E-commerce VAT: What You Need to Know

Whether you sell bits and pieces on eBay or your e-commerce business is altogether more grand, it’ll pay you to get to grips with your VAT (Value-Added Tax) position. Here are the basics for businesses trading in the UK and overseas.

What is e-commerce VAT?

If you run an e-commerce store and you’re doing well, you might need to start charging VAT. The good news is that a lot of the VAT rules that apply to physical stores also apply online. The bad news is, of course, that as a VAT payer you’re essentially an unpaid tax collector for HMRC. Lucky you.

If your turnover reaches the threshold of £85,000 in any rolling 12-month period, you must register for VAT immediately or face a fine.

The rules apply to pretty much all goods and services, with the exception of music downloads and e-books. There’s a whole different set of VAT rules for them.

Once you’re VAT-registered, your e-commerce site has to make this abundantly clear. When you show your prices, they can be displayed as VAT-inclusive. There’s no need to list VAT separately.

If your turnover is below the VAT threshold, you’ve no need to register for VAT. If you’ve got any queries, you can call HMRC’s VAT advice line for help.

What rate should you charge?

For most items, the UK VAT rate is 20 percent. However, there are three VAT rates to get your head around. Some goods get charged at just five percent and others at zero percent. That’s known as ‘zero-rated.’ Some goods are even completely exempt from VAT.

So now you’re asking: what’s the difference between zero-rated and exempt?

Zero-rated items aren’t VAT-exempt. They’re still taxable. This means you must record all sales and submit them on your VAT return. They’ll also count towards your 12-month threshold.

In contrast, you don’t have to include sales of VAT-exempt items on your VAT return.

What about delivery costs?

The VAT you charge on delivery depends on what you’re selling. If it’s a printed e-book incurring zero percent VAT, there’s a 0% rate on delivery, too. When you offer free delivery, VAT is included in the price.

For international e-commerce trade, a whole different set of rules applies – more of which later. But first, let’s look at eBay.

The curious case of eBay

Last August, thousands of eBay sellers suddenly experienced a hike in their selling fees. This was down to the online auction site adding VAT to its fees.

The move resulted from a corporate restructure, with UK sellers told they had to start paying fees to eBay’s UK business, rather than the Luxembourg subsidiary. Not that this will mean eBay paying any more tax in the UK (eBay’s British subsidiary pays only around £2m tax a year, despite the UK being a major marketplace).

Tax-efficient corporate structures aside, what does this mean for UK eBay sellers? You’ll feel the biggest impact if you’re an eBay trader with a business account but aren’t registered for VAT.

In short, you’ll pay 20 percent UK VAT to eBay (UK) Limited on taxable fees. You won’t be able to claim these back unless you register for VAT with HMRC. Most private individuals trading on eBay won’t be affected because they’ll likely have a turnover beneath the £85,000 VAT threshold, so they’re effectively already paying 20 percent VAT on their fees.

Most business sellers also won’t incur extra costs if they’re already VAT-registered. They can claim a tax credit to offset the VAT they paid, unless they pay VAT through the flat rate scheme.

So what about paying VAT internationally?

E-commerce VAT gets a little more complex if you sell goods from the UK to other countries. Fasten your seatbelts.

Most goods sent outside the EU can be zero-rated for VAT. This also applies to receivers who are registered for VAT in another EU country. Selling to people in the EU who aren’t VAT-registered will mean you have to levy VAT in the usual way.

The term ‘exports’ relates to sales to a non-EU country, while ‘dispatches’ or ‘removals’ describes sales to EU nations.

Selling to VAT-registered EU buyers

Sending goods to a VAT-registered buyer in the EU allows you to zero-rate the supply, if:

• The goods go from the UK to another EU country
• The recipient is VAT-registered in their country
• You put their VAT registration number with their two-letter country code on your sales invoice
• You get ‘evidence of removal’ within three months to show the goods have left the country

Evidence of removal could be such things as customer orders, customer correspondence, sales invoices or bank statements. Your evidence has to show your business details, customer details, a description of the goods and their value, how they’ll be transported and by which route, and where they’re going to.

You’re obliged to keep this evidence for six years. HMRC might ask you for it, and if the information’s not up to scratch, they’ll ask you for VAT on the items you sold. Can’t get the evidence in time? You’ll need to account for VAT on your return.

To validate a VAT number for an EU country, you can use the EU's online interactive tool. And you can check the details a new customer has given you by calling the VAT Helpline.

Sending zero-rating goods

By post

You can zero-rate goods sent by post to VAT-registered customers in other EU countries. Use Certificate of posting goods form 132.

Alternatively, get a certificate of posting from the Post Office. Royal Mail Parcel Force can supply a dispatch pack complete with accounting documents, customs declaration and receipt copy.

Send the dispatch with the goods. There’s no need for a customs-declaration form for EU sales.

By courier

Use a courier and you’ll get an airways bill number. HMRC deems this acceptable evidence that the goods have shipped abroad.

Personal collection

If you agree that your customer can collect the goods from you, find out how and when the items are leaving the country. And make sure you get good evidence of removal before you agree not to charge VAT. Got doubts? Take a VAT-sized deposit. You can refund it once they’ve provided evidence that the goods have left the country within the time limit.

Reporting zero-rated EU sales

If you’re a UK-registered trader, you must send lists of your EU sales to HMRC. To report zero-rated EU sales, use these forms:

• Standard VAT Return (boxes six and eight)
• The EC Sales List (ESL)
• The Intrastat Supplementary Declaration for higher-value sales

Supplying to non-VAT-registered EU buyers

Supplying to EU customers not registered for VAT counts as a ‘distance sale’. This could be mail order or online sales to private individuals.

If you move your own goods to another EU country – say for storage or to another office – HMRC assumes you’ve made a supply in the UK and an acquisition in the other country. Unless you’re VAT-registered in the destination country, you might have to account for UK VAT. You’ll usually be able to zero-rate this manoeuvre.

Registering for VAT in other EU nations

You’ll charge VAT at normal UK rates for distance sales. But note each country’s ‘distance-selling threshold’. If you exceed this limit, you’ll have to register for and pay VAT in that country.

Reporting EU VAT sales

For any EU sales that have incurred VAT, put the sales value in box one and box six on your return. Pay HMRC any VAT you’ve charged as usual. If you sell more than £250,000 of goods in a year to the EU, you must fill out an Intrastat Supplementary Declaration.

Exporting outside the EU

VAT is an EU tax. That means there’s no VAT to be charged on goods sent outside the EU. If you get evidence of the sale within three months, you can zero-rate it. You can exceed this time limit for anything that needs processing before export (or for racehorses).

However, don’t zero-rate any sales where the client asks you to deliver the goods to a UK address. If they arrange to collect, you can zero-rate provided you meet particular zero-rating conditions.

Processing goods in the EU before export

If you sell to a non-EU customer but send them to another EU business for processing first, zero-rating is still possible if:

• You deliver the goods, not sell them
• The EU business only processes the goods for export

The records you must keep of this transaction include the customer’s name and address, the invoice date and number, a description of the goods and their value, and proof of export.

There’s a time limit of six months if goods have to be processed in the EU after leaving you but before they’re finally exported. Get the paperwork handled by your freight forwarder or other agents. You can read about appointing an export agent in  VAT Notice 703.

Making export quicker

If you want to make exporting goods simpler and quicker, you can send your documentation to HMRC electronically through the New Export System (NES).

Dealing with customs authorities

If you’re exporting goods outside the EU, make sure you get an Economic Operator Registration and Identification number (EORI) to keep EU Customs authorities happy.

This number is unique and it’s valid right across the EU. Use it when offering information to customs, such as completing declarations. This number is required even for occasional non-EU exports.

Proving export

To zero-rate your exports, you must get commercial or official documentary evidence of goods leaving the EU. If you don’t get it in time, the VAT must go on your return.

The National Export System automatically gives you an electronic Goods Departed Message. That’s good enough for HMRC.

You’ll need to keep further evidence that the goods have left the EU. That means that your accounting system must indicate that a transaction took place. If your evidence doesn’t cut the mustard, you’ll need to pay VAT. Keep all this evidence for six years in case HMRC wants to see it.

Exports by retailers

Zero-rating sales of goods to private customers is possible provided you can satisfy the terms for commercial exports, or the conditions of the VAT Retail Export Scheme.

Make sure you keep various records for the VAT you pay on exports. These include copies of invoices, a register of temporary movements and your evidence of export.

Finally, put your sales into box six on your return and you’re good to go.