The eBay Sellers Guide to VAT

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Value Added Tax, or VAT, is a tax charged on most goods and services in the EU. eBay is based in the EU – in Luxembourg, actually – and as such charges VAT on most products sold to European non-business users. The rate of VAT is based on the country where the customer is based.

But not all eBay sellers have to register to pay VAT. And doing so can be a huge mistake. The truth is that the vast majority of eBay sellers are not VAT registered. So, by registering yourself (when you don’t have to) you may be inadvertently making yourself less competitive.

In order to get the low-down on VAT, you’re best reading the HRMC website. It’s a complicated topic, with lots of special rules and exceptions and, unfortunately, there’s not the space to go into all of them here.

We will, however, give you a brief overview, before delving into whether you should or should not be paying VAT.

VAT: A Brief Overview

As of 4th January 2011, the standard rate of VAT in the UK has been 20 percent. However VAT isn’t fixed across the EU so, if you’re based outside of the UK, you’ll have to look up the VAT level specifically for where you are.

VAT is a form of consumption tax:

  • From the buyer’s point of view, it’s a tax on the purchase price.
  • From the seller’s point of view, it’s a tax on the value added to a product or service – hence the name. (The value added to a product is the sale price charged to its customer minus the cost of materials and other taxable inputs).

VAT registered businesses may reclaim VAT that they’ve paid on any business-related goods or services.

Not all goods are charged VAT. A reduced rate of 5 percent is applied on some goods, such as children’s car seats or home energy. And a zero rate is charged on goods such as most food, children’s clothes, equipment for disabled people, and cycling helmets.

The full list of reduced rate and zero rate products is available here.

Who Has to Pay VAT?

Not everybody has to pay VAT. Only businesses that have a VAT taxable turnover of more than £82,000 in a 12 month period are required to pay VAT.

Moreover, if you go over the £82,000 threshold temporarily – at Christmas, say – then you can apply for an exemption from registration. For more information about exemptions, see the HMRC website.

The £82,000 threshold will likely change at the next budget (it almost always does) so make sure to check the current threshold when you’re reading this.

Importantly, the threshold includes money made from selling zero-rated items. So, if you deal with zero-rated goods, you will still have to register for VAT when you reach the threshold.

If you don’t reach the threshold, you can still volunteer to pay VAT. But you’d be wise to weigh up you options before doing so.

The Benefits of Not Paying VAT

  • Lower Prices or Higher Turnover

If you choose to pay VAT, you’ll either have to raise your prices to protect your margins, or keep prices the same and make less money. Raising your prices makes you less competitive. Not great since eBay is already a highly competitive marketplace. Protecting your prices means taking home less cash. Not great since taking home cash is the reason you started trading in the first place!

Registering for VAT when you don’t have to means paying the same proportion of tax as the industry’s biggest players. It’s hard being a small fish in a big pond, and eBay sellers should try to take advantage of ant benefits they can.

  • Easier Accounting

Registering for VAT makes the accounting process a lot more complicated. So, unless you love bookkeeping (a rare trait!), avoiding registering for VAT means less headaches and possibly financial savings (since you’re likely to have to hire an accountant to deal books once you’re VAT registered).

VAT is a lot of hassle and stress, and bringing that into your life for no reason seems a little silly. Even accounting software which includes a VAT option is more expensive than their non-VAT counterparts.

But What About Reclaiming VAT?

It’s true. You’re only able to reclaim VAT if you’re VAT registered. And, whilst claiming back all that VAT can seem very enticing, the truth is, for most eBay sellers, they’re likely to pay more than they reclaim.

This just makes sense. You should be making more money than you spend. That’s good business. But this also means that, if you’re VAT registered, you will almost definitely pay more than you can reclaim. The only way that reclaiming would pay off is if your outgoings were higher than your incomings, in which case you may have bigger problems than paying VAT.

Our Advice

In our opinion, the longer you can avoid paying VAT the better.

Avoiding paying VAT will help you stay competitive, build a sturdier business and, when the time comes, and you meet the threshold organically, mean that you’re able to contribute to society in a continual and meaningful manner.

Once you meet the threshold, you will have to pay VAT. No question about it. But, until that time, make the most of your VAT freedom. You’d be surprised at how many eBay sellers don’t!

Did you find our article on VAT informative? Perhaps you have some opinions about VAT you’d like to share? If so, let us know with a comment!

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