What is VAT?
VAT (or Value Added Tax) is a type of sales tax that is applied in both the UK and the EU. You will be charged VAT on the actual price you sell a product or service at (regardless of how much profit you make on the sale).
Who Should Register For VAT?
UK-based business owners do not need to register for VAT until their turnover exceeds the VAT threshold (£85,000 in 12 months), although there is an option to register voluntarily beforehand. UK businesses need to register for VAT when they expect to cross the VAT threshold within the next 30 days and will owe VAT on any sales past the date they crossed the VAT threshold.
VAT is charged at three rates in the UK:
|Rate||% of VAT||Applies to|
|Standard rate||20%||Most products and services|
|Reduced rate||5%||Some goods and services e.g. children’s car seats and home energy|
|Zero rate||0%||Zero-rated goods and service e.g. most food and children’s clothes|
Some goods and services are outside the VAT tax system so you can’t charge or reclaim the VAT on them. Out of scope items include, for example:
- goods or services you buy and use outside of the EU
- statutory fees – like the London congestion charge
- goods you sell as part of a hobby – like stamps from a collection
- donations to a charity – if given without receiving anything in return
Click here for a list of goods and services showing which rates of VAT apply and which items are exempt or outside the scope of VAT.
There are two elements of VAT:
- Input Tax – the VAT your suppliers charge you
- Output Tax – the VAT you charge your customers when they buy products or services from you
When you submit your VAT return, you calculate the amount of VAT you need to pay to HMRC by working out the difference between the input tax you have paid and the output tax you have collected via sales. If you have paid more input tax than output tax then HMRC will owe you a rebate.
Flat Rate VAT Scheme
The Flat Rate VAT Scheme is an alternative way to calculate VAT, saving businesses time. You still charge VAT to your customers in the normal way, but you pay a percentage of your total sales to HMRC as VAT. The percentage you pay depends on what type of business you are in, and unless you buy a capital asset over £2,000 including VAT, you can’t reclaim VAT when you are using the flat rate scheme.
Cash Accounting Scheme
With the Cash Accounting Scheme, you only repay VAT to HMRC once you have received payment yourself. You pay VAT on your sales when your customers pay you and reclaim the VAT on your purchases from suppliers when you have paid your supplier. This scheme can help with your cash flow and to be eligible to use this scheme your VAT taxable turnover must be £1.35 million or less.
Annual Accounting Scheme
The VAT Annual Accounting Scheme is designed to reduce paperwork for businesses and help with budgeting and cash flow. With the scheme, businesses submit one VAT return a year (rather than the usual four) and then pay their VAT in instalments.
For the first 12 months, your instalments are based on an estimate of your VAT liability. Once your business has been registered with this scheme for more than 12 months, you can choose to pay your VAT in 9 monthly instalments. Each instalment will be 10% of the amount owed for the previous tax year and will be due at the end of months 4 to 12 in the tax year. Otherwise, you can pay 25% of the amount owed in quarterly instalments due at the end of months 4, 7 and 10. There will then be a balance to pay for that year.
You are able to apply to HMRC at any point to change the way you pay your instalments.
VAT Retail Schemes
VAT Retail Schemes can make calculating VAT easier. There are three standard VAT Retail Schemes:
- Point of Sale Scheme
This scheme can be used if you can identify the VAT rate for goods sold at the time of sale (e.g. via an electronic till, for example). You calculate your VAT by adding up all the sales for each VAT rate for the VAT return period. For 20% rated goods, divide the sales by 6 and for 5% rated goods divide the sales by 21.
- Apportionment Scheme
This scheme can only be used by businesses that buy goods for resale. Businesses providing services (including catering services) or goods that they have made or grown themselves, can’t use the Apportionment Scheme. To be eligible, your turnover, excluding VAT, can’t be more than £1 milion a year.
Under the Apportionment Scheme, you calculate the total value of goods purchased for resale in the VAT period and for each VAT rate. You then divide the total purchases for each VAT rate by the total for all purchases and then multiply the outcome by your total sales (divided by 6 for 20% rated goods and by 21 for 5% rated goods).
- Direct Calculation Scheme
This scheme is useful if you make a small proportion of sales at one VAT rate and the majority at another.
You calculate the expected selling prices for the majority of your goods and total them for the the VAT period. For standard rated goods (20%), you then divide by 6. If they are zero rated goods, you deduct the total expected selling price from your total sales, then divide by 6. For reduced-rate (5%) goods, deduct the expected selling price from your sales before calculating your VAT at 20%. Then calculate the VAT due by dividing the expected selling price of these by 21. Add this figure to your 20% VAT to get total VAT due.
You can use one of the above Retail Schemes together with the Cash Accounting Scheme and the Annual Accounting Scheme, but not with the Flat Rate Scheme.
VAT Margin Schemes
VAT Margin Schemes can be used by people who sell:
- second-hand items
- collectors’ items
- works of art
VAT Margin Schemes tax the difference between what you paid for an item and what you sold it for – rather than the full selling price – and you pay VAT at 16.67% on the difference.
You are not able to use a Margin Scheme for any item you bought but on which were not charged VAT, precious stones and metals and investment gold.
VAT For Amazon Sellers
If you are an Amazon FBA (Fulfilled By Amazon) Seller then you will need to know all about VAT and how it applies to you.
As outlined above, if you are a UK-based Amazon FBA Seller, you don’t need to register for VAT until your turnover exceeds the VAT threshold. If you are a non-EU Amazon FBA Seller and want to sell products on Amazon, you need to immediately register for VAT.
If you are an EU based Amazon seller and your products are stored in the Amazon UK FBA warehouse, you will need to register for VAT straightaway. If your goods are stored in your home EU country, however, whether you have to register for VAT will depend on the value of your sales into the UK.
If you are selling directly to consumers on Amazon then your sales price will need to include VAT.
Amazon FBA businesses usually aim to buy in bulk at a discounted price and sell on at a higher price for maximum profit Where this is the case, the input tax can be lower than the output tax. The difference will be the amount they owe to HMRC.
The Amazon Pan-EU Program
Amazon’s Pan-EU program allows FBA Sellers to offer their goods to all 7 European marketplaces. Rather than being stored and distributed from one fulfilment centre, Amazon distributes your products from the country itself. This program saves you money:
- On sale of one of your items, you only pay the local fulfilment fee for that particular marketplace
- You don’t pay the usual cross border fee, which is charged when you sell via Amazon’s Fulfilment Network
Plus the items are eligible for Prime and are delivered faster to your customers!
With the new Pan-EU program, you now have to register for VAT in each of the countries where you have inventory stored. Unlike with UK VAT registration where you have to register only once you have reached the VAT threshold, you must register for VAT in these EU countries regardless of how much your sales are. Dependent upon where your stock is held/sales are being made, you will have to comply with the rules of that specific country, i.e.:
- Charge the relevant VAT rates
- Keep records
- File VAT returns for all sales
As well as being very complex, it could be quite costly, as you may need to hire a VAT expert in each of the EU countries you hold stock in.
Whether you’re an Amazon FBA Seller or sell online through your own e-commerce store, if you’d like more information about VAT and how it applies to you, please get in touch. We’re here to help.