Thanks to the likes of Amazon’s fulfilment programme, build-your-own website platforms and the simplification of shopping cart technology, it’s easier than ever to set up shop online.
Today, you can run a successful e-commerce business without having to store stock yourself, or without even having your own website - and it means more and more people are giving online retailing a go.
But amid the excitement of watching those early sales pour in, it’s important to remember that e-commerce businesses come with legal and tax obligations like any other.
And, if your store takes off, it won’t be long before you need to start thinking about things like VAT.
In this blog, we’ll run through the VAT rules for e-commerce businesses, to help you keep on the right side of the taxman as your online empire grows.
The VAT threshold for e-retailers (and what it might mean for your prices)
Whether you sell online or from a physical store, the threshold for VAT registration is the same. Once you reach the point at which your store turns over more than £82,000 per year (on a rolling basis), you’ll need to register for VAT and start charging tax (usually 20%) on your goods.
Of course, this begs the difficult question of whether you’ll put your prices up by 20% to preserve your profit margin (but potentially put customers off) or absorb the cost yourself.
If you choose the latter, you may be able to reduce the impact by joining HMRC’s flat-rate scheme, under which you won’t necessarily have to pay the whole 20% back. The scheme only applies to businesses with a turnover under £150,000 though - and in most cases, you’ll still be required to pay back 16.5%.
However you choose to tackle the issue, you’ll need to make your VAT registration clear to customers on your website. That said, you don’t to show the VAT breakdown for every product, you can just show your prices with VAT included.
Standard, reduced and zero-rate VAT
As mentioned above, most items sold online will incur VAT at 20%. That’s the standard rate of VAT, and it applies to the vast majority of sales.
However, certain products are charged at a reduced rate of 5%. These include health and welfare products such as children’s car seats, cycle helmets, mobility aids for the elderly and even nicotine patches and gum.
Some products, meanwhile, are zero-rated (charged at 0%) - with baby clothes and books among the more common items that fall into this category.
If you’re selling those particular products online, you won’t need to charge any VAT at all, but you will still need to record the sales and include the figures in your quarterly report.
It’s also worth noting that while physical, hard-copy books are zero-rated, digital download e-books aren’t. Indeed, digital products are subject to a their own set of rules altogether.
Thanks to recent EU legislation, digital goods and services must include VAT at the rate of the customer’s home country. So, if your customer is UK based, the sale must include 20% VAT. If they’re in Croatia, for example, it would be 25%.
Like any EU law though, there’s always the possibility that the rules will be changed for UK sellers once the terms of Brexit are confirmed.
The VAT implications of distance selling
Assuming you’re selling physical items rather than digital downloads, international sales to other EU countries will incur VAT at the standard UK rate (20%).
However, every member state has its own annual threshold for these distance sales, and if you’re exceeding that threshold (typically either €35,000 or €100,000) you’ll need to register for VAT in that country as well as at home.
You’ll therefore need to monitor your distance sales to each EU country, and should start doing so right from the very beginnings of your business.
Indeed, with many countries operating a lower VAT threshold than ours, you might technically be obliged to register for VAT abroad before you have to register at home.
Registering for VAT abroad might sound like a lot of hassle, but if you’re running your online business through the likes of Amazon’s fulfilment programme, rest assured they’ll often take a lot of the administration off your hands via simplified VAT subscription services.
Of course, we’re here to help you too. So whether you’re just getting your online empire off the ground, or you’re already hitting the VAT threshold, we’ll be happy to help you get your house in order.
Contact us at hello@informaccounting or give us a call on 0121 667 3882 - and don’t forget to check out our introduction to e-commerce ebook for more useful information.
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