Brexit, Covid-19, widespread unemployment across the UK, and a sharp increase in consumers buying online, all seemed to happen at the same time. It has been a shock for customers and business owners alike and no one was ready for it. In fact, many are still trying to come to terms with what just happened and its implications for the future.
For e-commerce businesses the future is bright. We are seeing excellent growth in the e-commerce industry and it is likely to continue on this growth path in the near future.
The only problem is, that the e-commerce environment is changing quickly as governments in the UK, USA, and the EU take steps to regulate it.
In this comprehensive guide, we will break down everything that you know, you want to know about, as well as a few things that you didn’t know you wanted to know about.
Get comfortable; grab a coffee or a cold one.
An Introduction to VAT
Keep in mind that you don’t want to leave this to the last moment. It takes some time for HMRC to process VAT returns so the sooner you can get this out of the way the quicker you can receive your refund (if you’re owed it!)
What is VAT?
The Value-Added Tax (VAT) is a consumption tax added to goods and services sold in both B2B and B2C situations. VAT is also applicable to other business operations such as the sale of business assets, commissions, items sold to staff, etc. For e-commerce retailers, it is important to note that VAT is also applicable on goods that are imported into the UK to be sold locally. There are 4 types of VAT used to cover different categories of products. These are:Standard Rate VAT
The standard rate of VAT is charged at 20%. In general, all products and services within the UK will be charged at the standard rate unless specified otherwise. Note, supplies/sales to EU countries have specific rules depending on the type of supplies/sales and place of supplies/sales. Sales to the EU can be categorized into two types; B2B and B2C.- The UK standard rate can apply to B2C sales to customers in the EU depending on the type of supplies.
- B2B sales in the EU are charged at a different rate. Generally, if you are selling goods or providing services to VAT-registered businesses in the EU then the supplies will be zero-rated.
- Any sales outside the UK and the EU from the UK are mostly out of the scope of UK VAT so it is not necessary to apply any rate on these sales. However, it is important to check the regulations of the non-EU country that you are selling in as they may require you to register for VAT in that country.
Reduced Rate VAT
Reduced rate VAT is charged at 5%. This usually applies to things such as energy-saving products, children’s car seats, and sanitary products. There are also certain situations where the reduced rate will apply even though the product doesn’t fall under the reduced rate category.Zero Rate VAT
The zero rate VAT is when you charge a VAT of 0% and it applies to products such as books, newspapers, children’s clothes, and goods that are sold to VAT-registered businesses in the EU. The important thing here is that the transaction is still recorded in your VAT sales however the tax itself is charged at 0%. The aim is that such a transaction will still show under your total sales transactions (i.e., in box 6 of the VAT return) even though it doesn’t affect the price of the good or service.VAT Exemptions
Exemptions include those things for which no VAT is charged at all and you aren’t required to record these transactions even as a zero VAT transaction. This can include things like medical services provided by doctors or postal charges.Should I Register For VAT?
VAT registration is mandatory for businesses of a certain size or of a certain kind. You should register for VAT if:- Your total VAT taxable turnover for the last 12 months was over £85,000 (the VAT threshold)
- You expect your turnover to go over £85,000 in the next 30 days
- You’re based outside the UK;
- Your business is based outside the UK; and
- You supply any goods or services to the UK (or expect to in the next 30 days)
- You must register if, by the end of any month, your total VAT taxable turnover for the last 12 months was over £85,000.
- You have to register within 30 days of the end of the month when you went over the threshold. Your effective date of registration is the first day of the second month after you go over the threshold.
- If the online marketplace that you work with provides you with the VAT number of business clients you will need to register for VAT to provide the required level of service.
- If you are an overseas seller but the goods are located within the EU, Northern Ireland, or the UK and your sales exceed £70,000.
When Are My VAT Return Filings Due?
Generally, businesses either file their VAT returns on a monthly or quarterly basis. The deadline for submitting your return online is usually one calendar month and 7 days after the end of an accounting period. This is also the deadline for paying HMRC. For example, if you are filing VAT quarterly and your previous VAT accounting period ended on the 31st of March, your deadline will be the 7th of May. Similarly, if you are filing VAT every month and your previous accounting period ended on the 31st of December, you have until the 7th of February to file your returns. If you are expecting a refund from HMRC for your latest VAT return, then expect to receive the money from HMRC within 30 days of filing your return.Who Submits VAT Returns?
You can submit the VAT returns for your business yourself directly through the HMRC website. If you aren’t too comfortable with accounting you can outsource your VAT return work to a specialist accountant, such as Guide Hustle, and they can reconcile all your data for you. They will provide you with a complete file of all your VAT information for that accounting period and tell you the amount to pay or expect to be refunded.What Happens If I File A Late VAT Return?
HMRC considers businesses with an annual turnover of more than £150,000 as large businesses and businesses that have an annual turnover of less than this amount as small businesses. Late payments have slightly different consequences depending on the size of your business. If you are late with filing VAT returns the first thing to happen is that your account will be flagged as a ‘defaulted’ account. This essentially means you have been late with your payment and it also puts you into a 12-month surcharge period. Think of the surcharge period as a probationary period where, if you slip up again, you will have to pay a percentage of your total VAT for the relevant period as a fine. The main difference between the two categories of businesses is that smaller businesses get a second chance. For example; If you are a large business, the first time you are late with filing or with payments you will get a notice and you will be put into the surcharge period of 12 months. At this point, you will not be fined anything and will only be highlighted as a defaulted account. The second time you are late with filing or with payments you will have to pay a 2% fine of the total value of your VAT for that period. If you were a small business, you would get another notice the second time you were late and wouldn’t have to pay any fine. The third time you are late you will have to pay a 5% fine on your total VAT amount. If you were a small business, on the third time you are late you would have to pay a 2% fine. Being late a fourth time will earn you a fine of 10% and the fifth time and beyond will all be charged at 15%. If you were a small business, the 15% fine would kick in on your 6th late payment or late file submission. One important thing to note is that on your 2nd and 3rd late payment/filing (which would be the 3rd and 4th late filing/submission for small businesses) you can get off the hook with no surcharge at all if the total surcharge amount is less than £400.What Is The Flat Rate Scheme?
The flat rate scheme is a variant of the VAT tax system where you charge all your sales at the standard rate (20%) but pay less VAT to HMRC (known as a flat rate, which could range from 4.5% – 16.5% depending on the nature/category of your business). In the flat rate scheme, the business cannot claim input VAT (the VAT paid on the purchases) as you are paying less VAT to HMRC than the VAT you have collected. There is one exception to the input VAT in the flat rate scheme; you can claim input VAT on certain capital asset purchases worth £2,000 or more. Eligibility You can join the flat rate scheme if:- You’re a VAT-registered business; and
- You expect your VAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months
- On the anniversary of joining, your turnover in the last 12 months was more than £230,000 (including VAT) – or you expect it to be in the next 12 months
- You expect your total income in the next 30 days alone to be more than £230,000 (including VAT)