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VAT Moss and E-Commerce Business

Disclaimer: Policies discussed are as of the January 8 2016 changes to the HM Revenue and Customs VAT MOSS guidelines for E-Commerce businesses in the United Kingdom. All UK VAT and VAT MOSS guidelines can be found here.

In 2015, as an answer to large companies driving sales through countries with low VAT rates, the European Commission issued changes to VAT laws forcing E-Commerce businesses to apply VAT rates to their digital services based on the consumer’s location in the European Union, as opposed to the business’.

In essence, the same £100 service would now be £120 if sold to a customer in the UK (20% VAT rate), £121 if sold to a customer in Spain (21% VAT rate), and £124 if sold to a customer in Finland (24% VAT rate). This proposed an immediate problem for every E-Commerce business across the EU- there were 28 different countries with 81 different VAT rates, the prospect of accomplishing the admin work alone seemed insurmountable. As opposed to registering for VAT in every country your business sold a product in, the EC offered the highly attractive option of registering instead for a VAT Mini One Stop Shop (VAT MOSS) to E-Commerce businesses. While VAT MOSS did solve a huge problem for e-commerce businesses across the EU, much confusion arose and remains about its exact operation and regulations.

What to Know & When to Register

The main goal of VAT MOSS is to simplify things for the business, and it only applies to business to consumer sales of digital services. If you aren’t sure if your product qualifies as a digital service, HMRC defines them in extensive detail here.

VAT MOSS was introduced as a platform to distribute quarterly VAT returns directly to each country digital services are sold in, as opposed to you submitting VAT reports individually to each country. VAT MOSS requires you to submit one return quarterly that identifies your business’ total VAT accumulation in each country digital services were sold.

In order to register, your business must already be VAT registered in each country you have a fixed establishment. There are no thresholds for the new VAT laws, so even if your business falls under the £82,000 UK VAT threshold, you must still pay VAT on digital services sold in other countries. This means if you own a micro e-commerce business under the threshold, then you must voluntarily register for VAT (don’t worry, you won’t have to pay VAT on services sold in the UK) in order to use VAT MOSS.

Remember, you only need to register for business to consumer sales of digital services. A consumer is any person or business that is not VAT registered, so if you are selling services to a business that is not VAT registered, you must treat it as a business to consumer sale. There are also exemptions if your sales fall under non-business activities, which are explained here.

VAT MOSS Returns

HMRC requests when using the VAT MOSS scheme that your business keeps records of each sale for up to 10 years. These records must include the member state of sale or the member state of consumption, the date, the taxable amount and currency, the VAT rate applied, the VAT due and currency, the payments received, the invoice issued, and the information used to determine the customer’s location. The list seems extensive, but most of the information is required on your service invoice. Apart from the data on your invoice, documentation of the customer’s location is the primary record that must be kept. Most businesses must keep two sources of information, but businesses under the UK VAT threshold only need to keep one. This may be information provided by the payment service provider, an IP address, billing information, etc. Almost any documentation that confirms your customer’s location will suffice.

When filing your VAT MOSS return each quarter, you will require, for each member state services were sold in, the VAT rate type (standard or reduced), the VAT rate percentage, and the total of all taxable digital services sold. You must also submit a separate VAT return for services sold in the UK (micro-businesses who had to voluntarily register for VAT may submit nil returns). If you are leery about filing your first return, the HMRC provides a detailed walkthrough for first-timers using the VAT MOSS scheme.

While VAT MOSS remains imperfect, as evidenced by continual EC gatherings and amendments to the laws, learning to use it has become essential to reporting and paying VAT returns across the EU. It is our hope that some of the trepidation regarding VAT MOSS has been alleviated, and that you now possess an understanding of the benefits VAT MOSS can have for your e-commerce business.

Cash Flow

Many business owners I talk to don’t have a problem growing their business, they have a problem managing that growth.

Often when a business grows rapidly without being prepared it can lead to strains on the owner’s time, stretched resources, unhappy and disengaged employees and pressure on the finances of the business.

Put simply, sometimes high growth businesses are too successful for their own good, or should I say that’s how they appear, when in all reality this can be managed before getting into cash flow difficulties.  Sometimes the peculiar situation arises whereby a successful business appears to really be struggling financially when they don’t need to be.

What follows is some practical guidance for businesses of all sizes and in all industries for managing their cash flow.

Cash Flow Fundamentals

First and foremost it’s crucially important to understand how the cash flow of a business works.  This is not the same as the profit a business makes.  It is absolutely possible for a profitable business to go bust if they don’t manage their cash properly.

At the most basic level, cash flow is the difference between cash coming in to the business and cash going out of the business. It’s that simple right?  Well, not exactly, some attention is required to maximise cash inflow and minimise cash outflow.

To ensure that cash flow is optimised we can concentrate on 3 key areas for maximum effect.  These being Inventory, Accounts Payable (or Creditors) and Accounts Receivable (or Debtors).  Let’s have a look at each in turn.

  1.    Inventory

The purchasing of stock which will be re-sold at some time in the future, possibly as it is or possibly after some adaptation, has the potential for tying up your cash.  If a business has its money invested in stock sitting in a warehouse then this can’t be spent on other things which may be of more immediate benefit to the business.  Not to mention that the longer that stock is held increases the risk of waste, theft or obsolescence.

Only enough inventory should, therefore, be kept to fulfil firm orders unless the item is something which can be used in many product lines as this could increase response time to customer orders.  The management of stock will require an effective supply chain but only that which is required imminently should be kept on hand.  Keeping large amounts of inventory can mean increased costs associated with storing, managing and securing that inventory.

  1.    Accounts Payable

As a general rule of thumb, paying suppliers as late as reasonably possible will positively impact cash flow.  Businesses large and small can take advantage of maintaining an effective and lean accounts payable function.

Where suppliers invoice on credit try to pay as close to the due date as possible, if you have a good reputation for paying on time you may also be able to negotiate extended credit terms meaning that your money stays with you for longer. Occasionally suppliers offer discount incentives for early payment, you should weigh up the benefit of the reduced cost against the benefit of extended payment terms at a higher amount.  It very much depends on each individual situation and would need to be balanced against how much cash you have and whether your cash receives any interest invested anywhere else.  If you’re short on cash you would probably be better not paying earlier than necessary.

A cautionary note, however, would be that not paying suppliers on time regularly can lead to reputation damage, supply chain interruption and withdrawal of credit facilities.  This is not a position you want to find yourself in if you already have cash flow worries and will certainly make managing growth harder than it should be.

  1.    Accounts Receivable

If selling to a customer on credit the first step before anything would be to determine the risk of selling to them by checking their credit history, whilst no guarantee it should reduce the risk of default on invoice payments.  If a prospective customer has a history of non-payment then you need to determine whether you want the sale more than you want the money in the bank…the two are not the same thing.

Quite the opposite of accounts payable, the aim in accounts receivable is getting paid as quickly as possible.  One way of doing this would be to reduce payment terms for as long as your customers will accept this.  Another very effective way of getting paid on time is making it as easy as possible for customers to do so. There are a variety of ways that this can be done from electronic invoicing to accepting other payment methods or offering incentives.

In addition to all of the above, consideration should also be given to the selling price of products based on how complex they may be to create and deliver, so that you charge commensurate with the complexity involved.

One of the larger costs that businesses often incur is staffing, it’s always important to review workload and determine up to date and realistic staffing requirements- perhaps hiring staff to work in support functions is not the best option, that’s where specialist professional services companies come in.

On a final note it’s important to realise that often the business owner’s time is not best spent managing the day-to-day cash flow, that’s where accounting and bookkeeping businesses such as Sanay can help.

Business Success

For many business owners who are trying to keep costs down, they try to do their accounting and bookkeeping themselves.  But these areas that can make or break your business success.  They are critical in managing your cash.

Here are some reasons you must not do it all on your own if you wish to be successful in your endeavour.

1.       Challenges in growing business

Starting up your own company will have several challenges.  You will need to come up with the right business plan, budget, and methods to manage cash flow, among other things.  But engaging with a professional bookkeeper or accountant can make life easier.

You may think that doing it on your own can help you save money.  But is it a good idea to use your time doing taxes or other accounting tasks?  Or are you better off spending your time focussed on growing your business?

How much is 10 hours of your time worth? During this time, you could already be driving new sales, winning a lucrative contract or developing your business in other areas.  It probably doesn’t pay off doing it yourself when you think in these terms.

And what if you make errors?  You are likely to do your accounts all over again, which can double the cost.

Getting an accountant to take care of your finances will actually cost less in the long run.  You will not only have the extra time to think about how to generate revenue but you will also have peace of mind knowing that an dedicated professional is already looking after your accounting needs.

2.       Getting back on track

It is easy to lose track as your business grows.  Outsourcing all accounting jobs can help you avoid losing control of how much is owed and from which customers.

Outsourcing accounting jobs will also help you with measuring key business metrics.

They can also help you manage your payroll and produce great reporting that lets you see periodic comparisons.

If you outsource your accounting jobs to a company that utilises cloud-based accounting software, you can easily and quickly look at your business accounts to better understand your current financial situation at any given time.

Overall, these can help you in monitoring your business and keeping track of your cash flow.

3.       Delegating tasks

It is natural to feel reluctant in allowing others to handle any part of your business.  But your inability, however well intentioned, to handle everything can ultimately damage your business.

Therefore, you have to let go of some responsibilities and allow others to handle some of the support functions of your business.  In that way, you’ll have more time to look after the core functions, support your customers and concentrate on what you do best.

Delegating accounting and financial affairs to others is a good start.  Successful business owners are delegating their work to the right people.

Getting the help of an accountant can help your business every step of the way.  Your job is to run your business.  Leaving the financial details to someone more qualified is a positive step in the right direction to helping your business grow.

Having good financial management is a must for any business. In addition to preparing and understanding your budget, it is also essential that you monitor your cash flow.  If you don’t manage it well, you can run out of cash to pay the bills.  Pan Am Airlines, for instance, was once a high-flying brand.  But it is now gone and whilst the underlying reasons are complex these led to cash flow problems and the company ultimately ran out of cash.

What Could Go Wrong and the Things You Can Do to Manage Cash Flow Better

1. Not Following GAAP

GAAP or the Generally Accepted Accounting Principles is an accounting methodology that, amongst other things, helps keep track of the “money in and money out.”  If you don’t follow this system, your company will be running blind.

What you can do: Implement these standards to ensure your company has reliable accounting information that you can use to base your financial decisions on.

2. Counting Profit Before Collecting Payments

You may have sent the invoice.  But did you receive the payment?  Sometimes, customers tend to stretch pay periods.  As a result, you may see the top line figure, without knowing if they’ve actually paid you and then find out you don’t have the cash you thought you had.

What you can do: Have a system in place that lets you collect payments on time as agreed. In this way, your receivables are in balance with your payments.

3. Disregarding Cash Obligations

One of the most common mistakes by business owners is that they don’t prioritise bills and other liabilities.  These can easily accumulate and become hard to manage, which may ruin your cash flow.

What you can do: Pay bills regularly, take advantage of agreed credit periods and make sure that you are monitoring the money that goes out and tracking the money coming in.  Use the accounts payable module of an accounting system to help track payables and schedule payments.

4. Having Unnecessary Expenses

Many businesses spend money on unnecessary things, such as certain staffing costs.  They often miscalculate their true personnel costs, how many people they need and how much they should pay them.

What you can do: Before you go through hiring an employee for a certain job, look into outsourcing.  For instance, instead of hiring a bookkeeper, why not outsource it to a dedicated provider of these services.  This can significantly reduce your overall expenses.

5. Undercharging for your Products and Services

It’s easy to think that you can charge less to beat your competitors to the sale. But it’s not necessarily realistic, unless you are guaranteed to receive a significantly higher volume of sales.

What you can do: Perform competitive analysis to explore how much you can charge your customer for a particular service/product while still being competitive.

6. Ignoring Where your Money is Going

It’s easy to be blind as to where your money is going if you don’t have a budget or an investment plan.  If you don’t have a clear plan it’s easy to lose sight of what your income is being spent on.

What you can do: Create a solid plan to help you spend more wisely. In this way, you will be better prepared for unexpected expenses and big future purchases.

There are other things that can go wrong that may leave you with no operating cash.  You can enhance your cash flow in a number of ways, like improving debt collections, managing inventory, controlling interest and bank charges etc.  It is critical to ask for help from a business adviser or your accountant as early as possible.  Remember that issues with cash flow can indicate operational problems that require your attention.

Do you want to learn more about how Sanay can help you manage your cash flow to facilitate growth in your business? Schedule a free consultation today!

Finance Function Outsourcing UK

Many businesses these days are looking to outsourcing as part of a successful long-term competitive strategy – one that cuts administrative costs and increases administrative efficiencies.  With the increase of cloud-based services and the increase in business-over-web communications, pretty much any business function can be outsourced.  In fact, the worldwide outsourced market was estimated to be $309 billion in 2013 and is growing at a rate of 25% per year[i]!

The reason for this is because the outsourcing model is one that has been tried and tested for many years.  To be successful in any outsourcing venture, it’s important to first pick the right function that will be migrated to a vendor company.  Finance is the perfect function to outsource because in most cases, this is an administrative function – one that does not provide income for a business.  Because it’s not a primary income generator, there are very real benefits that include decreased cost, increased expertise, flexibility and focus.

DECREASED COSTS

There are many companies that benchmark their administrative costs against similar industries to make sure that they are working as efficiently as possible.  The reality is that costs tend to run much higher for companies with internal administrative departments in comparison with those who outsource these types of functions.  Outsourcing, when done correctly, almost always decreases costs.  The reasons include:

  1. There are no benefits to pay. When outsourcing finance functions, such as bookkeeping and payroll, you pay for the outcome based upon the work being done.  You don’t have to pay for sick days, holiday pay, medical insurance, or retirement benefits.  Simply reducing these types of benefit payments can contribute to an immediate bottom-line impact.
  2. You only pay for what you need. When structuring your agreement with the outsourcing vendor, you define the types of services you will need.  Whether these services require 20 hours per week or 50 hours per week, your payment terms will be based upon your specific and unique needs.
  3. You reduce overhead costs. When you use an outsourcing firm, the vendor is now responsible for turning on telephones, paying the energy bills, setting up the cubicle space, purchasing office equipment, and paying rent.  While it’s true that these costs are passed on to the client, they are also shared amongst all the vendor’s clients so your portion remains much lower than it would providing those items in your own place.

 

EXPERTISE

When it comes to running a finance company, the name of the game is risk mitigation. Everyone has to pay taxes, everyone has to report company earnings and everybody has to make payroll.  However, one mistake or miscalculation could lead to years of litigation and severe penalties. Using an outsourced company for finance functions makes sense because:

  1. You have access to the experts you need. A finance company providing outsourcing specialises on one thing:  FINANCE! Whether you’re facing a thorny accounting issue or have specialised bookkeeping requirements, you can find whatever expertise you need to help meet your specific requirements.
  2. Best practices are put to work for you. A financial company must stay up to date on the latest financial trends, business practices and governmental requirements.  Vendors understand exactly what types of practices work best in order to better serve their clients. This takes the onus off the client to have to figure it out.
  3. The best technology and software is available to you. A finance company invests in the best technology and software available in order to be the most competitive in the marketplace.  This type of investment makes sense for the finance company because finance is the core business.  For companies where finance is not the primary function, making this type of infrastructure investment simply doesn’t make sense.

FLEXIBILITY

Businesses are not static.  The demand ebbs and flows.  In order to be successful, your business functions need to meet the demand as it changes.  By using an outsourced finance company, you can rely on the vendor to ramp up or dial down availability to meet your need.

  1. Their entire team is at your service. By using a vendor company, you don’t just have one or two employees – you have a team working to meet your needs.  If someone goes on holiday, your personalised service doesn’t have to stop for the week until she returns.  Instead, you will have people available to you when you need them.
  2. You have scalability. Suppose you’ve got some temporary projects coming up that will require a short-term increase in staff.  You simply let your vendor know your requirements ahead of time and the vendor can make sure you have the number of people you need to meet this temporary demand.  In addition, as your company grows, there’s no need for you to have to take the time and effort to go through the hiring process.  You let your outsourced vendor know that your needs have changed and let them quickly and easily adjust to fit your new workload.
  3. You have flexible availability. Not all business is conducted from 8 am to 5 pm.  Sometimes your business requires someone available on a second or third shift.  Instead of worrying hiring extra staff and worrying about hiring extra supervisors to manage the staff, your outsourced vendor will make sure you have staff at the hours that you need them.

FOCUS

Let’s face it; you are in business to perform your business function.  Unfortunately, as an owner, executive or high-level manager, you probably spend a good bit of your time on all the other things that have to get done.  Payroll needs approved, audits need reviewed, expenditures need initialled and issues need addressed.  Administrative functions often are huge time and resource consumers.  So, the final, but most important benefit to your business is that you can:

  1. Spend your time on your core business! Outsourcing means that you negotiate your financial requirements, figure out a plan to manage the day-to-day tasks and then step back and let your trusted vendor take care of the administrative section of your business.  This means that you get to allocate your time and energy on building your business, selling your product and planning for your future!

Although outsourcing has proven to be beneficial for many companies, there have been a few published stories that describe how outsourcing can sometimes go bad.  Good outsourcing vendors study up on these stories in order to better understand what type of relationship works best for both the client and the vendor.  Several themes seem to come up and it’s important to address these potential pitfalls, especially if you are a business owner and are considering some type of outsourcing partnership. Understanding what to avoid can help you better build the right relationship!

Managerial control is not well defined.  In most client-outsourced relationships, the single point of failure often comes about because the transfer of managerial control is not well defined.  The vendor may believe they should make managerial decisions while the client believes these decisions should remain with them.   Unfortunately, without a good discussion prior to creating the contract that delineates a clear description of duties and responsibilities, the relationship could devolve into arguing over who is supposed to do what!

Combat this by selecting an experienced outsourcing partner, understanding the terms of the agreement, defining your service level requirements and fully defining the relationship terms prior to signing the contract. 

Lack of customer focus.  Unfortunately, there are some outsourcing vendors that enter the market only to get as much money as possible without providing a quality product.  Luckily, these companies don’t stay in business long, but for the clients they sign up, they can leave a lasting negative impression.

Combat this issue by doing your research on possible vendors, asking lots of questions about their practices and policies so you fully understand the specifics of what the vendor company provides.  Vendor companies that overstate their results are easy to spot as their practices won’t match their sales pitch. 

Risk of data loss.  This is certainly a biggie!  With the increase of hacking activity and the need to keep personal data as safe as possible, outsourcing vendors have a responsibility to their clients to make sure that the client’s data is kept safe and secure. Some vendor relationships break apart simply because there has been a data breach or confidential information is not kept confidential.

Combat this issue by asking questions about how data is kept secure and how the client’s need for confidentiality is handled. Although the vendor must keep certain details a secret, the vendor should be able to describe their overall security strategy and offer reassurances as to how they address the issue.

Hidden costs. There seems to be a misconception that outsourcing companies hook you in with initial low prices and then spring hidden costs on you later.  While it’s true that a few un-reputable companies may do this, most vendor companies will clearly outline the costs for their services and will publish their prices for your review.  This helps you to better find the company that suits your needs.

Combat this issue by asking to see a list of costs associated with the services.  Hidden fees are also hidden in the contract details, so read through those details carefully.  Great outsourcing vendors will always be up front with you about costs and will be willing to negotiate in order to build a long-term mutually beneficial relationship

If you are a company that is seriously considering outsourcing some of your business functions, we hope that this list helps you get more information related to why outsourcing can be a great idea for your company.  We also hope that you have a better idea of what to ask of potential vendor partners and what questions you should ask.

[i] Lacity, M. C., & Willcocks, L. P. (2013). Outsourcing business processes for innovation. MIT Sloan Management Review, 54(3), 63-69

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