A guide to VAT for e-retail businesses

by QuickBooks UK

2 min read

If your e-retail store is going from strength to strength, you might need to start charging VAT. Thankfully, selling goods online is covered by many of the same rules as selling goods from a physical store.

A business that charges its customers VAT is, in essence, acting as an unpaid tax collector on behalf of the taxman and each quarter you must hand the takings over to HMRC. Here’s our simple guide to how this area of tax applies to e-retailers.

Selling online or selling from a shop front?

In terms of VAT there is no difference between online and physical retailing – as long as you aren’t selling digital goods and services, such as e-books and music downloads, which are covered by a separate set of VAT rules. Essentially, if you are an e-retailer selling goods online, you are using the internet purely as a tool for communication and distribution, as well as receiving payment from your customers – just as if you were handing over the item and accepting their money in a physical shop.

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.

Should you be registered for VAT?

If your turnover during a 12-month period on VAT-taxable goods is higher than £82,000 (as at February 2016) you must register or you will be fined. If your turnover is less than the threshold, you do not need to register and you do not 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’s VAT advice line offers helpful information on registering.

What rate of VAT should you charge?

In the UK there are three VAT rates and for most items, it’s 20 per cent. But some goods are charged at a reduced rate of 5 per cent and others at 0 per cent, which is known as ‘zero-rated’. Finally, some are exempt from VAT altogether.

Here’s the slightly complicated part. Just because an item is zero-rated, that does not make it VAT exempt – it means the item is still VAT-taxable, but the rate you must charge your customers is 0%. An example is children’s clothing – even though these items are zero-rated, you still have to record all of these e-retail sales and report them on your VAT return. These goods also count towards your 12-month threshold.

What about international VAT charges?

If you are based in the UK and selling goods to EU customers, you charge at the rate of VAT here. However, if a customer is VAT-registered you might be able to ‘zero-rate’ the goods. If you are selling goods to a customer outside the EU, VAT is not charged. However there are exceptions, so make sure you check with the HMRC.

Does VAT affect delivery costs?

The VAT you charge on delivery depends on the rate that applies to the item you’re selling. For instance, if you are selling a printed e-retail book that incurs 0 per cent VAT, a 0 per cent rate applies to delivery. If you offer free delivery, the VAT is incorporated in the price of the item.

Getting to grips with the basics of bookkeeping will help you keep track of the VAT you charge and the tax you pass on to the HMRC.

 

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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