Understanding VAT Rules for eCommerce Businesses
Running an online retail business in the UK comes with certain VAT obligations that must be properly followed. While understanding VAT may seem complicated at first, having a grasp of the key rules and requirements for eCommerce companies can help them stay compliant and avoid encountering unexpected bills and charges down the line.
This short guide breaks down the essential VAT rules and obligations that UK-based online sellers need to know.
VAT Registration Thresholds
One of the most common questions that eCommerce business owners have is at what point they must register for – and charge – VAT on their products.
In the UK, there are two main thresholds to be aware of:
- UK VAT registration threshold – You must register for VAT if your taxable sales in the UK exceed £85,000 in a 12-month period.
- EU VAT registration threshold – If selling digital services to EU countries, you must register once sales to EU countries exceed £8,818 per year.
If your company is currently performing at or above these thresholds (or expects to), then you must register for VAT. If you need to calculate registration limits for previous years to see whether you owe VAT, you can get access to that historical data.
So in layman’s terms, VAT registration is compulsory for any UK eCommerce business with over £85,000 in UK sales, or over £8,818 in EU-destined remote digital sales.
Calculating VAT on Online Sales
Once online retailers are VAT-registered, they must implement an appropriate VAT rate on all products eligible for sale.
There are three main VAT rates to be aware of:
- Standard VAT rate – 20% – This applies to most physical and digital goods sold online.
- Reduced VAT rate – 5% – This charge is applicable for certain essential products like mobility aids and children’s car seats.
- Zero VAT rate – 0% – Books, food, prescription medication and other products qualify for zero VAT.
It’s critical to use the right VAT rate and calculate VAT accurately on all taxable sales. Failure to do so can open you up to investigations and fines from HMRC.
Collecting VAT from UK and EU Customers
As an online retailer, you must collect the applicable VAT amounts from UK and EU-based customers at the point of sale and submit this to HMRC directly.
However, the VAT collection process differs for UK customers than for EU customers:
UK sales:
- VAT is included in the sales price and collected directly from the customer.
- UK VAT charges and collections must be reported to HMRC through your VAT returns.
EU sales:
- No VAT is added to the sale.
- You must obtain the customer’s VAT number.
- VAT is later reported through the VAT MOSS scheme (more on that below).
Managing VAT MOSS Reporting
The VAT MOSS (VAT Mini One Stop Shop) scheme streamlines how UK eCommerce businesses account for and remit VAT on sales to EU countries. Following the UK’s official withdrawal from the EU in 2021, understanding VAT obligations through the MOSS scheme can be a bit confusing.
In summary, here are its key features:
- VAT MOSS replaces the need to register for VAT separately in each EU country.
- Sales from all EU countries are reported to HMRC through a single VAT MOSS return each quarter.
- The return will calculate how much VAT must be paid to each member country’s tax authority.
- VAT MOSS removes the need for you to pay VAT individually to multiple countries.
Adhering to VAT MOSS takes some work, but greatly simplifies the process of complying with EU eCommerce VAT rules.
Common VAT Pitfalls to Avoid
While the world of UK VAT can be complex, some common compliance mistakes crop up.
Be vigilant to avoid:
- Failing to register for VAT once exceeding the VAT registration threshold
- Applying the wrong VAT rates to your online products and inaccurate bookkeeping lead to incorrect returns
- Not collecting VAT from EU customers and accounting for it through VAT MOSS, or calculating VAT incorrectly
With some care taken to follow VAT rules properly from the start, online retailers can stay on the right side of compliance.
Get Expert Help to Understand UK eCommerce VAT
Running an eCommerce business while remaining VAT compliant is achievable with proper preparation and foundational knowledge of how to manage your VAT returns. However, at Hamlyns Chartered Accountants, we understand that understanding your VAT obligations can be challenging.
For personalised VAT advice for your online operations, explained to you in a language that you can understand, our professional accountants can assist you. Our VAT experts work with many eCommerce businesses helping them fulfil all their VAT compliance and regulatory obligations accordingly. Contact us today to make your VAT journey easy and stress-free.
Patrick Collins
Tax Director
