Andrew Needham looks at the VAT implications of selling goods over the internet.
Many small and medium-sized businesses sell their goods through internet marketing platforms such as Amazon and eBay. Once their turnover exceeds the VAT registration threshold, they have to account for VAT on their sales; but how much VAT do they have to account for?
Platform charges
Marketing platforms charge businesses for their services; they take a commission on the value of the sales, and as they often hold a stock of the goods themselves, they charge for postage and packing and dealing with the shipping on behalf of the seller.
The platforms work out the sales carried out and deduct their charges before sending the balance to the seller.
Example: Sale of goods via an internet marketing platform
The total value of the sale of goods through the internet in the month is £1,000, plus £100 postage and packing.
The internet marketing platform provider charges 10% commission of £100 and deducts this from the sales along with the postage and packing, passing over the balance of £900 to the seller (£1,000 sales + £100 postage and packing - £100 commission - £100 postage and packing = £900).
How much VAT?
A number of businesses take the view that they need to account for VAT on the actual income that they receive, which in our example would be £900. Others think that it would be the value of goods they had sold, £1,000.
In fact, VAT is due on the full sales value, which would be the total value of the goods sold plus postage and packing, which is £1,100. VAT is also due on the postage and packing, as this charge follows the liability of the goods you are selling; so if you sell standard-rated goods, the postage and packing is also standard rated.
The actual VAT due would therefore be £1,100/6 = £183.33, even though the seller only received £900 in cash. The net amount he would be left with is £716.67 (£900 - £183.33).
HMRC guidance states:
The consideration for a supply is everything that the supplier receives for making that supply. However, some companies attempt to reduce the value of the supplies they have received, or made, by off-setting (sometimes called netting-off) supplies received from other companies, against supplies made to those companies. This practice is incorrect as there are two separate supplies and VAT must be accounted in full.
Businesses cannot offset the charges deducted by the marketing platform provider from their total sales figure before accounting for VAT. I have come across some businesses that have done this and got into trouble, with HMRC assessing them for underdeclared VAT, interest, and penalties.
Don’t forget the reverse charge
As most internet marketing platforms are based outside the UK, they do not charge VAT on their charges to UK businesses. However, VAT is due on the services supplied under the reverse charge procedures, whereby the UK seller accounts for the VAT due.
In this example, the services supplied amount to £200, so VAT of £40 is due and is accounted for in Box 1 of the VAT return. A corresponding input tax deduction is made in Box 4 of the same VAT return, effectively cancelling out the output tax charge resulting in a nil net tax position. The net figures are recorded in boxes 6 and 7 of the VAT return.
Practical Tip:
If you sell goods through an internet marketing platform, VAT is due on the full selling price of the goods plus the postage and packing. If the provider is outside the UK, you also have to account for VAT under the reverse charge rules.
