Business Seller Preparing Taxes for HMRC with High Sales Volumes and Accounting Software

[cookienabber]

As a large ansd growing business seller, I'm working through my accounting, namely how to account for eBay transactions through Xero.

I've been able to keep tracking of invoices and payouts, but I am struggling to work out how exactly to translate the daily sales data into a format acceptable to HMRC.

I tried LinkMyBooks, which linked with my business eBay account and pulled all data on transactions, from the sales amount, fees, taxes etc, and even had an option where I can enter the cost price of my times and in theory this should work out my profit margin. My issue ultimately was that the charts weren't neccesary providing more info than I had already put together with Excel spreadsheets and the £30+ a month for the service seemed extortionate given that's more than Xero itself.

I've now setup a manual bank account to represent my eBay account and have entered data from the monthly transaction reports and tax invoices, to creating a running balance. I've applied my eBay payouts as transfer from this account to balance out those reports/invoices, which seems to work.

The remaining difference is that whereas LinkMyBooks pulled data on every single transaction, my manual process makes this impossible due to my high sales volume. I'm not sure if this is entirely neccesary. For example, if a mechanic was repairing my vehicle, I wouldn't expect then to account for profit on every single nut and bolt, drop of oil, used in the repair, when filing taxes, but instead would expect a total cost for parts used against revenue to show the total proft. So with eBay, why would I need to represent the exact profit from every single sale? Can I not show, at the end of each month for instance, my cost of purchases against revenue from sales, minus operating costs, to give a general report on profit over that time period? If I'm buying boxes in hundreds, would HMRC expect me to deduct the cost of a single box and against each order manually to calculate the exact profit on that indivdual sale? What about the postage label, dunnage, bubble wrap?

With Xero supporting MTD, I like to think that including all my purchases invoices against my transaction reports would provide sufficient data to appease HMRC. I can still access my monthly transaction reports from eBay and these are great for monitoring individual product performance. These could be used to back up my monthly total if requested by HMRC, but it seems trying to include every single sale into accounting software, seems unnecesary and costly given how much these ecommerce linking applications charge.

Can anyone offer advice on how they have handled their accounting in this way?

Thanks in advance.

ps (I am not posting from my business account)

[therenewalworkshopltd]

I use Link My Books and Xero and I have to say, that though it may not be particularly cheap, the amount of time that it saves is well worth the cost.  So not entirely sure why you want to go back to manual?

I'd be willing to bet that the time spent on your accounts, could be better spent doing something else.

Regardless however, I would strongly advise that you get the advice of an accountant.

Just as a reference, I was using LMB when I was doing several million transactions a year with no issues at all.

It was always a no brainer to me, the time saved was worth every penny spent.

[cookienabber]

Thanks for the reply.

The issue for me is that I'm very good with IT and have been using a spreadsheet for the last couple of years, which I have set up to extract data from the eBay transaction report and present in in various charts and tables that show company performance. I just copy and paste the data in the and charts that I have customised, show more of the information I want then the LMB charts.

LMB clearly extracts data from each sale and can link it to individual stock content, which again, is something I've already done in Excel. Where it may automate the process the same way, it also requires that every single item/variation be priced up, meaning I have to set up a price for thousands of products that I stock. The admin to set this up, isn't much different to what I have to do in Excel for my database.

I've setup up Xero to run the account off the monthly account summaries, which show revenue, payouts, taxes etc, which I can then weigh against my invoices for goods/costs. In theory, this is money in and money out in the most basic form, with the difference being profit. As I'm 37 days away from submitting my first tax reinbursement and a year away from my first annual tax return, so I want to get this right so I don't have to redo 12 months of taxes.

I'd like it if a business seller with experience with HMRC and Xero might be able to offer me some insight and advice on what level of information HMRC are expecting me to keep and eventually submit thought MTD. I'm aware I may need an accountant at some point, but I'm currently trying to learn all I can and utilise MTD as much as possible and implement processes to keep track of the data these services would require.

Thanks!

[therenewalworkshopltd]

As strange as it may seem, I'm also very good with IT.  Spent most of 20 years in the industry.  🙂

And I have experience of MTD and Xero, as I submit returns every quarter for two different companies.

It's fine if you really want to set things up that way, but I do question as to why you think that you need to enter all of that information into LMB?  It's a nice to have, but far from a requirement.
Yes, if you do that, then you will be able to get a profit and loss etc from LMB's.  But why on earth do you actually need it to do that, when Xero will do it for you, with no extra work?

I would advise that you keep to the accounts package to work out your profits/losses and just use a spreadsheet to work out indidivual lines profit/loss.

[cookienabber]

Thanks for the reply. 

LMB has an inventory option which lists every item in my store. I can enter the cost price for these items and I assume it works out the profit/loss for every item. This seems to support the various charts and performance figures the add on provides, but it's nothing I haven't already set up in Excel by pulling the data from my transaction reports.

Also, rather than price up each item (multiplied in the case of variations), I've given each product listed a unique product code. For example, if a product has 10 variations, they all share the same product code, even if I price them differently. For example, trading cards are valued differently despite coming from the same box or pack, so each card may have different profit margins, but putting them all under one product line, gross profit is simply revenue from each product line - total price paid for product line. Fees, taxes and costs (ie boxes) are all invoiced separately, so net profit can be worked out on a monthly basis by revenue from all product lines - cost of goods from all product lines - operational costs. 

This is all through Xero and I have no intention of getting rid of this, my issue is that LMB pricing is more than Xero and I don't see the value in the product as it isnt doing anything new, aside from itemising individual sales. I just don't see why HMRC would want that level of info, and if they requested it, I could just send over all my transaction reports, which should support the figures on my monthly eBay reports.

I'm essentially testing the water here, as this is all mostly theory right now. My business continues to grow rapidly and I would really appreciate some advice from eBay sellers who have more experience with HMRC. 

Many thanks

[therenewalworkshopltd]

I'll leave you to those sellers that have obviously more experience with HMRC.

[cookienabber]

I wasn't trying to out you down, only being specific about what I'm looking for. With your experience with Xero and MTD, you should have some insight in how this has worked for you and whether you had to make some adjustments to your process after feedback or problems with HMRC. 

[ojewellery]

This may not directly be answering what you''ve asked but may also provide further food for thought. 

I use link my books and Xero.  I'm a multi platform seller, albeit I don't sell millions of items do my volumes may be far less.  I'm originally an Engineer also proficient at excel.  As a rule of thumb, I consider my time, as a minimum, is worth £20/hr. Hence £30 is 1.5 hours of my time.  Link my books provides a full digitally traceable link into Xero for every transaction and all can be accounted to the penny.  My accountant who costs more than LMB or Xero, then produces my VAT and annual returns from Xero.  I've had an HMRC mini audit - following a few randomly selected transactions through my files (prior to being fully digital). This year a full audit for the 20-21 tax year every transaction, every bank statement, every receipt and invoice.  I'm glad I'm now fully digital.  All this info is now in Xero.  A few years ago it would have been many boxes of paper files and harder to show the paper trail.  Now,it's all in one place,all linked.  A button press to meet an HMRC request.

  I also had a penny drop moment this year, after reading (listening on audiobook) to Profit First.  My Xero accounts are for HMRC, they're my legal accounts for tax paying.  My personal data records are derived from sales reports and third party inventory management software where I can look at average price paid vs sales price vs channel.   So I can assess profitabilty at an item level, an SKU/ platform across all platforms etc.  Excel allows me to manipulate my reports to extract the info I need to keep an eye on my operation expenses, cash available for stock investment etc.  link my books and Xero meet my legal tax obligations. 

[cookienabber]

Where you say you had a full audit for every transaction, I think that relates to my question. The eBay transaction reports, in csv format, technically provide this information and should account for the totals on the monthly summary if the dates match. I've been compiling these csv documents, so they are available to backup the monthly summaries. With LMB, they are compiling (and submitting?) this info automatically. I guess the question is whether there is really any value to paying LMB to provide this routinely, compared to manually storing and submitting eBay reports on request.

The other detail I guess is that the eBay reports don't show what the profit margins are, whereas LMB, had that inventory option to calculate profit per item. I have to wonder whether this makes any practical difference when the revenue is shown on the ebay reports and I would be submitting my costs of goods anyway. Does the inventory and profit margin calculation on LMB form any part of the MTD submission?

The idea in my head could be explained as this. If I spend £1000 a month on products, hit £2,000 revenue, and costs are £500, that's £500 profit, regardless of which and how many items I sell, when I bought them or what their individual profit margins are. 

To advance this, I would claim back the tax every quarter on the £1000 CGS, plus any tax from costs, then spend that on more product, with the aiming of wiping on my profit margin in favour of compound growth and trying to get as close to zero tax owed. Maybe even use a credit card at the end of a tax period to get into negative balance and claim more tax back.

What are your thoughts on this approach? 

[ojewellery]

There's more than one correct way to do things.  For me having a push button every thing syncs and tallys each week/ month/ quarter/ annum gives great peace of mind.  I spent too long double/ treble checking myself - it was an emotional burden I could do without. 

Stock management is an area I've spent a lot of time on this year.  I'm overstocked - I've taken money out of the business each year but also invested in expansion - like you looking at putting some of my profit back into the business.  I didn't have an end plan on this or a business plan on how far I wanted to expand.  That in itself wasn't an issue but what I hadn't spent enough time on is looking at stock rotation and sell through rates.

Every product type has a stock turn period.  For fashion its something like three months, jewellery more like 12 months  for higher value jewellery items longer.  For some stock its weeks.  I now have spreadsheets looking monthly at my rolling 12 month stock turnover per SKU (Stock Keeping Unit).  I sell jewellery so my stock turn is 12 months hence the rolling 12 months I use for assessment.  From this I automatically allocate a stock status to each SKU (formula based) on if its rotation is average, above average, below average or dead somethings really not right.   To reorder any line its got to be average or above average standing.

In a perfect world the below average and dead would be zero. 

Change, what ever product you sell is inevitable. Todays best seller could be tommorows dead stock - things like facemasks in the pandemic, a popular toy or passing fashion phase.  So this figure will realistically never be zero but monitoring it with a growing stock volume is something I now think is an important metric.  To encourage time investment in maintaining healthy stock.

On the boards there are often posts of people with high volumes of stock but low sales when historically they've had great sales.  I wonder how many fall into the trap (I have) of continual expansion but ever growing volume of slower moving stock.  Ultimately a stores sell through rate taken as a whole slows and I don't think the algorithm can like this.

Regarding avoiding tax, I get the theory of it but if you're not using your tax free allowance whats your end game plan (rhetorical question) Ultimately you'll need to pay some form of gain on the goods purchased, whether your expansion leads to you being a ltd company (which is when I had to pay) or you sell the stock on in bulk as a going concern to another person. If it retains or grows in its capital value great but if its a growing volume of slower moving items, not so great.

[cookienabber]

Thanks for the reply and some insights.

I agree that some products/markets require some specialist knowledge and art in how you conduct your business. Following trends and using data to monitor product performance throughout the year is part of that. I do this myself on my own products, where some are released in waves, limited runs or peak periods throughout the year. I've just had products in specifically for Halloween and having sold 90% of what I ordered, so I'm confident I had the numbers right, plus the stock isn't time sensitive, so good for next year. I'm doing the same for Christmas too.

The idea of avoiding tax is more of the business view that cash/profit is toxic. I spent some time investing and there's a few legal tricks that are shared in business. Essentially minimise your tax liabilities by locking in your losses at the end of your tax period, use cash/profit in hand to buy more stock/assets, pay down debt. Consider Amazon with their low profit margin, but constant reinvestement into the business, is how they were able to expand so rapidly, but where they are struggling now is simply that they have grown to a scale too large for a market they have over-saturated.

I don't claim to be the next Amazon but my intention is to continuing scaling up the business to secure true financial independance. I work 25 hours a week to cover my overheads, but hope to reach a point where my business is scaled up to the point where I can justify quitting employment entirely with a business that can claim those same 25 hours from me due to being able to cover the same  salary.

But back to the point at hand, and your mention of an SKU is pretty much what I do, only I tend to clarify all variations of a product under a single SKU. So in your case, you might order a box of shirts under different sizes, and you may notice different demand on that basis. Similarly, I would have a box of products with different versions, different demand, and I price each variation accordingly. In the most extreme cases, I might make a loss on one variation, which is balanced out by a gain on another. So rather than over-complicate this by having to account for every variation (especially when some trading cards sets are around 450+ cards), I cound them all under the same SKU. So the cost of a box of cards, weighed against the total revenue from all cards sold, provides my profit margin.

I think the LMB feature of setting a price for every product sold, is good for small volume, but when you need to set a prices for literally thousands of products, this becomes realistic. My process of using SKU to cover multiple variations, is simpler. It's only a question of whether HMRC would disagree. Looking at the tax forms, they seem to care more about a general total of expenses and revenue, so this seems to be the case. I suspect I might be on the right track, so summaries are acceptable, as long as can back up those summaries with data on every single sale, which is possible as long as my eBay transaction reports are filed so they can back up the monthly summaries. I may update on exactly how I have done this shortly.

I think where LMB can offer a lot, is how they can extract data automatically and present it in useful graphs, showing the patterns you speak of. I think I'm fortunate in that I have enough IT knowledge to pull and present this same data through Excel, so I don't think I need to be paying LMB monthly. I think LMB just gave me a false idea of what data HMRC are expecting through MTD on a regular basis.

I would also need to speak to Xero about their MTD process and what information is being sent by their system. It's all well and good to have a manual eBay account set up, but if Xero doesn't include this in their MTD data package, this would be a problem.