distinct company bank account: This simplifies the bookkeeping and tax reporting process.
- Reconcile your accounts: Match your Etsy sales, fees, refunds and payments with your bank accounts.
- Keep track of your inventory and cost of goods sold: Maintain accurate inventory records so your reported profits reflect the cost of products sold.
- Seek professional help if required: If you face problems with VAT or international sales, get expert help from an ecommerce accountant.
How UK Ecommerce Accountants Can Help
Keeping track of your Etsy revenues, VAT responsibilities, Etsy fees, currency conversions, and accounting procedures can be difficult as your Etsy business grows. Our ecommerce accountants for Etsy can perform the following for you:
- VAT registration and compliance, including a review of the VAT handling of Etsy fees and cross-border sales.
- Integrate your accounting system with Etsy, Xero, QuickBooks, FreeAgent, and other ecommerce platforms.
- VAT Return preparation, ensuring that the Making Tax Digital criteria for VAT-registered firms are met.
- COGS and inventory accounting guarantee that your profit figures are precise.
- Depending on your Etsy company structure, you are required to file either self-assessment or corporation tax returns.
- An analysis of concerns with Etsy payments, fees, and banking reconciliation.
- Tax and expense management services can help you through the process of controlling your tax responsibilities in accordance with the law.
- Professional accounting support allows you to focus on your Etsy business without worrying about accounting concerns.
FAQs
Do I need to register for VAT as an Etsy seller in the UK?
When your business operates in the United Kingdom, you must register for VAT once your taxable turnover exceeds £90,000 during the preceding 12-month period or exceeds £90,000 within the next 30 days. There are several requirements for enterprises operating outside the UK. Therefore, overseas Etsy entrepreneurs should evaluate their VAT status.
Does Etsy charge VAT on seller fees?
The VAT treatment of Etsy charges is determined by certain factors, including the trader’s location and the submission of a valid VAT number. Once the relevant circumstances are met, the VAT reverse charge regime applies to Etsy charges. If your company is not VAT registered, VAT can be applied to Etsy costs, and you are unable to reclaim it as VAT input.
What expenses can I deduct as an Etsy seller?
Allowable company costs are usually deducted when calculating taxable earnings. They can include Etsy fees, supplies, packing, postage, and advertising, among other expenses, provided they comply with applicable tax regulations. Keep your accounts up to date and save your receipts for any eligible deductions.
Do sole traders and limited companies pay tax differently on Etsy income?
Yes. A sole trader must pay Income Tax and National Insurance on their taxable business profits through the Self Assessment procedure. Corporation tax is charged on the profits of a limited firm. The proprietor is then required to pay personal taxes on any proceeds from the business.
What accounting software works best for Etsy sellers?
There is no one-size-fits-all solution for any Etsy shop. You can utilise applications such as Xero, QuickBooks, and FreeAgent. You can also use applications like Link My Books and A2X to automate the transfer of your transactions. It all depends on the number of sales you make, whether you are VAT registered, and what bookkeeping services you require.
When is the self-assessment deadline for Etsy sellers?
For most sole proprietors who prepare their tax return through the internet, they are required to send their tax returns before 31st January of the next tax year. Sole proprietors who are supposed to be registered as self-employed are supposed to be registered by 5th October of the next tax year.
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