VAT Changes for Online Sales

2021 is a year of change for businesses trading with the United Kingdom, and these changes have not spared the online sales sector. If you run an e-commerce business, regardless of your sales channel (a marketplace or your own platform), the new VAT regulations may apply to you. When do you have to be a VAT payer in the United Kingdom? How should you account for it correctly? Let’s find out.

Who do the new tax rules apply to?

The new rules connected with Brexit, in accordance with HMRC (HM Revenue & Customs) regulations, apply if:

• Your business is based outside the UK and sells goods to British customers which are then imported into the United Kingdom,

• Your business is based outside the UK and the EU, and you sell goods to customers in Northern Ireland which you then have to import there.

Remember that for VAT on online sales in the UK, a company’s place of establishment is considered to be the country where its central administration is located. HMRC takes three aspects into account when determining the location of a company’s administration: where the essential decisions concerning the management of the business are made, where the company’s physical registered office is located, and where management meetings are held.

Bear in mind that e-commerce platforms such as Amazon or eBay enable distance selling of goods. Under the new rules, they are responsible for collecting and accounting for VAT on transactions made through them. As a result, goods stored outside the UK and then sold in the UK are to be treated in the same way as goods from British businesses.

Is registering for VAT compulsory for an e-commerce business?

As a company that may potentially pay VAT in the United Kingdom, you should know that there is currently no obligation to register as a VAT payer if your business’s sales over the last 12 months have not exceeded £85,000. You do, however, have the option of registering voluntarily before you exceed this threshold, and once you exceed it, registration becomes your obligation.

Registering as a VAT-paying entity in the e-commerce sector carries several advantages:

• A registered company is more credible in the eyes of future business partners.

• If you sell via eBay or Amazon, registration is often required to run a business account.

• Amazon’s country of tax residence is Luxembourg. If you do not plan to pay tax on invoices for the services provided by the platform, registering for VAT and accounting on the basis of an intra-community purchase of services will help you avoid this charge.

How do you register a company for VAT?

You can register as a VAT payer in two ways:

• online, by completing the appropriate form,

• by post, by sending a properly completed VAT1 form.

After registering, you are required to provide your VAT number to all the sales platforms you use.

Please note! The shop name that appears on the online sales platform (Amazon, eBay) should be exactly the same as the business name provided when registering for VAT. Otherwise, the platform owner has the right to remove your account because of this kind of discrepancy.

VAT accounting options in the United Kingdom

VAT in e-commerce in 2021 can be accounted for in two different ways, the Flat Rate Scheme or standard VAT.

If you sell online in the United Kingdom, you have the option of using a simplified VAT accounting scheme. Under this scheme, the tax return mainly takes into account your online sales over a given period. It is a simpler form which can sometimes save you a few pounds compared with the second method, standard VAT. The VAT rate for the Flat Rate Scheme is currently 7.5%, although it may vary depending on the type of goods you sell. Bear in mind, however, that to account at the 7.5% rate you must incur qualifying costs in a given quarter that entitle you to this rate; if you do not, the Flat Rate Scheme rate is 16.5%, regardless of the nature of your business. Remember also that once your company’s online sales exceed £230,000, you are required to account using the standard VAT method.

The standard VAT rate in the United Kingdom is 20%. It is accounted for on the basis of the difference between your company’s income from online sales and the business costs you have incurred.

HMRC has committed to helping businesses selling online to comply with the new e-commerce VAT rules. You now know the general principles of accounting for VAT on online sales. If you have any doubts about VAT registration, contact a tax adviser, who will certainly answer all your questions about accounting for VAT in the UK.