Wherever you sell your products, whether that’s on your own independent store, Amazon or eBay, it’s important to think about e-commerce VAT (value-added tax).
No matter what country you sell in, getting a good grasp of the taxes you’ll need to pay is super important.
Doing it early will not only save you time but save you a headache in the long run.
In this post, you’ll learn:
- What is VAT?
- Who does VAT affect?
- What VAT rate should you charge?
- How VAT affects delivery charges
- How to register VAT
- Pitfalls to be aware of
What is e-commerce VAT?
E-commerce VAT is a type of tax you need to pay if your turnover is more than £85,000. This tax goes for brick-and-mortar stores as well as online.
Once you’ve hit this threshold you must make sure that your site clearly has your VAT registration number (more on that below). If you fail to register for VAT, you could be subject for a fine.
So as soon as you start nearing the threshold, it’s important to get everything prepared.
When you list your prices on your website, you simply include the VAT tax to your prices. There’s no need to list your prices separately.
For example, instead of £10 + £2 VAT, you can simply write £12.
VAT differs from sales tax because everyone in the supply chain must pay VAT on their purchases. This includes manufacturers, distributors retailers, and consumers.
Who does VAT affect?
VAT affects any store owner that has a turnover of £85,000 or more.
On the buyer’s side, you need to think about who is purchasing your goods. F you sell items from the UK to other countries, most of these items fall under the zero-rate VAT band.
Equally, if you sell items to a VAT-registered EU buyer you’re able to apply the zero-rate band if you meet the following requirements:
- The items go from the UK to an EU country
- The recipient is registered for VAT in their country
- You include their VAT number and their country code in the invoice
What VAT rate should you charge?
In general, most products will be at a 20% rate. However, there are actually three different VAT rates you should be aware of. Some goods only have a 5% rate and others have 0%. These items are known as zero-rated. Others are exempt from VAT.
Please note, that even though there’s a 0% rate on VAT for some goods, this doesn’t mean you don’t have to declare it.
It simply means you need to declare it as taxable on your record, but you won’t be charged for the VAT on it.
How VAT affects delivery charges
When you’re sending VAT zero-rate items by post, you need to use this form. This for when you’re sending goods by post to VAT-registered customers in an EU country. If you’re using a courier, you’ll need to keep a hold of your airways bill number. Finally, if you go for personal collection, make sure you get evidence of removal when the items have left the country.
How to register VAT
When you find yourself ready to register for VAT, the UK.GOV website has a whole section dedicated to helping you get started.
If you do find you come into some trouble, be sure to reach out to a representative.
Where is your stock held?
Let’s say you’re based in the UK, but you want to house your stock in a fulfillment center in a different EU country. If you do this, however, you should note that even though the stock is owned by you, you now have created a ‘taxable supply’ for yourself and you’ll be immediately liable for VAT.
If you’re holding stock outside the EU or drop shipping from China, you need to make sure you know who the importer of record is as the responsibility for taxes depends on this.
If the customer is the importer of record, they’ll be liable for the import VAT when products are imported.
If you want to avoid this, though, then you should register for VAT at the first point of entry in the EU. This way you’ll be able to reclaim your import VAT on your return.
Pitfalls to be aware of
In 2011, the EU reported a loss of €193 billion from undeclared VAT. As such, they’ve begun to crack down on any people who might try and avoid it. This includes people who sell on marketplaces like Amazon or EBAY. If you do want to start selling internationally, make sure you have fully considered and prepared for VAT.
If you don’t you could be subject to any or all of the following:
- A fine. These fines carry interest and in some cases can be as high as 120% on top of the total unpaid taxes owed.
- Subject to comply with backdated payments
- Your marketplace account being shut down
- A formal investigation
International VAT (Distance sales)
A distance sale is where an item is sent to a private consumer in a different EU country. The supplier, in this instance, is responsible for delivery. This allows you to sell your products cross-border within the EU until you meet the thresholds.
Once you’ve exceeded that threshold, you’ll have to switch to the domestic tax for that country.
How this works in practice.
For the UK and Germany, the distance sales limit is £70,000 in the UK and in Germany is €100,000.
If you’re VAT registered in the UK and find you have plenty of customers in Munich, Germany, you’ll be eligible for VAT refunds in the UK up until the point where you hit €100,000 sales in Germany. At that point, you’ll have to start paying local German VAT rates.
So what now?
Now you have a basic idea of what VAT is and whether it affects you, it’s time to start preparing. As always, we recommend working with a great accountant who will be able to check you’re fully compliant.
Be sure to register as early as possible. In some cases, it can take up to 10 weeks to become registered and you don’t want to leave it too late and end up impacting your e-commerce business negatively