Growing your business
Intuit QuickBooks Small Business Index, December 2023
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TAX AND PENSIONS
Are you running a successful online retail store and are you unsure about the VAT on your ecommerce sales? If so, then here’s our simple guide to how VAT applies to e-retailers.
“You can only charge VAT if your business is registered for VAT”
For most goods, there is no difference between online (e-commerce) and physical retailing in terms of VAT. The exception to this is digital goods and services, such as e-books and music downloads, which are covered by a separate set of VAT rules.
As far as HMRC is concerned, if you’re selling goods online then you’re using the internet purely as a tool for communication and distribution, and for receiving payment from your customers. It’s the same as if you were handing over the item to customers and accepting their money in a physical shop.
And whether you’re selling online or from physical premises, this basic rule applies – you can only charge VAT if your business is registered for VAT.
You must register for VAT if your VAT taxable turnover is over £85,000 (the “threshold”). Your VAT taxable turnover is the total of everything sold that isn’t VAT exempt.
If your turnover is lower than the threshold, you don’t need to register and you don’t need to charge VAT. Note that the threshold is not based on turnover in a calendar year, but on a rolling 12-month basis. The HMRC VAT advice line offers helpful information on registering.
“Check the HMRC VAT rates on different goods and services”
Physical and online retailers are legally obliged to register for VAT and start charging tax on their goods (usually at 20%) as soon as their taxable turnover reaches £85,000. If your turnover is less than this threshold, you do not have to register for VAT or charge VAT on any of the products or services you sell.
If you supply digital services to EU countries, you may need to register for VAT in each country you supply those services to, even if your turnover is below the UK VAT threshold. The threshold is £8,818 before VAT during the calendar year. You will need to sign up for the government’s VAT MOSS service to get started.
In the UK there are the following different VAT rates.
20%. This is the VAT rate for most items.
5%. Some energy-related goods and welfare and health-related goods, such as mobility aids, have a reduced rate.
0%. Some goods, such as children’s clothes, are “zero-rated”.
Some things are exempt from VAT altogether.
You can check the HMRC VAT rates on different goods and services page for more details.
It’s important to know that zero-rated is not the same as exempt. If an item is zero-rated, it is still VAT taxable, it’s just that you charge your customers 0%. Even though you’ve charged 0%, you still have to record the sale and report it on your VAT return.
And the key thing: sales of zero-rated goods count towards your 12-month £85,000 threshold.
You don’t have to record sales of exempt goods on your VAT return and they don’t count towards your VAT threshold.
“If you are VAT-registered, you need to make this clear to customers on your e-retail site”
If you’re based in the UK and selling goods to EU customers, you charge the UK VAT rate. However, if a customer is VAT-registered you might be able to “zero-rate” the goods.
If you’re selling goods to a customer outside the EU, you can’t charge VAT. However there are exceptions, so make sure you check with HMRC.
VAT applies on delivery charges at the same rate as the VAT on the item. So you charge 20% VAT on delivery for goods that are 20% rated, and 0% for goods that are zero-rated. If you offer free delivery, then obviously there is no extra VAT to charge, as it’s all included in the price of the item.
If you are VAT-registered, you need to make this clear to customers on your e-retail site. The prices you display can be shown as VAT inclusive – you do not need to list the VAT separately.
Keeping track of your VAT taxable turnover is key. If it is over the £85,000 threshold then you need to register for VAT and start charging it on your sales. Having good accounting software like QuickBooks will help you keep track of the VAT you charge and the tax you pass on to the HMRC – more important than ever in the light of HMRC’s Making Tax Digital initiative.
Feel you’re better informed about VAT on ecommerce sales? The QuickBooks blog covers a wide range of business-related topics – it’s all part of our mission to help small businesses grow.