What to know about VAT for e-commerce businesses
The internet has allowed many of us to start up e-com businesses of our own, often with little to no past experience of running a business – so how do you know if you are affected by issues like VAT?
Here’s the ARRO Money Blog guide to VAT for e-commerce businesses, from when you might need to start charging it, to how to go about registering and calculating what you owe.
To begin with, don’t panic – the VAT rules for e-com businesses are largely the same as for any other type of company, so there’s plenty of good advice available to help you understand the issues.
If you do start charging VAT, remember that the extra money you get paid by each customer is not yours – you will have to deliver it to HM Revenue & Customs, usually on a quarterly basis – so like any tax you owe, you should be sure to keep it safe and separate and never, ever spend it on your own expenses.
Selling online vs. selling in the real world
There’s no reason why the rules should be different online than they are when you sell goods in the real world, and in most cases there are no real differences.
If what you sell are physical items, you are generally held to the same standards as a bricks-and-mortar retailer in terms of VAT – the only difference is if you sell digital goods and services like MP3 downloads, as the rules regarding VAT on those products are different.
But if the internet is just the way you distribute your goods – and especially if you could provide exactly the same service over a physical counter – then the age-old VAT rules should still apply.
Just remember that you should state whether or not your online prices include VAT. You don’t need to list the inclusive and exclusive prices separately, but provide a clear noticed of which price people are paying.
Do I need to be VAT registered?
Generally speaking, whether or not your e-com business should be VAT registered depends on how much income you make each year from taxable goods.
The exact threshold varies with time, so make sure you keep up to date on the maximum you can make without registering for VAT, as you may be fined if you earn ‘too much’ without registering.
You must calculate your total income for a rolling 12-month period, not just each calendar year or financial year, so if you have two particularly strong months of sales 11 months apart – no matter what time of year they occur – you could be close to the threshold.
VAT on zero-rated items
A slightly confusing element of the calculation comes from items that are deemed taxable but at a rate of zero – and if that sounds like a contradiction in terms, it really is.
What it means is that when you sell a zero-rated item, you must include it in your calculation of your total VAT-taxable earnings, even though the payable VAT on it is 0%.
This is important because if you reach the threshold including zero-rated sales, you must still register for VAT, even if most or all of your sales carry a VAT rate of 0%.
As well as zero-rated goods, there are reduced-rate items, such as some personal toiletries and other products considered essential or at least very important, that may be charged at 5%, whereas most ‘luxury’ items – the vast majority of all items – are taxed at 20%.
VAT in the EU
If you sell goods across borders, the rules can be slightly different, and this is especially true if you provide any kind of digital services to countries in the EU.
This includes things like:
- Digital documents, e-books, PDF files etc.
- Digital music, movies and computer games.
- Web hosting and web design services.
- Software updates.
- Website advertising sold directly – not via an advertising marketplace.
Under recent EU rules, you must charge VAT on digital services at the rate where the customer is, not where you are.
You can either register with their member state’s tax office, or with the VAT Mini One Stop Shop (VATMOSS), which collects all of the VAT you owe and then redistributes it to the relevant countries.
It’s a complicated system, even though it is intended to make things easier for small e-com businesses – and it’s worth checking on any changes after Brexit before you accept orders from the remaining EU member states.