Selling online looks simple from the outside. You list a product, someone buys it, money lands in your account. The reality behind that money is where most sellers come unstuck.
The figure that hits your bank is rarely the figure you actually sold. Amazon has skimmed its fees off the top. eBay has held some of it back. A chunk of it belongs to HMRC, even though it’s sitting in your current account looking like profit. Add a few EU customers, some stock bought in dollars, and a busy December and the admin stops being a side task. It becomes the thing that quietly decides whether your business is viable.
This guide walks through the three areas that trip up online sellers most often, with the UK rules as they stand now and the practical workarounds we use with our own e-commerce clients.
Why online sellers’ finances get messy faster than other businesses
A traditional shop has one till, one bank account and one stream of sales to reconcile. An online seller often has five of everything.
You might sell on Amazon, Shopify, eBay and Etsy at the same time. Each platform reports sales differently, deducts different fees, and pays you on a different schedule. Returns and refunds come back through the same channels, distorting your totals. If you sell internationally, you’re dealing with currency conversion and import paperwork on top.
The single biggest mistake we see is treating the marketplace payout as your sales figure. It isn’t. The payout is what’s left after fees, refunds, advertising costs and sometimes VAT have already been taken out. If you record only the payout, your books understate both your turnover and your costs, which throws off your VAT, your tax bill and your view of whether you’re actually making money. Getting this one thing right early saves a lot of pain later.
Getting VAT right
VAT is where online sellers feel the most fear, usually because the rules changed a lot after Brexit and again with the marketplace reforms. Here’s what actually matters.
When you have to register
You must register for VAT once your taxable turnover passes £90,000 in any rolling 12-month period. Rolling is the key word. It isn’t your tax year or calendar year. It’s any twelve months, so a strong run over summer can tip you over even if your annual figure looks comfortable.
You can also register voluntarily below the threshold. This makes sense for some sellers and not others. If you import stock or buy a lot from VAT-registered UK suppliers, registering lets you reclaim that VAT, which can be worth real money. If most of your customers are private individuals who can’t reclaim VAT, registering effectively raises your prices by 20% or eats into your margin. It’s a genuine judgement call, not an automatic yes.
When the marketplace handles VAT for you
This is the part that confuses people most. Since the post-Brexit rules came in, online marketplaces are treated as the supplier for certain sales and collect the VAT themselves. That mainly covers goods imported into the UK in consignments of £135 or less sold through a marketplace, and goods already in the UK that are sold by an overseas seller through a marketplace.
If you’re a UK-based seller shipping your own UK stock to UK customers, this generally doesn’t apply to you. You account for your own VAT as normal. The trap is reading a forum post written by an overseas seller, assuming the marketplace is dealing with everything, and quietly building up an unpaid VAT liability. Always check which side of the line your specific setup falls on.
Selling to customers in the EU
Distance selling thresholds for the EU are gone. If you sell goods to consumers in the EU, you can register for the Import One Stop Shop (IOSS) for low-value imports up to €150, or the One Stop Shop (OSS) if you hold stock inside the EU. These schemes let you report EU VAT through a single return rather than registering in every country you sell into. They aren’t compulsory, but the alternative is usually worse.
Choosing a scheme that suits how you sell
Once registered, you don’t have to use standard VAT accounting. Two schemes are worth knowing about:
- Cash accounting lets you pay VAT to HMRC only when your customer has paid you, rather than when you raise the invoice. For sellers waiting on marketplace payouts, this helps cash flow.
- The Flat Rate Scheme charges a fixed percentage of turnover instead of tracking VAT on every purchase. It’s simpler, but for sellers who buy a lot of stock it often costs more than it saves, because you give up most of your input VAT reclaim.
There’s no scheme that’s right for everyone. The choice depends on your margins, your suppliers and how patient you are with paperwork.
Tax beyond VAT
VAT and income tax are two separate things, and paying one doesn’t reduce the other. Plenty of new sellers conflate them.
Sole trader or limited company
If you trade as a sole trader, your profit is taxed through Self Assessment and you’ll usually pay on account towards next year’s bill as well. If you run a limited company, the company pays corporation tax on its profit, and you pay personal tax on whatever you take out as salary or dividends.
Neither structure is universally better. A limited company can be more tax-efficient once profits grow and gives you some liability protection, but it comes with more filing, more cost and less flexibility. For a seller turning over modest amounts, the admin of a company can outweigh the saving. This is worth a proper conversation rather than a rule of thumb.
Making Tax Digital is now arriving for income tax
If you’re a sole trader, you’ve already been keeping digital VAT records for a while. Income tax is now following the same path. From April 2026, sole traders and landlords with qualifying income above £50,000 have to keep digital records and send HMRC quarterly updates instead of one annual return. The £30,000 band follows in April 2027, and £20,000 in 2028.
If your turnover is heading towards £50,000, this affects how you should be keeping records right now. Spreadsheets stitched together once a year won’t cut it anymore. Moving to proper software before you’re forced to is far less stressful than scrambling mid-year.
Expenses sellers forget to claim
Online sellers tend to either claim nothing for fear of getting it wrong, or claim things they shouldn’t. The middle ground is knowing what’s genuinely allowable. Costs that are easy to overlook include:
- Marketplace and payment processing fees (these add up fast and are fully deductible)
- Packaging, postage and courier costs
- Software subscriptions for your shop, accounting and design tools
- A reasonable proportion of home running costs if you pack or admin from home
- Photography, samples and advertising spend
- Mileage for post office and supplier runs
Keep the receipts and a short note of the business reason. The note matters as much as the receipt if HMRC ever asks.
Bookkeeping that actually reconciles
Good bookkeeping for an online seller isn’t about being tidy for its own sake. It’s about getting your numbers to match reality so your VAT and tax are correct and you can see what’s selling.
Fix the payout problem first
Go back to that gap between your sales and your payout. The fix is to record the gross sale, then record the fees, refunds and other deductions separately, so the net agrees with what hit your bank. Done by hand across thousands of transactions, this is miserable and error-prone. This is exactly what tools like A2X and Link My Books exist for: they sit between your marketplaces and your accounting software, break each payout down into its parts, and post it correctly. For a multi-channel seller, that one bit of automation is usually the difference between books that reconcile and books that don’t.
Use software that talks to your channels
Xero and QuickBooks are the two most common choices, and both connect to the bridging tools above. The point isn’t the brand. It’s that everything flows into one place where the bank, the marketplaces and your records agree. If you’re still exporting CSVs and copying figures around at midnight, you’ve outgrown your system.
Track stock and cost of goods
Your profit isn’t your sales minus your fees. It’s your sales minus what the goods actually cost you. If you don’t track inventory and cost of goods sold, you can look profitable while slowly losing money on slow sellers. You don’t need a complex warehouse system to start. A simple, consistent method of recording what you paid for stock and what’s left is enough to tell you where you actually stand.
When to stop doing it yourself
There’s no shame in handling your own books early on. Most sellers do. The signal to bring in help is usually one of three things: you’re approaching the VAT threshold and aren’t sure what changes, you’ve started selling across borders, or you’re spending evenings on admin that you could spend on the business.
An accountant who works with e-commerce specifically is worth more than a generalist here, because the marketplace and cross-border rules are their own world. The goal isn’t to hand over a shoebox of receipts. It’s to set up systems that keep running with far less of your time.
The takeaway
The sellers who stay calm at year-end aren’t the ones who work hardest on their books. They’re the ones who set things up properly early: record gross sales rather than net payouts, register for VAT at the right moment, pick a structure and scheme that fit how they actually sell, and let software handle the repetitive reconciliation.
With Making Tax Digital now reaching income tax, the direction is clear. HMRC wants near real-time digital records, and the businesses that move early will find the transition routine rather than painful. Get the foundations right while your volumes are still manageable, and the admin scales with you instead of swallowing you.
If your online business is growing faster than your bookkeeping, that’s the moment to get the structure sorted, well before it becomes a problem.
FAQ
Do I need to register for VAT as soon as I start selling online?
No. You only need to register once your taxable turnover passes £90,000 in any rolling 12-month period. You can register voluntarily before that, which is worth considering if you reclaim a lot of VAT on stock and supplies.
The marketplace takes VAT off my sales, so do I still need to do anything?
Often, yes. Marketplaces only account for VAT in specific cases, mainly involving overseas sellers and low-value imports. If you’re a UK seller shipping UK stock to UK customers, you’re usually responsible for your own VAT. Check your exact situation rather than assuming it’s handled.
Why doesn’t my marketplace payout match my sales figure?
Because the payout is the net amount after fees, refunds, advertising and sometimes VAT have been deducted. For accurate books and VAT, you need to record the gross sale and each deduction separately so the net agrees with your bank.
Does Making Tax Digital apply to me as a sole trader?
It’s phasing in by income level. From April 2026 it applies to sole traders and landlords with qualifying income above £50,000, with the £30,000 band following in 2027. If you’re near these levels, start keeping digital records now.
Should I be a sole trader or a limited company?
It depends on your profits, your plans and how much admin you can stand. A company can be more tax-efficient and offers liability protection once profits grow, but it costs more to run. There’s no single right answer, so it’s worth getting advice based on your actual numbers.