You’re a UK seller and you’ve started selling on Amazon and it’s going well, you’re wondering whether there would be any benefit in being VAT registered instead of being a sole trader or a Limited Liability Company (LLC).
If you’re running a business especially if you’re first starting out, VAT can seem complex and an extra burden to think about. In this article we will explain what VAT is, the advantages and disadvantages of registering for VAT. We will provide an example and we will explain when you must register for VAT.
- 1 What is VAT?
- 2 When is it Compulsory to Register for VAT?
- 3 What are the Benefits & Negatives of Voluntary VAT Registration?
- 4 How to Register for VAT?
- 5 VAT Schemes Available
- 6 Deregistering for VAT
- 7 How About Selling Elsewhere Then the UK?
- 8 Amazon VAT Services
- 9 Accounting
What is VAT?
Value Added Tax (VAT), is a sales tax which is paid by the consumer and is collected by the seller that is VAT registered in the UK. The tax collected by the VAT registered seller is then paid back to Her Majesty’s Revenue & Customs (HMRC), the UK’s government’s tax collecting department.
The current standard VAT rate in the UK is 20%. Most products and services are subject to the standard rate of VAT. However, there are some goods which are subject to lower rates and others are even exempt from having to pay VAT. For example, Children’s clothing, books are 0% VAT rated while children’s car seats, mobility aids for the over 60’s, domestic fuel are charged at a reduced rate of 5%.
Businesses that are VAT registered are able to reclaim back VAT paid for goods and services. For example, VAT paid on importing goods from China to sell on Amazon can be reclaimed back as well such things as stationary.
When is it Compulsory to Register for VAT?
The VAT registration threshold is currently set at £85,000 (2017-18), you MUST register to be VAT registered in the following situations:
- If your turnover (NOT profit) exceeds £85,000 in a 12 month period (rolling 12-month basis not based on turnover in the calendar year).
- If you expect to go over the threshold in a single 30 day period.
If you fail to register within 30 days in any of the above situations, HMRC could fine you.
Once you’re registered, you will need to charge VAT on each item that you sell and you must file your tax return electronically every quarter.
Let’s say you’re based in the UK and run a beauty products business on Amazon through Fulfilment by Amazon (FBA).
You’re thinking of importing some make-up brushes from China in order to add to your line of existing beauty products and you’re wondering if you should voluntarily apply for VAT and whether there would be any benefits in doing so?
Let’s say your Chinese manufacture has quoted you a price of 4$ for 1000 units of a makeup brush set you like.
You’re freight forwarder has provided a FOB quote of £180 to get the make-up brushes shipped from China to the UK.
You find the commodity code for cosmetic makeup brushes and you see that they incur import duties of 3.70% and VAT at the standard rate of 20%.
£3,080 ($4000) – Product cost (1000 units x £3.08)
£180 – FOB shipping quote
£120.62 – UK Duties @ 3.70%
£676.12 – UK VAT @ 20%
Total landed cost = £4056.74
Ok, let’s now see the difference it makes if you’re thinking of selling the make-up brush set for £12.00 per unit if you’re registered for VAT or not.
If you’re not VAT registered, you charge the customer £12.00 and if you sell the full 1000 units that you’ve ordered, you will make £12,000 (not accounting for other costs and selling expenses etc).
While if you’re VAT registered, you will have to sell the make-up brush set for £10.00 plus VAT at 20%. If you sell all your stock, you will only make £10,000 (not accounting for other costs and selling expenses etc) as you pay 20% (£2,000) to HMRC.
So as you can see, even though you’re selling the make-up brush set for the same price, your profit margins are lower if you’re VAT registered. In order to make the same profit margins that you had before you were VAT registered, you would have to raise your prices which in turn could put your customers off and your sales may fall.
|Not VAT Registered||VAT Registered|
|Make-up brush set selling price per unit||£12.00||£10.00 + VAT (20%)|
|All stock sold||£12,000||£10,000 + £2,000 in VAT|
Let’s not forget though when you’re VAT registered, you can reclaim back expenses. So let’s do the calculations to see if there is any benefit being VAT registered in this case.
|Not VAT Registered|
|Product Cost + Shipping Costs + Duties||£3,380.62||-£3,380.62|
|Import VAT Reclaimed||£0||-£4056.74|
|VAT on Revenue||£0||£7943.26|
|Product Cost + Shipping Costs + Duties||£3,380.62||-£3,380.62|
|Import VAT Reclaimed||£676.12||-£3,380.62|
|VAT on Revenue||£2,000||£6,619.38|
As you can see from the example, being VAT registered, you can claim back the import VAT paid to bring the product into the country. Despite having this refunded, you will have to pay £2000 VAT on sales you make to HMRC. In this case, if you were VAT registered, you would make £1,323.88 less than if you were not VAT registered.
Naturally this is a simple example, if you were actually selling on Amazon FBA, you would have extra expenses such as Amazon selling fees, FBA fees, product ad fees, costs of sending your FBA shipment into Amazon’s warehouse etc. With these fees, you can reclaim VAT back if you’re VAT registered, so the above figures are not totally accurate although it should provide a general overview. In order to weigh up the benefits, you need to know whether the VAT you can claim back on your expenses outweighs the VAT you collect from your customers or not.
What are the Benefits & Negatives of Voluntary VAT Registration?
You may wonder what the benefits of registering for VAT are even when you are not required to:
1. Provides a more professional business image
Your VAT number will be displayed on your Amazon seller profile as well as your invoices. This should give you a more professional and trustworthy image and you may seem more appealing to potential customers. Also if you’re purchasing from wholesalers, some will require you to be VAT registered before they sell to you.
2. Reclaim VAT refunds
Once you’re VAT registered, you can claim back VAT on business expenses from anything from import VAT, accountancy fees, inventory, equipment etc. You can also reclaim VAT on goods that you bought up to 4 years before you actually registered for VAT providing you have kept the relevant invoices.
3. If you’re a B2B seller
If you sell mostly to other businesses that are VAT registered, they will be able claim the VAT back that you charge.
4. Not worrying about exceeding the threshold
If you register for VAT before you exceed the threshold, you won’t have to worry about closely monitoring your turnover and you won’t get fined by HMRC.
5. If you sell 0% rated or 5% VAT rated products
You will be able to claim the full VAT on your business expenses and you will only have to pay a small amount of VAT to HMRC. In cases where the product is 0% rated i.e. in the case of children’s clothing, you won’t be charging any VAT on your products and you will be able to claim the VAT on your business expenses.
1. More time spent on paperwork
You will have to file tax returns every quarter which will mean more paperwork work and extra workload for you and you will incur extra expenses such as accountancy fees.
2. You will have to charge more for your products
As you now need to charge VAT on your products, this may mean that your products are not as competitively priced as they were previously. If you’re selling in a competitive sector on Amazon, you may lose sales as customers who are not VAT registered (who can’t reclaim VAT back) will purchase from other more competitive priced-sellers.
3. Cash flow problems
If your output tax (the VAT you charge on goods and services) exceeds the input tax (VAT that you pay for goods & services), you will have to pay the different to HMRC so you may end up with a large VAT bill which could cause cash flow problems.
How to Register for VAT?
You must first already have a HMRC online account (Government Gateway account), you should already have this if you’ve registered as a sole trader or as a LLC.
When you’re registering you’ll need the following documents:
- Your Unique Tax Reference number.
- Registered address and company number.
- Business bank account details.
- Any details of a business that has been transferred.
- Details of all associated businesses from the past two years.
Registration can take up to 2 weeks. Once registered, you should receive a VAT registration certificate (VAT4) with includes your VAT registration number, the effective date of registration as well as the date you need to submit your first VAT return by.
VAT Schemes Available
There are a number of different VAT schemes available to different businesses, these include ones such as:
This is the standard scheme. The tax liable is based upon the date when the invoice was sent. You therefore pay HMRC by the end of the quarter even though the customer may not have paid you.
May cause cash flow problems if customers have not paid up in time and you have to pay HMRC.
Flat Rate Scheme
For businesses where the turnover is less than £150,000
You pay a percentage of your turnover to HRMC. Rates are dependent on individual sectors.
You can’t reclaim back VAT on business expenses.
Cash Accounting Scheme
For businesses where the turnover is less than £1.35m
You only pay HMRC the VAT you’ve received during a quarter. It’s based upon when an invoice has been paid, not when you sent the invoice. This insures you have the money in your account to pay the relevant tax due. Great if you have slow payers and you’re less likely to suffer from cash flow problems.
Not really suited for businesses who buy on credit, as they’re unable to reclaim the VAT until the payment has been made.
Deregistering for VAT
What happens if you’ve voluntarily registered for VAT and then find your circumstances have changed or you may find the negatives outweigh the positives for your business? Well, you’re able to deregister your business for VAT providing your turnover is below HMRC’s threshold (£83,000) in the next 12 months.
In order to de-register, you will need to contact HMRC, providing evidence that you won’t go over the £83,000 threshold in the next 12 months. HMRC will then decide if they will grant you your request.
You will need to weigh up the positives and negatives of voluntarily applying for VAT Registration. It really depends on different circumstances, on the whole though if you’re don’t sell 0% rated or reduced VAT related products it is advisable to not register until you reach the £85,000 threshold. Wherever possible always seek the advice of an accountant who will be able to advise you on your personal circumstances.
How About Selling Elsewhere Then the UK?
The article so far has covered what happens if you sell your products through the UK Amazon marketplace to local customers.
Amazon’s European Fulfilment Network (EFN)
What happens if you want to take advantage of Amazon’s European Fulfilment network (EFN)? This is where your inventory is stored at your local fulfilment centre but it allows you to sell to other European marketplaces including Germany, Italy, France, Spain and UK. For example, if someone places an order on amazon.de, your goods will be shipped from your local Amazon warehouse to the customer in Germany.
Does the VAT situation change if I’m selling to the EU but storing my stock in my local fulfilment centre? The answer is it depends on your amounts you’re selling. You can avoid VAT as long as you don’t exceed the distance selling thresholds. The thresholds vary from one country to another (see the below table).
|Distance Selling Thresholds|
As soon as your sales exceed these thresholds in a particular country in a calendar year, you will need to register for VAT there.
For example, you store your stock at one of Amazon’s UK fulfilment centres, and you sell your products through EFN. The product you’re selling proves popular in Germany and your total order amount exceeds €100,000 in a calendar year, you must register for VAT in Germany immediately.
|Standard Tax Rate|
If for example you’re based in France and your inventory is stored locally and you sell your products to the UK, you will need to register for VAT as soon as you meet the £70,000 threshold.
Pan-European FBA (PAN-EU)
Amazon has another option if you want to sell to the EU which is Pan-European (PAN-EU). This is where instead of having your inventory stored locally, Amazon ships your inventory to the fulfilment centres in 7 Europeans countries so it’s nearer to the customers. This makes the VAT situation more complex as as soon as your inventory arrives in the country, you immediately must register for VAT for that particular country.
This means you will need to register for VAT in 7 different countries where your inventory is stored, have 7 different VAT rates and submit 7 VAT reports throughout the year. You will also need to calculate the selling price for the 7 countries taking account of the different VAT rates for the corresponding countries.
As you can see, using PAN-EU is a great way to open up more marketplaces. It can make the VAT situation even more complex. It is advisable to only switch to PAN EU when you have met at least one of the distance selling thresholds in an EU country as you will have to register for VAT anyway.
Central and Eastern Europe (CEE)
There is also another option which Amazon provides which is Central and Eastern Europe (CEE). This is where Amazon stores your inventory in Germany, Czech Republic and Poland. Like with PAN-EU, your inventory is stored in another country so it requires you to be registered for VAT in the three countries.
|Inventory Stored||1 Country (local country)||7 Countries (Spain, France, Italy, Poland, UK, Germany & Czech Republic)||3 Countries (Germany, Czech Republic & Poland)|
|Minimum VAT Numbers Required||0 (If you’re under VAT threshold or under the distance selling threshold you don’t need to register)||7||3|
|Delivery||2-3 days||2 days||1-2 days|
|Selling Fees||Local fulfilment fee + cross border fee||Local fulfilment fees relevant to the corresponding country||Local fulfilment fees relevant to the corresponding country|
Amazon VAT Services
If you plan on using EFN, PAN-EU or CCE, Amazon provides a service called VAT services where for a small fee of $400 per country, they will register you for VAT when required and they will also file your VAT return.
As your business grows, you may find it difficult keeping on top of your bookkeeping. An accounting tool which we would definitely recommend is Xero which is easy to use. One of the advantages of Xero is the vast selection of third-party apps which you can use. For example, the A2X plugin allows you to automatically import your Amazon transactions into Xero thus saving you lots of time and effort and is a godsend if you plan to sell on multiple marketplaces.