VAT Tips For Online Businesses

Estimated read time 4 min read

Nowadays, it’s relatively easy to create a shop online, thanks to the simplification of the shopping cart, and the availability of build your own site platforms and the likes of Amazon’s fulfillment program. You can be able to run an e-commerce business successfully without having to store the stock yourself or even have your own business. This has given many people the opportunity to get into online retailing.

However, even though the digital world has opened exciting doors, it is important to keep in mind that e-commerce business comes with its fair share of legal and tax obligations. The moment your online store gains momentum, it won’t be long before you need to address aspects such as VAT. Take a look at these VAT guides.

In this read, we are going to take you through the various e-commerce rules in order to help you stay on the right side of the law and ensure your business grows without hindrances.

The Value Added Tax for e-retailers

The threshold for VAT registration is the same, regardless of whether you own a physical or an online store. When you reach a point where your business turns over £82,000 per annum, you will need to register for value-added tax and begin charging tax on your products (usually 20%)

At this point, you might be wondering, should you increase the price of your product by 20% in order to preserve your profit margin, but risk losing customers, or should you absorb the cost?

If you decide on the latter, then it’s possible to minimize the effect by joining the flat-rate scheme, implemented by HMRC. When under this scheme, you are not obligated to pay back the entire 20%. However, the program just applies to companies that have a turnover under £150,000, and more often than not, you will need to pay back 16.5%.

If you choose to increase the price of the products, it is imperative that you make the value-added tax registration clear to your clients to avoid losing them. You do not have to demonstrate the VAT breakdown for each item, but rather show the prices with VAT included.

Standard, Reduced & Zero-Rate Value Added Tax

Most products sold online will incur a 20% VAT, which is the standard VAT rate. This is the rate that applies to most products. However, some items are charged at a minimized rate of 5%. These are health and welfare items like cycle helmets, kid’s car seats, nicotine patches, mobility aids for the seniors, etc. Other products are zero-rated, including books and baby clothes.

know about vat for online business

If you are selling such items on your online shop, then you will not need to charge any VAT, but are still required to record the sales and include them in your quarterly report.

It is ideally important to note that while hard-copy books are zero-rated, e-books or digitally downloaded copies are not. Digital products, in this case, are subject to their own rules.

As a result of the recent EU legislation, digital goods and services are required to include value-added tax at the rate of the customer’s nation. So, if your client is based in the UK, the sale needs to include 20% VAT.  If they Croatia-based, for instance, then it would be 25%.

However, there is a chance that these rules will be altered for UK business people when the Brexit terms are final.

What are the VAT Implications of Distance Selling?

If you are dealing with physical products, international sales to other European Union nations will attract a standard VAT rate of 20%.

However, every EU country has its separate annual threshold for these international sales, and if you go beyond it, usually £35,000 or £100,000, then you are required to registers for value-added tax, both at home and at the destination country. As such, it is imperative to monitor your distance sales to every EU nation, and it’s advisable to do so from the very start.

When it comes to nations that impose a VAT threshold that’s lower than ours, then you are likely to find yourself registering for VAT abroad before you have to at home.

Having to register for VAT in another country might seem like a drag, but if you are running your business via platforms such as Amazon’s fulfillment program, then you don’t have to worry as they handle most of the work.

Sarah Cantley

Editorial Head at UK Blog for Business & Startup.

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