Those in the know are making a really great living by selling online through the market places. There are some brilliant success stories of ordinary people exploiting the impressive infrastructure and global reach of the online marketplaces such as Amazon and eBay.
As the marketplaces offer more and more to ensure sellers are successful - from localized exposure, in-country warehousing, packing and labeling and delivery to the customer’s door – many online retailers are benefiting from selling locally and internationally. With all this help at hand, what could possibly go wrong…?
Selling online does not excuse you from the societal rules of taxation and the tax man is still entitled to a piece of the pie. As a transactional tax VAT is applied every time value is added along the supply chain – from the raw material supplier to the end consumer.
However it is not supposed to be a burden on businesses, who, once VAT registered, can offset any VAT incurred on expenditure. Ultimately the private consumer bears the brunt as they are not able to reclaim or offset the VAT.
Ignorance of the VAT rules is no defense. Not accounting for VAT properly or not reporting it at all can cost you your business. So what do you need to think about before embarking on your retail campaign of global domination.
1. Don't put your own glass ceiling on your business
We hear a lot of stories about businesses who are victims of their own success. Mr Amazon Seller is making a really decent income from the exposure Amazon gives him. His domestic sales have suddenly come close to the UK VAT registration threshold of £83k. But, when he has to add 20% to the sale price, any competitive advantage is lost. Mr Amazon Seller has created his own glass ceiling and spends the next 20 years hovering below the £83,000 to ensure he never has to add the 20% VAT in order to retain his customers.
The best way to avoid this is plan ahead… When working out your margins, always add 20% to your costings long before you ever have to think about VAT registering. Right from the start, make sure you choose products that give you enough room in your margins to remain competitive when you do reach the threshold. You will learn later how this strategy also helps with your international sales
2. The benefits of registering for VAT voluntarily
Registering for VAT ahead of time can have its benefits – by accounting for the 20% VAT from the beginning, there are no nasty surprises ahead. It also helps keeps you keep your books in line.
As a small business it is easy to let the accounts go until they become absolutely necessary. By having to compile your VAT return every quarter means that you will keep your books up-to-date. There won’t be that last minute panic and sleepless nights trying to process boxfuls of expense receipts and invoices to get your accounts done in time.
3. Don’t avoid registering for VAT if you do exceed the £82k threshold
Not paying your taxes deliberately is tax evasion and the tax authorities will view it as such. Just because you sell online does not mean they can’t see you – they can. HMRC are now able to approach the market places to ask for transactional data of sellers they believe should be registered.
There have been a couple of high profile court cases where eBay sellers have had incomes of over £1 million from selling online and didn’t think the tax man wouldn’t be interested, he is!
4. Foreign customers
There are 2 types of customers when you are selling goods online to private consumers – those within the EU and those outside the EU.
Inside the EU
Set the scene, you are doing really well here in the UK, then Amazon approaches you and asks if you would like to sell in mainland Europe, they can extend your shop’s exposure to 3 or 4 countries inside the EU. Logistically nothing changes, you send your goods to their UK fulfilment centre and they do the rest. Great – you start getting French and German customers.. Should you worry about adding VAT? The answer is yes.
By selling to private consumers in Europe, you are now governed by the EU Distance Selling Rules. These rules apply to you even if you are sole trader, a limited company, or an individual selling online.
These rules state that you charge UK VAT on any EU sales to private consumers until you exceed set thresholds set by the different countries. The thresholds for most EU countries is only Euros 35k or equivalent, except for Germany, Luxembourg and Netherland – whose thresholds are Euros 100k. Once your sales (include delivery costs in the calculation) reach the thresholds in any country, you have an obligation to VAT register there and comply with the ensuing VAT return requirements. Failure to do so will and does lead to interest and penalties being applied.
If you are not VAT registered here in the UK, you don’t charge VAT. Though you do have to monitor your EU sales as if you do exceed the threshold in another country you will have to VAT register there (even though you are below the UK threshold here) and charge that country’s VAT on those sales.
Also be aware that a different VAT rate may apply, for example, here in the UK, children’s clothing is zero-rated, whereas elsewhere in the EU, it may attract a country’s standard rate.
VAT rates range from 17% (Luxembourg) to 27% (Hungary) across the EU – again, accounting for the variations within your margins from the start can ensure you remain competitive in every country.
Outside the EU
If you get customers outside the EU, as long as you can prove the export happened, you do not charge VAT on that sale
5. Holding Stock in an Amazon Fulfilment Centre
We have many marketplace sellers who are approached by Amazon to put their stock in one of Amazon’s European Fulfilment (FBA) Centres. They have FBA centres in France, Spain, Germany and Italy. It makes commercial sense by giving you the competitive edge by ensuring cheaper and quicker delivery to your EU customers. However be warned, by moving your stock to another EU country, you have now created a taxable supply and will have to register in that country immediately. There are no thresholds to exceed.
The EU tax authorities have been extremely pro-active in approaching Amazon for sales data for UK companies holding stock in the FBA centres. Clients have been approached and in some instances, the EU tax authorities have even approached HMRC for information on a particular UK company. Please be aware of your exposure as the tax authorities communicate with each other and share data. This is particularly pertinent with Amazon’s launch of their new Pan-EU Fulfilment Service – please be aware if you subscribe to this service it triggers a VAT registration in 6 EU countries (7 if you include the UK). This comes with a cost of compliance as 7 VAT registrations in France, Germany, Italy, Spain, Czech Republic and Poland triggers over 60 VAT returns per year and other reporting requirements such as EC Sales Lists.
Don’t let VAT be a barrier to your expansion plans
If you recognize yourself in some of the scenes we have painted, please don’t bury your head in the sand. There is help out there to ensure you become compliant even if it might be a little late in some instances. The tax authorities are much more lenient if you own up to them, then if they have to find you.
Our advice is ‘plan ahead’. If you know what triggers your VAT obligations, you can add the cost of compliance into your cashflow along with other staples such as web-hosting or accountancy fees. By doing this you will understand the true cost of expanding both locally and internationally and you will know whether your business can afford it.
If you want to know more, please download our free guides from www.simplyvat.com or get in touch to discuss how we can help you.
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