Charging VAT when selling online
If you run an online business selling goods and your turnover exceeds the VAT registration threshold, then you may have to start charging VAT when selling online.
However the amounts you receive for your sales will often be less than your selling price (due to selling fees), so if you’re charging VAT when selling online how do make sure this is calculated properly?
Charging VAT when selling online : web platform charges
Many sites, for example Amazon and Ebay, charge businesses to use their marketing platforms. They generally do this by taking a commission on the sale value.
If they hold a stock of your goods themselves, they may also charge you for postage and packing as they will deal with shipping on your behalf.
Then once a month they’ll calculate your sales transactions, deduct their charges and pay the balance to you.
Charging VAT when selling online: an example
Your online sales in August are £10,000 plus £1,000 postage and packing. The online marketing provider charges 12.5% commission (£1,250) and deducts this from your sales. They also deducth postage and packing - sending the balance of £7,750 to you.
You might think that you should be charging VAT on the income you actually receive - which if you take the above example would be £7,750.
Alternatively, you might consider that VAT should be charged on the sale price of £10,000.
In fact, the VAT is due on the sale price plus the postage and packing which is £11,000. This is because the postage and packing costs follow the VAT liability of the goods you are selling.
Therefore, if the goods you are selling are standard-rated, then the postage and packing is also standard-rated.
So in the example above, the actual VAT due would be £1,833.34 (11,000/6) even though you only actually received £7,750.
HMRC’s view (which you can see here) is that the sale on which VAT is chargeable must include everything received for making that sale. HMRC also warn that netting off the costs paid to other businesses is incorrect practice - so if they catch you doing this you could up paying penalties and interest for underdeclared VAT.
What happens if the online platform is based outside the UK?
Most online marketing platforms are based outside of the UK. If they're based within the EU, if they have your VAT number they won’t normally charge VAT on their invoices. However, VAT will be accounted for on their services under the EU reverse charge procedure.
If they are based outside the EU then their charges won't generally include VAT. However depending on the goods being sold, VAT may need to be accounted for under the reverse charge procedure. You can read more about this here.
What’s the reverse charge procedure?
In very simple terms, you’ll account for output VAT on any supplier invoices in Box 1 of the VAT return. At the same time, you’ll claim a corresponding input VAT deduction in Box 4 of the VAT return leaving a nil net tax position. The figures in Boxes 1 and 4 are also included in boxes 6 and 7 of the same period.
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