How To Minimize Tax & VAT For Your E-Commerce
Every business has the responsibility to file and pay its taxes.
Doing so provides an opportunity to fulfill your legal duties and consider the best practices to save money by reducing your taxes.
You need to carefully understand how much you need to pay to avoid overpaying on your taxes, as it can take a while to get refunded.
What is Tax & VAT?
Taxes are the compulsory financial charge imposed on a taxpayer by a governmental organization to fund government spending and other public expenditure.
Value-added tax (VAT) is commonly referred to as a goods and services tax.
This type of tax is placed on the price of a good or service at each stage of its production, distribution, and final sale.
Here, consumers pay a tax on any goods and services they purchase based on the product’s value.
How does your eCommerce get taxed?
The amount of tax you have to pay is derived from the profit your business generates.
Your profit is your total revenue minus total expenses.
The higher the profit, the higher the amount of tax you have to pay.
Therefore, the more you spend on your business, the more you save on taxes, as most business expenses are tax-deductible.
However, it would be best to keep in mind that not all business expenses are treated the same as some are measured differently.
What is the difference between costs and expenditure?
To understand how to minimize the amount of tax you have to pay, you will first need to understand the differences between your business costs and expenses.
All your business costs refer to the cost of production and operation, whereas all business expenses refer to fixed monthly expenses such as rent and utilities.
Regardless of how much you produce, your fixed monthly expenses will remain the same, unlike your operational costs.
This difference is relevant to how your business gets taxed.
All production and operating costs are deductible on your business tax return, lowering your overall income tax bill.
Another important factor to consider is the depreciation expense for each year, which is tax-deductible and known as a ‘non-cash expense’ as there is no check or receipt.
Despite there being no check, businesses can use it to reduce their income for tax purposes.
For example, suppose you buy a laptop for your business.
In that case, you can deduct the depreciation in its value each year, which is usually measured to be around 10-20% each year.
What is a deductible expense?
For tax purposes, a deductible is an expense that a business or a taxpayer can deduct from their gross income when filing their tax return.
Deductible expenses reduce the income earned and therefore reduce the amount of tax that is owed.
Examples of deductible expenses include advertising, transportation, travel, insurance, administration and management fees, delivery, maintenance, and repair work.
Depending on the expense, you can either deduct a percentage or the full amount of the cost from your tax bill.
On the other hand, non-deductible expenses have no impact on your tax bill.
These expenses do not add to the normal operations of your business and cannot be used to reduce your tax payable amount.
Non-deductible expenses are often referred to as ‘natural’ or ‘persona’ expenses, which do not contribute to the business’s operations.
Such expenses include food, clothing, rent, and gasoline.
It is often quite easy to identify which expenses are tax-deductible and which expenses are not.
How do deductible expenses save businesses money on tax?
It is crucial to understand the available tax deductions for your eCommerce business to minimize your overall tax payable amount.
If your business bears any of the following costs, you can claim a deduction when filing a tax return!
Working From Home
Most e-commerce businesses are run purely online and have no physical office.
If you work from home to manage your business, you may be able to claim a deduction for using part of your home as a workplace.
You can claim the specific costs for transitioning part of your home or any other building to an office.
You can also claim a business proportion of the total costs of using your home as a workplace.
Moreover, if your eCommerce is registered as a limited company, you could even charge it rent.
Lastly, you could also charge your business a fixed rate deduction either weekly, monthly, or annually.
Suppose you do have a physical office space and are sharing it with another business.
In that case, the cost associated with operating the space may be deducted as part of office costs.
This is quite similar to claiming the costs associated with a traditional physical office space which include utilities, office supplies, rent, and equipment.
Mobile & Internet
Another cost you claim is any phone bills associated with the running of your eCommerce business.
These costs include using a mobile phone to provide customer care service or liaise with suppliers or other business stakeholders.
You can claim the cost of making such phone bills when you file your tax return.
Moreover, suppose your eCommerce is registered as a limited company.
In that case, the company can also pay for the cost of a mobile phone or company landline.
Additionally, as all eCommerce and Dropshipping businesses are run online, you will need a strong internet connection.
A stable internet connection is crucial to running your business, which means your business internet bill is tax-deductible.
Keep in mind that if you work from home and use the same internet provider for your personal use and your business use, you will need to carefully calculate and deduct the proportion of your internet bill usage associated with running your eCommerce business.
Another crucial part of running your eCommerce business is your website and your platform to develop it.
Therefore, the costs of setting up your website, registering a domain, paying for any external IT assistance to ensure it runs smoothly are all tax-deductible.
This is limited to websites as any other application used to manage, track, and operate your business is tax-deductible.
These include any apps used to upgrade your website, manage its traction, process sales transactions, or track competitors.
Additionally, you can claim the cost of any hardware or software relating to the website’s functionality as tax-deductible.
Hiring Independent Contractors
All costs associated with hiring independent contractors or freelancers to assist with running your eCommerce business are tax-deductible.
You may hire a contractor to design your website, produce content for your website or market your products.
Regardless of the purpose of hiring a freelancer, as long as it is directly associated with the running of the business, these costs are tax-deductible.
However, make sure that you do not include any of your employees as freelancers or independent contractors, as it is illegal to claim tax deductions on regular employees.
Delivery, Transport & Travel Costs
Most of the costs incurred from delivering goods to the end consumer are tax-deductible.
This not only includes the shipping cost but all costs associated with packaging, envelopes, stamps, postage, and delivery charges.
Moreover, using your own car to deliver packages, attend client/supplier meetings, or carry out any other business activity necessary to operate your business is also tax-deductible.
Firstly, you may be able to claim a mileage allowance for business miles to cover petrol costs and any other costs to run your motor vehicle.
Secondly, you could also claim a business proportion of your vehicle costs if you operate your eCommerce business as a sole trader or a partnership.
Insurance & Bank Fees
Suppose you have paid for any non-health-related insurance for your eCommerce business, such as business or public liability insurance.
In that case, you will qualify for a tax deduction in this regard.
Moreover, all interest paid when you use a credit card to pay for business expenses or obtain a business loan is tax-deductible.
Professional & Legal Services
For whatever reason, if you have paid for any accountancy, tax, or legal fees to help manage your business finances and ensure your business is compliant with all legal requirements, such costs are also tax-deductible.
If you want to minimize the tax imposed on your eCommerce business, you should carefully consider these costs and how you can increase them to save more on your taxes and increase your profitability.
Moreover, you should never mix your business and personal expenses as this can severely impact your business and get you into deep trouble.
Remote businesses have become extremely popular. COVID-19 made it even necessary in some areas.
Not only are they a good option for employees but the business owners as well.
More and more people prioritize setting up their own remote businesses as it gives them more control and flexibility over their lives.
This article provides a complete guide to starting, growing, and managing a remote business.
What is a remote business?
A remote business is one where you work from here.
This working arrangement offers you flexibility as both you and your employees can work from home or anywhere else in the world.
While some businesses can work from home or come into the office, remote businesses have no corporate office and are run completely online.
To run and work for a remote business, all you need is your laptop and a good internet connection.
Why should you start a remote business?
There are many ways remote businesses save money compared to other businesses.
Remote businesses have lower startup costs as there is no rent to pay for office space, utilities, furniture, office supplies, cleaning services, food, and other workplace necessities.
It is also more cost-effective for the employees as they do not have to spend money and time commuting to the workplace.
Again, this aspect saves businesses more money as they no longer need to arrange their employees’ commute.
Improved Quality of Life
Remote working has now become extremely important for employees as they control their own work environment.
This increases their satisfaction and productivity levels as they work comfortably from their home and not from a busy office which can sometimes be distracting.
With absolutely no commute, employees get more sleep and are more energized when they get to work.
From a business perspective, if you have happier employees, you have a team that works well together and works more productively.
Remote businesses have access to a wider talent pool as they are not limited to hiring employees from a specific geographical location.
Therefore, remote businesses benefit from accessing a broader range of candidates who may better fit the company than local candidates.
Reduced Carbon Footprint
In today’s socio-political climate, organizations are under extreme pressure to reduce their carbon footprint and become more environmentally friendly.
It may be difficult for a traditional firm to switch to remote working and do so, so starting a remote business and avoiding that transition period is a huge advantage.
Since there is no office to commute to, a significantly lower amount of greenhouse gases is being produced as a remote business.
How to Start A Remote Business
Starting a remote business is a simple and easy process.
After looking at some of the benefits of starting a remote business, here is what you need to do to get started:
Generate a Business Plan
The first step is to outline a business plan. You need to understand what your business does clearly, the services or products it offers, how it makes money, and its goals.
You need to have a step-by-step plan in place on how you wish to achieve your goals.
Your business plan should also identify clear key performance indicators (KPIs) and any issues you think the business will potentially face.
A good business plan is crucial, as this is what potential investors see when they consider which businesses to invest in.
Get a Virtual Business Address
You will need a business address when you register your business.
This allows you to receive business emails and set up a business bank account.
Since you have a remote business and there is no office, you can use your home address.
Alternatively, suppose you wish to keep your personal information separate from your business.
In that case, you can use a virtual business address through a mailbox service.
Register the Remote Business
After getting a virtual business address, you will need to register your remote business.
Here is where you decide the business name, choose an appropriate business structure depending on how much tax you want to pay, and to what extent you want to be held personally liable.
If you want to learn more about registering a business in Hong Kong, you can look at our article here.
Funding & Managing Costs
Although remote businesses have lower startup costs than regular businesses, a few costs still need to be managed.
This includes website development, website management, marketing, legal fees, insurance, and technological tools.
Remote businesses also come with their own distinct expenses depending on their policies and employee benefits.
If you wish to provide your employees with work laptops and phones, this will be an extra expense.
Additionally, depending on how you want to manage your business, the type of software you use to manage your teams is also an expense.
You could also think about how you can get funding for your remote business through business loans, crowdfunding, or angel investors.
Develop a Marketing Plan
It is extremely important to have a strong marketing plan regardless of your remote business’s type of service or product.
Most remote businesses and startups become unsuccessful as they do not have an audience due to poor marketing.
Firstly, you will need to identify a target audience that will benefit from the product or service you are providing.
Secondly, you need to identify who your competitors are within the market so you can start focusing on setting yourself apart from them.
A good marketing plan outlines the target audience and the steps the business takes to connect with that audience to increase its sales.
Create a Remote Work Policy
The key to a successful remote business is a good remote work policy.
Any disorganization or lack of communication can lead to huge delays.
It would be best if you outlined your expectations from employees in terms of their communication, availability, timings, and responsiveness so every employee can be easily accessed when needed despite working from different locations.
Remote work policies also cover requirements and guidelines for data protection, minimum working hours, and set targets.
Other policies to consider when setting up a remote business include the employee code of conduct policy, employee disciplinary action policy, Bring Your Own Device policies, compensation and benefits policy, travel policies, work schedule policies, and employee complaint policies.
Such policies are important to keep employees and management accountable for their actions, ensure that the business is compliant with all legal requirements, and, most importantly, the expectations of the remote business.
Once Your Remote Business is Set Up
Hiring Remote Employees
Once you have successfully set up a business and created a remote work policy, you can start hiring and finding a team to run your business.
Based upon the nature of your business, you will need to list the roles that need to be filled for the business to operate smoothly.
Once you have identified the roles, you need to think about the skills, competencies, and qualities required from a candidate to perform each role’s duties successfully and responsibilities.
After identifying the type of candidate you are looking for, you will need to write the job descriptions for each role.
Therefore, a job description reflects the company and needs to be written extremely well to attract the right candidate.
You will also need to think of a recruitment process to consider and test each applicant carefully.
After doing so, you need to post your job description on your website or any other job board to advertise the opening.
Develop a Smooth Onboarding Process
When you’ve found the right candidates for your business, you should make sure to have a smooth virtual onboarding process.
Usually, employees find onboarding easier to build relationships in person, which is why you need to make even more of an effort virtually.
To do so, you will need to have all cameras on to create a more ‘face-to-face’ environment and communicate effectively.
This may also include having one-on-one meetings to ensure that each new employee is valued and understands company processes.
Additionally, you should also set up a remote working support group or helpline where the employer can address all concerns regarding onboarding.
It is important to have extra support available.
If you truly want to grow your remote business, you may need to think beyond using Microsoft Office 365 and Zoom.
You may want to consider integrating project management tools or practice management systems to streamline your business functions.
Project management tools such as Trello allow you to keep track of your projects remotely by allowing you to assign tasks, set due dates, and manage the overall progress of each project.
Other popular project management tools include Monday, Basecamp, and Wrike.
Additionally, you could also use video conferencing and chat platforms such as Slack to improve internal communication.
Lastly, suppose the nature of your business involves dealing with confidential information and personal data.
In that case, it is recommended to integrate some level of cybersecurity into your business data management to add an extra layer of protection from hacking or data leakages.
Conduct Regular Reviews
It may be hard to keep track of projects remotely, which is why you should conduct regular reviews with your employees.
This ensures that you are up to date with how work is progressing and provides you with an opportunity to see how your employees are feeling and if there is anything you can do to support them.
This regular interaction ensures that your employees feel valued and encourages them to be more productive and continue with the business.
Although the process of starting a remote business is quite simple, there are many factors you need to think of before you begin operating your business.
This is exactly why you need to break down each step and carefully analyze what needs to be done so you can start your business smoothly without any disruptions.