As you will probably already know, an e-commerce store is a virtual shop that may be run by an individual, or be a business with 200 employees. Regardless of size, tax is something that affects not only eBay sellers, but also all other e-Commerce store operators. To help clear things up for you weâ€™ve put together this easy-to-understand guide to VAT for UK E-Commerce Businesses in the UK. So that you can remain compliant, weâ€™ve included everything you need to understand the world of VAT.
UK VAT and Ecommerce â€“ An introduction
Tax is often confusing for many of us, but even more so when in relation to selling online. Ecommerce is quickly becoming a key economic driver and itâ€™s hard to disagree that itâ€™s also a growing business market within the UK. Digital ecommerce can leave sellers not knowing what tax they should be paying (if any?), but itâ€™s also difficult for governments to monitor and collect all necessary taxes.
In summary, VAT is a tax imposed upon the majority of goods and services sold in the EU, with the UK currently charging a set rate of 20% VAT.
With this being said there are certain points worth noting. Some businesses within the UK are eligible of paying a reduced VAT rate, for example if they sell home energy and childrenâ€™s car seats. Alongside this, some businesses are subject to paying zero VAT rates, for example if they sell childrenâ€™s food and clothing. For a full list of both reduced and zero rategoods you can visit the official UK government website here
When do I need to pay VAT?
- If the turnover of your business is Â£82,000 or above annually
- If you receive goods within the UK from the EU amounting to more than Â£82,000
- If you expect to go over the VAT threshold within a single 30 day period
All of the above applies regardless of whether you sell reduced-rated goods or zero-rated goods.
The three main transactions with potential VAT implications for eCommerce businesses:
- The supplying of physical goods to businesses or private consumers
- The supplying of intangible goods or services to a business
- The supplying of intangible goods or services to private consumers
As the majority of eCommerce stores sell physical goods, the remainder of this article will focus on this aspect of VAT. If you require further information on intangible goods/services to business or private consumers, â€˜out-law.comâ€™ has an insightful article that you can read here.
Due to many eCommerce businesses selling their goods to a range of different countries, it is important to consider both domestic and international obligations.
UK Ecommerce Business, Distance Selling, and VAT
Supplies of physical of goods are generally deemed to have occurred in the place where the goods are located when they are dispatched.
â€œHow does this affect me?â€ Well, it doesnâ€™t matter whether someone orders goods (using electronic communications) from inside or outside of the UK. This will not change the way in which they are treated for UK VAT purposes. Even though goods may be ordered outside of the UK, this still has no effect on the actual location of goods when determining UK VAT.
Putting this into action: If you are a) UK-based & b) you are dispatching your goods to countries outside of the UK, if the value exceeds Â£82,000 annually then it is likely that you are eligible to register for UK VAT. (It is important to note that if you also sell goods to one or more EU countries, you may also be required to pay VAT in one or more of these countries. This is discussed below).
A noteworthy point is that there is the potential of paying zero-rate VAT when selling to overseas EU-based businesses.
There are some depending factors on whether the supply of goods to a customer from outside the UK becomes applicable to VAT â€“ it depends whether they are a VAT registered business or not. Goods can be zero-rated if they are sent from the UK to a VAT-registered business in another EU member state, providing that particular conditionsÂ are complied with. This includes the obtaining of the customerâ€™s VAT registration number.
Sales will be subject to UK VAT when selling to private customers in the EU. This remains valid unless the level of sales by the business to private customers within a specific member state exceeds the distance-selling threshold for that state.
Lets use an example. If you were to sell â‚¬48,000 worth of goods to private customers in Spain, you would be required to register for VAT in Spain. This is due to the distance selling threshold in Spain being â‚¬35,000. But before you begin to worry, this doesnâ€™t mean that you will need to pay VAT twice. You will no longer be subject to UK VAT if you become eligible to pay VAT in another EU member state.
It is worth bearing in mind that volunteering to pay VAT in another member state may be seen as desirable, even if you havenâ€™t yet exceeded the distance- selling threshold. This is due to some member states potentially having a lower rate of VAT than the UK.
An important point to not forget is that if you opt for registering for VAT in another country, be aware that you will need to trade in compliance with their local rules. The legislation of VAT varies throughout the EU, making it extremely crucial that you are aware of what is required by yourself to remain compliant. This will aid in the avoidance of any fines and penalties.
Those selling into the UK
Although this article has focused on the eCommerce businesses within the UK it is unknown by many that selling into the UK comes with taxes too. Those sellers from outside of the UK that sell to the UK through Amazon or eBay are liable to pay UK VAT. But, some non-UK sellers claim that their items are â€˜giftsâ€™ or worth less than Â£15. This makes the item exempt from UK VAT. In turn this could lead to the UK losing millions of pounds in VAT each year.
How can this potentially affect a UK seller? Simple. If a seller from overseas is paying little or no VAT, they will then be able to price the item at a more competitive rate, thus causing the UK seller to either lower the items price or lose money.
It goes without saying that VAT and taxes can be difficult to grasp and understand, especially for eCommerce businesses. With this being said, it is vital that you know and understand what you are dealing with – be it in the UK or in different countries within Europe. We really hope this article has helped you to better understand what VAT actually is, the ways in which it works and the affects it can have on your business.