We recently wrote about how to tell if you should be paying tax as an eBay trader. We also wrote about when, and when not, to register to pay VAT on eBay. However, tax is an issue that affects all eCommerce store operators – not just eBay sellers. That’s why we’ve written The Essential Guide to VAT for UK Ecommerce Businesses. No matter how, when, and where you sell goods (from your own site, or on third-party marketplaces), here you’ll find everything you need to in order to remain compliant.
An Introduction to UK VAT and Ecommerce
E-commerce is a growing business market in the UK, and is fast becoming a key economic driver. But, due to the nature of digital eCommerce, it can be hard for sellers to know what (if any) tax they should be paying, and hard for governments to ensure that they collect any monies owed.
VAT is a tax charged on most goods and services in the EU. In the UK, the rate of VAT is currently set at 20 percent.
However, in the UK, some businesses are eligible to pay a reduced rate of VAT (e.g., if they sell goods such as children’s car seats and home energy) or a zero rate (e.g., if they sell children’s clothes and food). A full list of reduced rate and zero rate goods and services is available here.
If your business’s turnover is £82,000 or more annually, you need to register to pay VAT. If you receive goods in the UK from the EU worth more than £82,000, you need to register VAT. And if you expect to go over the threshold in a single 30 day period, you need to register for VAT. This applies even if you sell reduced- or zero-rated goods.
Three types of transaction may have VAT implications for eCommerce businesses:
- Supplying physical goods to businesses or private consumers.
- Supplying intangible goods or services to a business.
- Supplying intangible goods or services to private consumers.
Most eCommerce stores sell physical goods, so we will concentrate on this aspect of VAT in the remainder of this article. If you want to find out more about the sale of intangible goods to businesses of private consumers, have a read of out-law.com’s great article on these issues.
Because many eCommerce businesses sell to customers based in different countries, it’s important that international VAT obligations, as well as domestic, are considered.
UK Ecommerce Businesses, Distance Selling, and VAT
In general supplies of physical goods are deemed to have been made in the place where the goods are located when they are dispatched.
This means that, whether or not the goods are ordered (using electronic communications) from inside or outside of the UK, this will not affect the way they are treated for UK VAT purposes; the fact that goods may be ordered from outside of the UK does not affect the location of goods for when it comes to determining UK VAT.
So, if you’re UK-based, and are dispatching goods to countries other than UK, and the value of these transactions exceeds £82,000 annually, you are likely eligible to register for UK VAT. (Importantly, however, if you are regularly selling goods to one or more EU countries, you may also be eligible to pay VAT in one or more of those countries, too. More on this below).
But, it’s worth noting that there is an opportunity to pay zero-rate VAT when selling to EU-based businesses overseas.
The VAT treatment of a supply of goods to a customer from outside of the UK depends on whether the customer is a VAT registered business or not. Goods sent from the UK to a VAT-registered business in another EU member state can be zero-rated so long as certain conditions are complied with – including obtaining the customer’s VAT registration number.
When selling to private customers in the EU, sales will be subject to UK VAT unless the business’s level of sales to private customers in a particular member state exceeds the distance selling threshold for that state.
For example, say you sell €42,000 worth of goods to private customers in Spain. Since the distance selling threshold for Spain is currently €35,000, you will be required to register for VAT in Spain. But don’t worry, this doesn’t mean you will have to pay twice. If you are eligible to pay VAT in another EU member state, you will no longer be subject to UK VAT.
In fact, it may even be desirable to volunteer to pay VAT in another member state and account for VAT there even if you haven’t exceeded the distance selling threshold, since some member states may have a lower rate of VAT than the UK. So bear that in mind. A complete list of VAT distance selling thresholds for EU member states can be found here.
If you do decide to register for VAT in another country, you will need to ensure that your trade is in compliance with local rules. VAT legislation varies across the EU, so it’s crucial that you learn what you have to do to remain complaint in order to avoid fines and penalties.
Tax and, especially, VAT can be a tricky subject for eCommerce businesses. However, it’s important that you know what you’re dealing with. We hope this article has helped you gain a good understanding of what VAT is, how it works, and how it affects you.
Are you an eCommerce business owner confused about VAT? Or do you have any pieces of advice or words of wisdom you’d like to share. Either way, let us know your thoughts on VAT and eCommerce with a comment.