The internet has turned out to be an incredible asset for small and medium sized enterprises. It allows us to sell our goods and services to a much wider audience, and online selling platforms such as Amazon, Etsy and Ebay have a been a great assistance for companies wanting to reach out to people across the country and indeed the world. But when a third party is involved VAT can become confusing, and sellers can end up paying out more in VAT charges than they initially calculated. So we thought we’d take a look at the rules and regulations when it comes to VAT and online selling and debunk some of the mystery.
VAT Threshold
First of all it’s important to ascertain whether your company is required to register for VAT. As of April 2016, the current threshold stands at £81,000 which means that any person or company bringing in less than this annually can actually deregister from VAT. In addition, some services are exempt from paying VAT, so it’s important to go through your financial documents with your accountant and clarify what VAT is due and what is deductable.
VAT and Online Selling
The basic principle of VAT is simple, it’s a charge levied on businesses which is calculated from the amount of VAT charged on a business’s services minus the amount the business has paid on purchases. Currently standing at 20% in the UK, and in the company of a good accountant, VAT can be fairly straightforward. However, when online sellers enter the equation the amount of VAT owed can often be confusing,in part because the online seller deducts a commission from each sale. So say a business advertises (and sells) an item for £1,000, deduct a 10% commission levied by the online seller and the business receives £900. It would be understandable for the business to expect to pay VAT only the £900 they received, but actually, as the goods or services cost £1000, the VAT is due on the full amount. If you arrange for the online selling platform to pack and despatch your goods, things get yet more complicated . Add an extra £100 for post and packaging onto your £1,000 and you’ll find that VAT is now due on £1,100, as HMRC decrees that post and packaging follows the liability of the goods you are selling. So the VAT is actually charged on what the customer paid (VAT on £1,100 = £183.33) which means once VAT, commission and P&P is taken off, the business will receive £716.67 net from an £1,100 sale. It can be tempting to try and offset these costs, but doing so will immediately raise a red flag over at HMRC.
Selling outside the UK
We’ve mentioned how the internet has allowed SMEs a greater reach, which means that every online seller could potentially have a global audience. While we’re still in the EU, the good news is that provided you are selling to a customer registered for VAT in their own country, any goods can often be zero rated, with the customer responsible for paying the VAT equivalent in their country. For customers that aren’t VAT registered in their country, Gov.uk has got a great breakdown of just when VAT is due and when it’s exempt for EU countries. For countries outside the EU, goods and services can often still be zero rated, however at this point export licences and permissions come into force.
We hope that you’ve found our blog post on VAT useful. If you have any queries or questions regarding VAT we would be more than happy to assist.