How to pay VAT for e-Commerce

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Whether it’s selling handmade soap on Etsy, or mass distribution via Shopify, eCommerce is highly popular amongst entrepreneurs. Why? Well, besides the obvious allure of not forking out for physical business premises, there’s comfort in knowing clients can always find you – come rain, shine or pandemic restrictions. 

Let’s be honest – the Covid19 pandemic has played a major role in eCommerce’s grip on trade. Craig Billington at Kirkwood Wilson explains this exodus from the high street. “The pandemic led to many furloughed employees looking to ‘side hustles’ as a way to generate extra income for themselves and their families. For many, this extra income has helped alleviate financial strain throughout the pandemic. For others, it was the start of a fledgling business, often being run on an e-commerce platform.”

But understanding how VAT rules apply to eCommerce businesses might seem confusing. How much VAT should eCommerce business owners pay? When do you need to pay VAT, and how can you stay on top of your VAT bill during the year to ensure that you’re prepared?

Fear not – your questions will be answered! Let’s start at the beginning…

1. When do I need to register for VAT as an eCommerce business?

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When your e-Commerce turnover exceeds £85,000, you need to register for VAT – just like any other business. But many people choose to get VAT-registered before they reach that threshold.

Call360 CEO and founder Mark Taylor is one example of this. “We decided to be VAT registered from the start. We knew our revenues would exceed £85k in our first year and we wanted to pass on the VAT costs so we could protect our margins.”

Another reason to consider VAT registration from Day One is that you’ll be paying VAT on any products you buy for your business. “If you are buying goods with VAT, it makes sense to charge VAT onto your customers.” Mark explains, “Otherwise, it’s going to hit your margins if you don’t pass it on – and you won’t make as much profit.”

Finally, it’s important to note that the threshold for paying VAT is based on turnover – not profit.  “If your eCommerce site is turning over £85,000,” Mark notes, “you need to be VAT registered – no matter how much money you make or lose from your business.”

TOP TIP: If you’re exporting your goods from the UK to other countries, you won’t need to charge VAT on those sales. “Post-Brexit rules mean that you are able to zero-rate (i.e. charge no VAT) most sales,” Craig points out, “as long as you keep evidence that the goods were actually exported from UK shores.”

2. What happens if I don’t register for VAT?

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If you’re not at the earnings threshold yet, the answer is nothing at all. The minute your turnover exceeds £85,000, you’re legally obligated to register. 

Mark recommends hiring a professional to keep tabs on your finances. “It’s actually a criminal offence to not be VAT registered if you turnover more than £85k. Your accountant will certainly spot that you are turning over more than the VAT threshold, so there should be some warning signs to ensure you aren’t running illegally.”

3. When and how do I pay VAT for eCommerce?

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You can pay your VAT bill online through the gov.uk website. Unlike corporation tax, which is usually paid annually, VAT is paid quarterly in arrears – which is another reason to register before you actually need to.  

Craig breaks down how to handle your VAT bill. “If a business sells a product for £30 and it is VAT registered, then it will have sales of £25 and will account for £5 of sales VAT each time it makes a sale. The business effectively collects the £5 of VAT on behalf of the consumer and pays it over to HMRC, usually at the end of each quarter.”

So, if you’re charging VAT from Day One, you’ll have enough money set aside to pay your bill once you reach the threshold.  

Again, Mark points out that leaving no margin for error is the best approach, “You should get a good accountant to complete your VAT return. Whilst it looks simple, I recommend leaving things like this to trained professionals – so you don’t get the calculation wrong and end up owing HMRC thousands of pounds, which will eat into your cash flow.”

4. How can I make sure my eCommerce VAT return is correct?

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With eCommerce, your data is already digital – meaning there are tools you can use to keep things up to date all year round. 

“Running accounting software like Xero or Sage will make VAT and completing returns dead easy.” Says Mark, “Set up your eCommerce store the right way, with the right back-end systems, and you’ll never have a problem with HMRC. It’s important to get right as there are fines and even jail sentences handed out if you get it wrong.”

So, no pressure then. But a good incentive to register for VAT before you really need to. 

For Craig, this is vital to a smooth transition into VAT returns. “One thing we’ve always recommended is that businesses set their pricing structure up from the beginning to account for any monies they’ll lose in VAT when they do eventually reach the VAT threshold.”

Want Some Help With That?

eCommerce is a fantastic business venture for entrepreneurs – and we’re here to make it pay for you.

If you want expert support with all things VAT, from keeping up to date to claiming back on your return, we can help. Get help with your VAT bill today.

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