Unfair taxes squeezing my U.K.-based Business

I am located at the U.K.. Some of the challenges that affect my ecommerce company in first appear different from U.S. companies. Butactually, some of these challenges apply evenly, on each side of the Atlantic.

My current gripe is the unfairness of taxation. To be clear, I am not complaining about having to pay taxes — although it would be wonderful to not cover them. My gripe is that there is not a level playing field. Small-to-medium firms like mine are being squeezed out by competitors that don’t play with the same principles and pay much less tax. These competitions come from all directions.

Bedroom sellers

At the bottom of the market are the bedroom sellers. These are retailers that started out selling as a hobby, possibly just selling their old collections and new possessions. They move on to buying inventory (or use drop shipping) and expand.

These vendors have low-to-nonexistent overhead. They probably have not told their insurance company they’re running a business from home — hence their stock is not insured. They have not told their neighborhood council — they are not paying business prices. They do not announce their earnings — so do not pay income tax.

Lots of those sellers also appear to be unable to compute margins entirely and often sell at less than cost, as they have apparently forgotten the post or packaging or commission that they will need to pay.

These sellers undercut the market and drive prices down so we can not compete. For every one that goes out of business, there appears to be to replace it.

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Large corporations

Large companies appear to think that paying tax is not for them. They have offices worldwide and handle their own accounts so that they create losses in countries like the U.K. and the U.S. and their profits somehow, apparently, come from tax havens.

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Thus the percentage of the turnover that they pay in taxes is a whole lot less than a smaller firm. This, together with their own volume-buying power, enables them to reduce prices, leaving smaller companies exposed.

Foreign companies

Amazon is encouraging a global business. Amazon encourages vendors on Amazon.co.uk to sell on Amazon.com. Likewise U.S. sellers on Amazon.com are being encouraged to advertise on Amazon.co.uk. This leads to unfair competition.

U.K. merchants can sell in the U.S. without charging sales tax. Thus, we have approximately an additional 10 percent margin to play with. This is not fair on the U.S. sellers.

In return, U.S. sellers can sell in the U.K. without charging our sales tax — called VAT, value added tax — which is 20 percent. Thus, U.S. sellers get the additional, unfair margin. What makes matters worse is that the U.K. customers may be charged which 20 percent by U.K. customs when the parcels are erased. This is a random action.

In any case, we can not compete on price when non-U.K. opponents can avoid the 20 percent tax.

Illegal competition

Whilst the bedroom sellers could be prohibited, there is a much larger threat. This is largely Chinese rivals that hold stock in local U.K. warehouses and marketplace as”foreign firms” and thus do not charge the 20 percent VAT.

These businesses have imported the goods from the container, announcing a very low price and paying for the 20 percent tax with this minimum price. Then, the companies sell the product at a much higher retail price without charging the VAT. This is illegal. But governments proceed so slowly that it may be years before they discover and act on this.

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There is, moreover, a variant on this strategy. Large Chinese companies occasionally import and warehouse their stock into the E.U.. They enlist Chinese students studying in the U.K. to set up individual accounts on Ebay and Amazon, so they appear to be small sellers. The students get a small income, and the significant business avoids paying tax.

Clients benefit because the products are locally sourced and do not take weeks to arrive from China. And the customers don’t have to pay VAT. The downside is likely poor returns and refunds, and no warranty — things that lots of shoppers do not at first notice.

Things to do

For one thing, smaller ecommerce businesses need to market what we’re best at: specialized understanding, adequate customer service, prompt delivery, and a suitable warranty. We’ll have to guarantee our shoppers which we supply trouble-free purchasing. This will not stop the customer who only stores by price. But it will grab some who are more savvy and aware of the vendor.

The tax situation is less clear. It would be fairer if all retailers, irrespective of nationality, charged the exact same sales tax to a customer. The problem is how to calculate it and how to pay it to the ideal authority.

It would be much easier if Amazon and Ebay accumulated the sales tax and disperse it correctly. They are large companies with extensive administrative segments. Any proposal for small foreign companies to collect the sales tax and distribute it to multinational authorities will comprise such a layer of sophistication that many may want to stop selling abroad.

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It would be particularly tricky for people selling at the U.S.. There are thousands of different tax rates depending on the state, county, and city. Concerning selling in the U.K., there is just 1 rate, 20 percent, but even that is not so straightforward. Unfortunately, I’m unable to discover any laws coming shortly to fix this, and even when it does come, it will likely not be simple to implement.

In a nutshell, the net is making the world a smaller place. It is increasingly common to buy everyday items from overseas. Legislation has not caught up with this. Every small-to-midsize retailer should lobby his representatives to sort this out. Otherwise, we could end up with mostly large corporations — not smaller businesses.

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