What do Gymshark and Heist Studios have in common? Both are highly successful UK brands that use Shopify as their primary sales channel. Selling on Shopify clearly has major benefits but most new sellers overlook the needed bookkeeping and accounting for Shopify businesses. In this article, we will explore all the bookkeeping, accounting and tax nuances so you can assess whether or not you will be hiring a Shopify accountant.

Shopify accounting and bookkeeping is one of our specialties, so if you’re already set on outsourcing this part of your business, get in touch with us today. Let’s look at some of the important bookkeeping tasks when it comes to selling on Shopify:

1. Tracking Your Sales Revenue

Sales revenue tracking is the process of recording the total income from selling your products over a specific timeframe. This is fundamental to bookkeeping and accounting because it helps you understand how much money your business is actually making. In turn, this will allow you to make informed decisions, stay tax compliant and assess the profitability of your operations. As a Shopify seller, you need to consider a few things:

• Sales Channels: A sales channel is any place through which you sell your products. In addition to Shopify, you may well use other sales channels such as Amazon, your own website or even social media platforms. It is vital to track revenue separately for each sales channel to ensure accurate reporting.
• Shopify Payment Gateways: Payment Gateways facilitate the transfer of payments between a customer’s chosen payment method, such as a credit card, and your bank. They make the process secure and easy for customers but they do charge a payment processing fee on each transaction. Shopify allows you to use multiple payment processors including Shopify Payments, Stripe and PayPal. Regardless of which you use, Shopify sellers need to record their gross sales (the amount before any fees) and the transaction fees separately.
• Currency Conversion: Shopify allows customers to purchase from you using multiple currencies. If you choose to take advantage of this and sell internationally, you need to carefully track currency conversion rates and the associated transaction fees. For accounting and tax purposes, all sales should be converted to the GBP (British Pound) currency.
• Shopify Sales VAT: If you are VAT registered, Shopify can help collect VAT (Value Added Tax) on your sales. Since VAT is region-specific, you will need to pay careful attention to VAT-inclusive and VAT-exclusive prices depending on where your customers are based (UK, EU, or outside the EU). More on VAT below.

2. Tracking Refunds, Returns and Discounts

While sales revenue (gross sales) provides you a figure, you also need to account for refunds, returns and discounts. These must be deducted from gross sales to find your net sales, which shows you how much revenue you’ve actually earned. This is the amount of money your business keeps after offering those refunds or discounts to your customers.

3. VAT (Value-Added Tax) Compliance

VAT is a tax levied on the sale of goods or services. Due to the complexity of this tax, many sellers seek out Shopify accountants to keep their businesses VAT compliant. VAT compliance is the process of ensuring your business meets its legal obligations when it comes to this tax. This usually involves registering for VAT (if/when required), charging the correct amount of VAT on your sales, submitting accurate VAT returns by return deadlines, keeping VAT records, and paying the VAT you owe to HMRC (His Majesty’s Revenue and Customs). Here are some noteworthy points when it comes to VAT for UK-based Shopify sellers:

• UK VAT Registration Threshold: As of April 1 2024, UK businesses are required to register for VAT when their taxable turnover exceeds £90,000 in a 12-month period. However, you can elect to register for VAT before reaching the threshold, which some sellers do for the purposes of claiming VAT back on business expenses. If you sell to UK customers but are not a UK-based business, there is no VAT taxable turnover threshold and you must therefore register for VAT as soon as you make your first sale to a UK customer. 
• Collecting VAT on Shopify Sales (Output VAT): The manner in which VAT is collected and applied on UK sales can depend on whether you are selling products which are already located in the UK at the point of sale (POS), or if you are a dropshipper selling goods located outside of the UK at the point of sale (POS) - for example if you are selling goods which are being purchased via Alibaba or similar platforms on a per sale basis.
  • Goods in UK at POS: If you’re VAT registered, you must charge VAT on your sales to UK-based customers. The VAT you collect like this is known as Output VAT.
  • Goods outside UK at POS: The VAT treatment for dropship sales into the UK depends on the total value of the shipping consignment. If the value is:
    • Under £135: You will need to account for the Output VAT on the sale (at 1/6th of the final selling price). 
    • Over £135: VAT will be paid by the customer before the item is delivered to them.
• Reclaiming VAT on Expenses (Input VAT): The VAT you pay on business expenses and purchases is called Input VAT. As a VAT registered business, you can generally reclaim input VAT, provided the costs are for a business purpose and you’ve kept the VAT invoices from your suppliers.
• VAT Returns: As a VAT registered business, you are required to submit quarterly VAT returns to HMRC. These should outline details of your output VAT (VAT you’ve collected on sales) and input VAT (VAT you’ve paid on business expenses).
• Other VAT Schemes: The normal approach to VAT accounting is where you collect and account for Output VAT due on your sales and make a deduction against this for the Input VAT you’ve paid on expenses. You’d then end up with either a VAT liability to pay to HMRC (where Output VAT due is more than Input VAT reclaimable), or a VAT refund (where Input VAT reclaimable is more than Output VAT due). However, there are some other VAT schemes which you may be able to use, such as:
  • Flat Rate Scheme: This is where you apply a flat percentage on the sales you have made and pay this amount to HMRC. Under this scheme, you do not reclaim any Input VAT incurred as this is taken into account within the flat rate percentage that you apply. Most ecommerce sellers would receive a flat rate percentage of 7.5%. Whether or not this scheme would be beneficial will depend on your specific circumstances. Furthermore, there are restrictions over who can use this scheme, as it is generally only available to smaller businesses. 
  • VAT Margin Scheme: This is where you only account for VAT on the profit margin of your sale (sales price less cost you bought the item for). However, most ecommerce sellers would not be able to use the margin scheme as it is generally intended at those selling second hand items and also where you have not incurred Input VAT on the initial purchase. 
  • Cash scheme: This is the same as the normal scheme, except you account for the VAT on a cash basis, rather than on an invoice basis. For Shopify sellers, this is generally not a beneficial scheme to be on (since you usually get paid for sales within 2-3 days, whereas you may have certain costs that are subject to beneficial credit terms).

4. Cost of Goods Sold (COGS)

Your Cost of Goods Sold (COGS) represents the costs directly associated with producing and distributing the products that you sell on Shopify within a specific timeframe.
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You can calculate your COGS using:

COGS = Opening Inventory + Purchases (within the period) – Closing Inventory

Where:

• Opening Inventory is the value of your inventory on hand at the start of the chosen accounting period.
• Purchases are the costs of any additional products purchased during the period.
• Closing Inventory is the value of your inventory on hand at the end of the chosen accounting period.

COGS is an important accounting figure because it is an essential component when calculating your Gross Profit with:

Gross Profit = Total Sales Revenue - COGS

Here are some key points surrounding COGS for Shopify sellers:

• Product Costs: Whether you’re creating your own products, bulk ordering from suppliers or dropshipping, as a Shopify seller, your COGS includes all the costs of making or purchasing the products that you sell.
• Shipping Costs: If you’re shipping batches of inventory from suppliers abroad or locally, the cost of doing so should be included within your COGS. Where you pay suppliers a shipping cost which is passed on to the customer as part of the purchase price (often the case with dropshipping), this too should be included within the COGS.
• Inventory Management: Shopify does have inventory tracking features however it’s important you sync this data with your chosen accounting system. Remember, the amount of inventory on hand and the inventory valuation methods (weighted average, FIFO or LIFO) will affect your COGS. COGS affects your profitability which affects your tax liability.

5. Tracking Expenses

With any business, you want to track your expenses. This should be an integral part of your Shopify bookkeeping process because genuine business expenses are tax deductible. This means you can deduct them from your business’s profit which reduces the taxable income and, of course, the amount of tax payable. Among others, Shopify sellers should keep track of expenses such as:

• Shopify Subscription & Other Fees: You will generally pay Shopify a monthly subscription fee. You will likely also pay transaction fees for the sales you process through payment gateways. You want to track all of these fees and categorise them as business expenses.
• Marketing & Advertising: As a Shopify seller, you may well use various forms of paid advertising on Google, YouTube, Instagram or Facebook. These should be recorded as marketing expenses.
• Apps, Software & Plugins: Shopify allows you to integrate a variety of third-party apps and plugins such as those for email marketing or inventory management. These expenses should be tracked as operational costs.
• Order Fulfilment: If you choose to handle your own shipping, then the costs you incur for packaging, postage and any other third-party logistics (e.g. Royal Mail) should be recorded separately.

5. VAT Automation

When VAT registered, you want to ensure you are VAT compliant. Consider:

• Shopify VAT Settings: Although Shopify provides you tools to calculate and collect VAT based on your customer’s location, it’s essential to review your VAT settings frequently to ensure you are complying with current UK and EU VAT legislation.
• Third-party VAT Tools: Many Shopify sellers opt for third-party VAT automation tools. Avalara and TaxJar are popular choices. These tools integrate with Shopify to automatically calculate, collect and remit VAT. They are particularly useful for international sales.

6. Income Tax Obligations

Here are some important considerations when it comes to taxing the income your Shopify operation generates:

• Sole Trader (Self-Assessment): If you’re selling on Shopify as a sole trader, you must report your profits to HMRC through self-assessment. You will then pay income tax and National Insurance contributions (NICs) on your net profit.
• Limited Company (Corporation Tax): If you’re selling on Shopify as a limited company, you'll need to report your numbers to HMRC via a corporation tax return. Then, you will pay corporation tax on your profits. Any income you take as a salary or as dividends will be subject to personal income tax.
• Allowable Expenses: As discussed above, certain business expenses such as those for advertising, software or even office supplies can be deducted from your profits, which reduces your taxable income.

7. Reconciliation and Record Keeping

To ensure you are recording figures correctly, consider the following:

• Bank Account Reconciliation: It is crucial that you reconcile your bank statements with your Shopify sales records. This ensures that all transactions, from customer payments to payment processing fees, are recorded accurately.
• Transaction Reconciliation: Shopify has built-in payout reports containing information on your net sales (sales after transaction fees). You want to reconcile these figures with the gross sales recorded in your chosen accounting system (e.g. Xero).
• Digital Record Keeping: The UK’s “Making Tax Digital” (MTD) initiative means that VAT-registered businesses have to keep digital records and use MTD-compatible software to file VAT returns. You need to keep all your business records for a minimum of 6 years.

8. Shopify Accounting Software

There are a myriad of Shopify accounting software solutions you may wish to use:

• Shopify & Accounting Software: Shopify allows you to easily integrate accounting software such as Xero or QuickBooks. These tools can automatically import your Shopify sales data, categorise all your transactions and create financial reports.
• Automated Bookkeeping: Once the above software is integrated, you can also automate bookkeeping tasks such as tracking your revenue, VAT and expenses. This ensures accuracy by reducing errors caused by manual data entry.
• Inventory Management: If you’re managing your own inventory, you may well want to integrate software such as Shopify Inventory (formerly TradeGecko) or Cin7. These tools will automatically track your stock levels, reorders and stock valuation.

9. Financial Reporting

These are some of the most important financial reports you will want to generate as a Shopify seller:

• Profit & Loss Statement: This is a financial report that tracks your revenue, COGS and expenses over a specified period. It is essential to gaining an accurate picture of your business’s profitability and will aid you in making business decisions.
• Cash Flow Statement: As an ecommerce business owner, monitoring your cash flow is critical. This report will provide you great insight into your current cash flow and how to improve it.
• Balance Sheet: This provides you with a snapshot of your business’s overall financial health. It breaks down your business’s assets, liabilities and equity.
• Sales Reports: Shopify’s detailed sales reports will provide you insight into sales trends, customer behaviour and specific product performance. This information is invaluable when evaluating your business’s performance and assessing growth opportunities.

10. Tax Deadlines

Here are some key tax dates to add to your calendar:

• Self-Assessment Deadlines: The tax year runs from the 6th of April to the 5th of April the following year. As a sole trader (or as part of a partnership) you need to submit your self-assessment tax return by the 31st of January each year for the previous tax year. This is also when you will pay your balancing payment or receive a refund based on the payments on account you have made during the year. Learn more in our HMRC Payments on Account blog.

• Corporation Tax Deadlines: When operating as a limited company, you must register for Corporation Tax. The statutory filing date (deadline) is 12 months after the end of your company’s accounting period. You must submit your corporation tax return at any point between the date of your company year end and your statutory filing date. If you miss the deadline, you will face penalties for late filing. However, you may need to pay your corporation tax before your return is actually due. Company’s with a taxable profit up to £1.5m need to pay corporation tax within 9 months and 1 day after the company year end.
• VAT Returns: As a VAT registered business, your VAT returns are generally due quarterly but this does depend on your VAT scheme. You must report all sales, purchases, VAT collected and VAT paid within one month and 7 days after the end of each VAT period.

11. International Sales

If you sell to customers around the globe, consider:

• Multi-Currency Accounting: As a Shopify seller, you may well deal with international customers and need to manage foreign currency transactions as well as exchange rates. The key here is to ensure your chosen accounting system accurately records the GBP equivalent of each sale.
• International Tax Compliance: Should you choose to sell to customers in the European Union (EU) or other countries, ensure you are up to date with local tax regulations (e.g. the One Stop Shop - OSS in the EU). This will help you avoid double taxation and compliance issues.

Final Shopify Accounting Tips

1. Automate VAT Calculations: Use Shopify’s built-in tax tools or integrate third-party apps to ensure you are VAT compliant for UK and international sales.
2. Reconcile Frequently: Ideally, conduct monthly reconciliations. This will ensure that all transactions match your bank statements and your Shopify reports.
3. Keep Separate Accounts: Importantly, keep your personal and business finances separate from the outset. This is best achieved by using a dedicated business bank account.
4. Frequent Financial Reviews: Review your financial statements (e.g. Profit & Loss, Cash Flow) regularly. This will keep you on top of the business’s financial health and help you catch discrepancies early.
5. Consult a Shopify Accountant: Work with UK-based Shopify accountants, who specialises in eCommerce and VAT to ensure compliance across the board. That is exactly what we do at Ecommerce Accountants. See how we can help on our Shopify accountants page.

That sums up our high level overview of the best Shopify accounting and bookkeeping practices. We hope this helps you decide on whether or not you will be hiring a Shopify accountant. If you will be, feel free to get in touch with us. If you won’t, then we hope this information helps you maintain proper financial records, ensure tax compliance and, ultimately, make informed decisions for your business.