For most products, there’s no difference between online and physical retailing where VAT is concerned. However, digital goods and services (ebooks, music and image files etc) come under a different set of VAT rules.
The way that HMRC look upon it is that if you’re selling goods on the Internet, you’re using it solely as a tool for communication and distribution as well as receiving payment from the customers buying your products.
The same rule applies as it would for a physical store, you are only able to charge VAT if your business is registered to do so.
Should your eCommerce business be registered for VAT
You’re legally obliged to register for VAT if your VAT taxable turnover is £85,000+. If your turnover doesn’t reach or exceed £85,000 you have no requirement to register and you do not need to charge VAT on any products or services that you sell.
Charging the Correct VAT rate.
Depending on the products or services you’re selling the VAT rate charged will differ. Here’s a quick guide on VAT rates in the UK – screenshot this if you need to!
|20%||The common VAT rate for most items|
|5%||Some energy, welfare and health goods. These have a reduced rate due to the nature of their uses.|
|0%||‘Zero rated’ goods are often things such as children’s clothes and other goods.|
|Some items are completely VAT free|
Zero-Rated and VAT Exempt – What’s the difference?
Zero-rated and VAT exempt are not the same thing and it’s important that you understand the difference between the two.
A zero-rated item is still VAT taxable – you just charge your customers 0%. Despite charging 0% VAT you must still record the sale and report it when you do your VAT returns. Sales of zero-rated products/services count towards your 12-month VAT threshold (the £85,000 we mentioned previously).
Items which are VAT exempt do not count towards your threshold so therefore you’re not required to record these sales.
If you are VAT registered always make this clear to your customers on your site.
International VAT Charges for eCommerce Retailers
If you’re based in the UK and you have customers in the EU, you simply charge the UK VAT rate. If a customer is VAT registered (another business maybe) then you could possibly zero-rate the good. Selling goods to a customer outside the EU, you can’t charge VAT. Exceptions are possible though so make sure you consult HRMC.
VAT and Delivery Costs for eCommerce Stores
VAT does apply to delivery charges at the exact same rate as the product being delivered. So 20% for a product that carries 20% VAT and 0% for a product carrying 0%.
If you’re VAT registered, you must register for VAT. On your e-commerce site, you must make customers aware of VAT. You can display your prices as VAT inclusive – there’s no need to list the VAT separately.