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
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.
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 must also register (regardless of VAT taxable turnover) if all of the following are true:
- 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)
What if I exceeded the threshold in the last 12 months?
- 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.
What if I register late?
If you register late, you must pay VAT on any sales you’ve made since the date you should have registered, regardless of whether or not you have collected VAT from your customer.
For businesses selling goods or services through online marketplaces, there are a few other situations that will make it mandatory to be VAT registered. These are:
- 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.
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 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.
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
Leaving The Scheme
You must leave the scheme & move to the standard scheme if:
- 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)
Should My eCommerce Business Use The Flat Rate Scheme?
It depends on the industry that you are in and the kinds of operations that you have. The main drawback of the flat rate scheme is that you are unable to utilize the input VAT (VAT that you are paying your suppliers).
In the standard scheme, a business pays (or receives) from HMRC the difference between the output VAT that they have collected from their customers and the input VAT that they have paid out to suppliers. In the flat rate scheme, you only pay output VAT to HMRC because you aren’t able to claim the VAT that you are paying suppliers.
If your business has high VAT-applicable purchases then it would be counterproductive to move to the flat rate scheme. If you have a low turnover and buy mostly from suppliers who do not provide you with VAT invoices, then it might be helpful.
As long as your company does not have a lot of places where it can make use of the VAT that it secures from customers, moving to a flat rate VAT structure will help.
Plus, if you are selling products/services that are not standard rated or sell internationally (outside the UK) then the flat rate scheme must not be used, as the VAT rate is fixed in this scheme i.e., there is no option to zero rates the supplies or apply any other applicable rate.
Making Tax Digital for eCommerce Businesses
What is Making Tax Digital (MTD)?
MTD is a government initiative that aims to upgrade, modernize and digitize the entire tax system in the UK. It started off in 2018 and has gradually been growing to include more and more businesses and service providers. The most recent update has been to include smaller businesses that fall below the VAT threshold so they too are doing all their accounting with the standards set forth by MTD.
All VAT-registered businesses who have not yet signed up for Making Tax Digital for VAT need to do so.
From your first accounting period starting on or after 1 April 2022, you must also keep your records digitally using Making Tax Digital compliant software.
We understand that this shift is overwhelming for business owners that aren’t very comfortable with technology, but there are big benefits to this system.
With MTD in place and suitable accounting software to manage all your financial information, you don’t need to worry about late payments or late filing since everything will be done in real-time. Moreover, since nearly everything can be done automatically there are significantly lower chances of errors in your tax return information.
You won’t have to post paperwork or keep physical files full of past financial information. If you ever need to access your information you can access it from any device and conveniently search for whatever it is that you need.
What Do I Need To Do Once I’ve Registered For VAT?
The first thing to do is to get a copy of HMRC’s record-keeping guidelines and make sure your accounting systems are according to the guidelines. If you aren’t doing this yourself then get in touch with your accountant and make sure they are doing things in line with HMRC requirements.
Sending in financial information that does not meet HMRC requirements is like sending a client a bag of apples when they really asked for a pair of shoes. Sending in incorrect information will be considered an error on your end and you will have to face the same penalties as you would have faced had you filed your reports late or sent a late payment.
Next, you also need to start issuing VAT invoices to your customers. Make sure you are keeping a good record of these invoices since these are the same invoices you will need to send to the HMRC in a few months.
Most importantly, stay on top of your financial information and note down when your accounting period begins. It is critical that you send in your VAT returns and your payments on time to save yourself from defaulting and facing penalties due to poor conduct.
In the case of e-commerce businesses, you also need to provide your online marketplace with the VAT number that you have received as they will publish this on your storefront on their platform. Also, make sure that the business name associated with your VAT number is the same business name that you use to represent yourself on the online marketplace.
Which Accounting Software Will Do My MTD VAT Returns For Me?
Nearly all accounting software will do the MTD VAT returns but what you really need is a system that will do these accounting tasks AND integrate fluidly with your business operations.
Ideally, you want something that can cover as many business processes as possible. Being able to do things such as inventory management, invoicing, payment management, etc., without needing add-ons for your accounting platform is the best-case scenario.
In this case, Xero or Quickbooks are fantastic options to consider since they give you in-depth functionality and all the accounting services you could possibly need. Paired with the affordable price plan, easy-to-learn interface, and reliable support team, it’s a complete package for growing eCommerce businesses.
What VAT Rules Do I Need to Consider if I Sell Products to UK Customers?
HMRC differentiates between sellers that are based in the UK (or the goods sold are located in the UK) and non-UK resident sellers (or the goods sold are stored outside of the UK). There are minor differences between these two kinds of sellers but for the most part, the main consideration is the VAT and how it applies to the products that are sold in the UK and Northern Ireland.
There are 3 main things that both kinds of sellers need to be aware of if they want to sell products to the UK:
Register For a UK VAT Number
Whether you are selling goods as a B2B company or a B2C company, you will need to register for a VAT number through HMRC. The only exception for this is if you are selling to a B2B client and your customer is able to provide a VAT number.
No Low-Value Orders
In the past, there was a rule that products or shipments that were worth less than £15 were exempt from VAT. This was known as the Low-Value order rule and it is no longer in effect since 1st January 2021. Orders of any size will need to be processed with the appropriate VAT.
All businesses that have a registered VAT number and are selling to the UK must file VAT returns every three months just like local UK businesses do. In the case that a VAT-registered business is unable to do so it will be subject to the same penalties and fines as outlined previously.
One additional thing to bear in mind is the value of the products or shipments that you are processing. Specifically, if you are importing products into the UK that are less than £135 in value, then you just need to pay the regular VAT that applies to that product category. If it is more than £135 then you may also have to pay import duty on that product in addition to the applicable VAT.
What VAT Rules Do I Need to Consider if I Sell Products to EU Customers?
This depends on whether you are selling physical goods or services as the rules vary for these. But since 1st July 2021, the EU has removed the distance selling threshold system and replaced it with the One Stop Shop (OSS) system. Under the new system, non-EU businesses no longer need to register for VAT in every EU country where they are selling their products.
You can conveniently sign up for the OSS program and register yourself in a single EU state and be able to sell in the entire EU region. When it comes time to pay VAT (which is done quarterly just as it is in the UK) you will need to file your VAT returns through the OSS system according to the rates defined by the EU country that you have registered in EU.
For instance, if you are registered for OSS & sell your product in Germany where the standard VAT rate is 19%, you will charge 19% VAT on your sales but you will report and pay through the OSS system rather than send it to the relevant authorities in Germany. If the products you are selling are currently stored in the UK or Northern Ireland, they will be considered zero-rated exports from the UK.
Also, you might want to look into specific import duties and other associated costs for the products that you are selling. Some EU states may have additional taxes or duties that the consumer needs to bear so it would be good to mention these to clients before they confirm their purchase.
If your preferred language is English then Ireland would be a good choice for registering for OSS, so you can communicate with the authorities in the same language.
There are companies that handle all this for you, such as Taxamo Assure or Avalara, for eCommerce sellers who trade in the EU, this is a must-have.
What VAT Rules Do I Need to Consider if I Sell Products to Non-EU Customers?
It depends on the place of supply. Generally, if you are selling your products to another business, then the place of supply will be where the client is based. Therefore, you would zero-rate your invoices. However, if you’re selling to customers, then the place of supply will be where you are based, which means in the UK you charge 20% VAT as normal.
Online Marketplace VAT Requirements
Here you find some important steps below;
Does Amazon Collect All The VAT From My Sales On My Behalf?
Yes and no. If you are selling a specific product in a certain region where the marketplace is held responsible for VAT collection then yes, Amazon will collect the VAT on your behalf as it is included in the price that the customer sees. If you sell in the United States, this would apply.
However, there are some things that might be charged VAT in the customer’s country but not in the seller’s country or vice versa. Similarly, if you are also adding gift wrapping, shipping, and other additional costs that are VAT-applicable, you will need to include these things yourself in the selling price as Amazon will not do this automatically.
It is also important that you double-check all your listings in your seller account to make sure you have the right tax codes listed on each item. Here you can also verify that the customer is seeing the right price including all the VAT and additional costs that you have to account for.
In the UK, Amazon will not pay your output VAT for you, it will only collect the necessary funds and forward them to you. It is then your responsibility to sort out how much VAT you owe HMRC for the goods you have sold. You need to do the filing and VAT payments yourself.
If you have tax integration software such as A2X or Link My Books, it can arrange all your tax accounting automatically, this is then transferred to your accounting software and you’re safe in the knowledge that all your VAT postings are accurate.
Do All Online Marketplaces Collect Sales VAT On My Behalf?
No. VAT is imposed on the person/business that HMRC considers the ‘deemed supplier” of the goods. In some cases, this can be the online marketplace, in other cases, it can be the vendor who is selling through the platform.
This is something you should definitely ask your online marketplace about and find out whether collecting tax will be your responsibility or whether they will assist in this process.
If Amazon Collects All My Sales VAT For Me, Do I Have To Submit A Return?
Yes. Amazon will collect the VAT in situations where it is Amazon’s responsibility but the total amount will be forwarded to you. You then need to work out how much VAT you owe HMRC (or HMRC owes you) based on your purchases and other business expenses. Make sure you file returns within the 1-month and 7-day deadline from your previous accounting period.
What Are The Benefits of Integrating My Online Marketplace With My Accounting Software?
A lot of people are concerned about privacy issues which they believe will stem from integrating all their information in one place. In reality, if a cybercriminal or government agency really wanted that information there are other ways to get it. The digitization of your business and your accounting software is mostly to benefit you, the business owner. Some of the biggest benefits include:
Better Customer Experience
When your store is constantly updated through your accounting software you don’t have to worry about customers ordering things at the wrong prices or placing orders for products that are out of stock or paying the wrong VAT amount because of a clerical error on your end. It helps smooth out the customer experience. Whether or not you are looking at your seller platform, your accounting software is always monitoring your digital store and making sure that customers have access to the latest information.
You will have to spend a bit of time and effort in the beginning when you are setting up your accounting software to make sure it is properly integrated with your store and all the information is properly entered. Once that is over, everything is done automatically so you don’t have to worry about placing the wrong order, ordering too much or too little, being late with orders, or even sending HMRC the wrong information. Since the system is digital there is a much lower chance of human error.
Whether you are at work or out on holiday, you can keep an eye on your accounts and your store because it is all happening live. More importantly, stakeholders such as vendors and HMRC also get up-to-date information and don’t have to worry about you hiding anything or being late in reporting financial information. In the past, you would need a team of VAs to do this for you round the clock but today you can get this done more cost-effectively and efficiently through a digital system.
It makes business management that much easier because you can access all the information you need from one central location rather than having to call up different team members or having to scroll through multiple spreadsheets and files just to find out what the total turnover for the day was.
Finding information is so much easier, storing and sorting data is easier, you get a better overall view of how the business is performing in different areas and as a result, you can make much better managerial decisions. As your operations continue to grow you can add more functionality to your accounting system to help you manage things better.
Overall, integrating your online store and accounting software will make your life easier, it will save you money, it will make your customers happier, it will earn you compliance with financial regulations (which you need anyway) and it will make it easier to scale operations in the future. Most importantly, it will give you that strong operational infrastructure that is the cornerstone of every successful business.
Hustle Guide’s Roundup on eCommerce VAT for UK Businesses
If you want to take your business to the next level then learning about VAT, Making Tax Digital (MTD), accounting software and what you need to do as a UK-based business to be able to expand to new territories, is crucial. As e-commerce continues to grow rapidly, all stakeholders need and want the digital business environment to be as easy to navigate as possible.
The changes that are taking place today are setting the stage for bigger developments in the future and taking timely action today will ensure that you are prepared to make the bigger moves in the time to come.
Invest in yourself today to stay ahead of the competition.