Running an online marketplace involves various tax duties and compliance rules that business owners must stay on top of. With intricate sales tax regulations, income taxes, VAT, GST and other guidelines that differ by country, it’s imperative to grasp your marketplace tax responsibilities globally to remain compliant and avoid fines.
This guide inspects key marketplace tax laws and other taxes that online marketplace owners need to incorporate into their operations.
One of the most vital taxes for online platforms is marketplace sales tax. Numerous countries have distinct sales taxes pertinent to the sale of products and services, encompassing VAT in the UK and EU, GST in Australia, and state and municipal sales tax in the US.
As a marketplace owner, you may be accountable for charging, gathering, documenting, and remitting the accurate sales tax rates universally founded on your seller and purchaser sites. Most countries mandate marketplace owners to collect and remit sales tax on behalf of their sellers once transactions surpass a certain threshold.
Marketplace sales tax becomes particularly intricate in the US, where there are over 10,000 different tax jurisdictions across states, cities, and counties.
There are also evolving marketplace sales tax laws needing marketplaces to gather and remit sales tax on marketplace deals for sellers, even if the sellers aren’t established in that state. These intricacies make sales tax automation indispensable for US marketplaces.
Marketplace income tax
In most countries, online marketplace owners have to pay income tax on their business profits. Tax rates and regulations differ extensively by country.
UK income taxes
In the UK, if you operate your online marketplace as a sole trader rather than a limited company, your business profits are subject to Income Tax rather than Corporation Tax.
Income Tax is pertinent to your taxable income over the personal allowance, currently £12,570. The tax rates range from 20% basic rate to 45% additional rate contingent on total taxable income. You document and pay Income Tax through a Self Assessment tax return annually.
As a sole trader, it’s vital to track allowable business expenses you can deduct from your marketplace revenue, like platform costs, advertising, accounting fees, mileage, and other operating expenditures. Accurately recording your marketplace income and expenses will decide your taxable profit and how much Income Tax you owe.
UK corporation tax
If you operate your online marketplace as a limited company in the UK, you’ll need to account for and pay Corporation Tax founded on any taxable profits. This is applicable to resident companies, non-resident companies with an enduring establishment in the UK, and UK income of non-resident companies.
Corporation Tax is charged on all of a company’s profits, encompassing marketplace fees, commissions, advertising revenue, data sales, and any other income streams. Expenses and permissible deductions are subtracted to attain your taxable profit figure.
The principal UK Corporation Tax rate is currently 19% for most companies, but can range from 0% to 25% based on profit levels. Tax is paid nine months after your financial year end in most situations.
It’s essential for marketplace owners to uphold accurate financial records and comprehend what counts as taxable income versus allowable expenses to compute their corporation tax liability accurately. You may need to make quarterly installment payments depending on the magnitude of your taxable profits.
US income tax
In the US, marketplace profits are subject to federal income tax as well as state income tax in certain states. Federal corporate income tax rates are currently 21% for C corporations and vary for pass-through entities. State income tax rates range from 0% to 12%.
Grasping income tax rates in each country you operate is crucial for marketplace founders to appropriately budget and set aside funds to encounter their income tax duties annually.
Value Added Tax (VAT)
One of the most vital UK taxes for online marketplaces is VAT. VAT is a tax on the supply of merchandise and services in the UK, and there are particular VAT rules for online marketplaces and platform sellers that you need to pursue.
As an online marketplace founder, you may be accountable for charging, gathering, documenting, and remitting VAT contingent on your business model and seller arrangements. Marketplaces are generally deemed supply facilitators or intermediaries, so you may have to register for VAT if your gross sales exceed the VAT registration threshold, even if you don’t physically supply products yourself.
Under the UK’s Making Tax Digital initiative, marketplaces also need to uphold digital records of their VAT transactions and submit VAT returns employing compatible software. This is something marketplace owners need to factor into their compliance obligations.
VAT also administers differently based on whether your sellers are UK or EU founded, versus non-EU founded. For UK and EU sellers, you may be mandated to charge VAT under the destination principle, meaning VAT pertains founded on where the purchaser is situated. With non-EU sellers, you likely have to charge VAT at the point of sale irrespective of customer location.
As a marketplace owner, you’ll also need to decide the accurate VAT treatment for your platform fees and commission charges to sellers. This can depend on factors like whether your sellers are VAT registered and if you are contractually obligated to remit commission fees.
Retaining compliance with intricate UK and EU VAT regulations necessitates marketplace owners to implement robust VAT reporting and have systems in place to handle VAT registrations, calculations, marketplace tax collection, and remittance on behalf of sellers. Automated VAT tools can assist marketplaces remain compliant and eliminate the VAT burden from sellers.
VAT obligations for overseas sellers on UK marketplaces
- Overseas sellers making sales via a UK online marketplace may need to register for UK VAT. The marketplace itself must be VAT registered.
- For sales to consumers under £135, the marketplace is deemed to make the sale so should charge VAT. The overseas seller makes a zero-rated supply to the marketplace.
- For sales over £135, import VAT is charged to the consumer at the border.
- For sales to VAT-registered UK businesses, the overseas seller is deemed to make the sale so must charge UK VAT if registered.
- Sellers can reclaim input VAT if UK VAT registered.
- For goods stored overseas and sold below £135, the marketplace charges VAT to consumers. VAT-registered buyers self-charge reverse VAT.
- For goods stored overseas and sold above £135, import VAT applies regardless of customer type.
Obligations for UK sellers on UK marketplaces
- UK sellers on marketplaces may need to register for VAT if sales exceed the VAT threshold. VAT must be charged on applicable sales.
- Evidence of export is required to apply zero VAT on sales sent outside the UK/EU.
- Sales within the EU may require VAT registration and charging of VAT in destination countries.
Payroll & employment marketplace tax
If your online marketplace has employees or contractors, you also need to conform to payroll tax prerequisites in each country where your team members are situated. These encompass income tax withholding, employer and employee social security contributions, unemployment tax, disability insurance and other employer obligations.
In the UK, you need to register for PAYE to withhold income tax and National Insurance contributions from employees. Australia has parallel requirements.
In the US, you need to withhold federal and state income tax as well as Social Security and Medicare tax under the Federal Insurance Contributions Act (FICA) rules. There are also federal and state unemployment taxes, and workers’ compensation insurance necessities.
Failure to encounter payroll tax responsibilities can lead to substantial penalties in many countries. So it’s vital for marketplaces to comprehend the payroll compliance edicts wherever they have personnel.
Other marketplace taxes
Contingent on your business model, you may need to conform to other taxes like customs duties, product-specific excise taxes, insurance taxes, property taxes, and more. Understand how these taxes administer in each country you operate and factor them into your financial planning.
Learn more about marketplace tax obligations
Tax compliance tips for marketplaces
Here are some tips for marketplaces to regulate compliance across multiple countries:
- Determine all your tax obligations in each country and register fittingly.
- Implement tax calculation and collection systems to automate compliance globally.
- Integrate with tax compliance software to stay updated on rate changes.
- Set aside funds to encounter income tax duties in each country.
- Meet all payroll withholding, reporting and remittance requirements.
- Maintain detailed records to accurately calculate global tax liabilities.
- File and pay all required returns on time in each country.
- Check for new tax rules and marketplace facilitator laws in each region.
- Get expert cross-border tax advice to navigate multinational compliance.
Navigating global tax compliance is crucial and complex for online marketplaces operating internationally. Meeting obligations across many countries necessitates comprehending local regulations, automating tax processes, and obtaining professional counsel.
By making compliance a priority, global marketplaces can avoid legal issues and focus on increasing their transnational enterprise.