Andrew Needham highlights what to look out for when selling goods online.
Many small and medium sized retail businesses trade online through trading platforms such as Amazon and e-Bay. There are many advantages to this, as the set-up and maintenance costs of the online platform are not borne by the trader.
However, there are a number of VAT issues that need to be considered to avoid costly problems down the line.
The three main areas where errors occur are:
- selling to private customers in other EU member states;
- what figure do you use to calculate the VAT on sales; and
- the reverse charge on commissions.
Selling to other EU member states
When you sell goods to customers in other EU member states, you are engaged in what is known as ‘distance selling’. If you have low levels of sales to other member states you charge UK VAT. If your sales exceed certain limits (i.e. either 30,000 or 100,000 Euros, depending on the member state) you will need to register for VAT in that member state and charge local VAT; you will therefore need to monitor your sales to each member state.
Some of the larger online platforms such as e-Bay and Amazon will identify and correlate sales to each member state, helping the business identify any registration requirements and how much VAT is due to each tax authority.
However, it can still be a nightmare for businesses, as they have to manage several VAT registrations and different rates of VAT.
What figure do I account for VAT on?
This seems like a simple question, but it causes many businesses problems that can result in an unexpected VAT bill from HMRC.
Businesses selling through an online platform set a price for the goods, plus any postage and packing that they charge for and in turn the online platform charges them commission on the sale plus any handling and delivery charges if they hold stocks on behalf of the trader. At the end of the accounting period the online platform provider nets off the total sales from their charges and pays over the difference to the trader.
Some traders then account for VAT on the monies they receive. Unfortunately, this is incorrect and catches many businesses out. Assuming that the goods are standard rated, any separate delivery charge is subject to VAT at the same rate as the goods being sold, even if no VAT is charged to the business. VAT is due on the full selling price of the goods plus postage and packing before the platform provider deducts their costs.
For example, if the total sales plus postage and packing are £2,000 in the period and the platform provider deducts £300 for commissions and any other charges, the trader receives £1,700; however, VAT is still due on the full £2,000.
Reverse charge
Many of the platform providers are based outside the UK, and so they do not charge VAT on their commission and other charges. Most businesses never give this another thought; however, VAT is due on this under the ‘reverse charge’ rules – so the business has to charge itself VAT on the charges, which it can deduct as input tax on the same return. However, if the trader is not registered for VAT, the amounts subject to the reverse charge count towards its taxable turnover for VAT registration purposes.
For example, an online trader is turning over £78,000 per annum in sales and is just below the VAT registration threshold; however, it receives £10,000 in commission charges and other charges from the platform provider based in Ireland that it has to add to its turnover, which is now £88,000 per annum (i.e. above the registration threshold) and so has to register for and account for VAT on all sales.
Practical tip
To avoid problems trading through an online platform, businesses need to monitor their sales to other EU countries and calculate its output tax correctly.
