If your e-commerce business is based in the UK and your sales are below the £90,000 VAT registration threshold, you are not required to register for VAT. However, selling through platforms like Amazon or eBay involves additional considerations because of the Marketplace Facilitator Rules, which impact how VAT is charged and collected. Let’s explore these rules and why it might be beneficial for your business to voluntarily register for VAT.
What If You're Below the VAT Threshold and Not VAT-Registered?
If your business’s taxable turnover is below £90,000, you aren’t required to register for VAT in the UK. You won’t charge VAT on your sales, and you also cannot reclaim VAT on any VAT-charged business purchases (like goods from suppliers, software subscriptions, or shipping costs).
However, if you’re selling through online marketplaces like Amazon, VAT may still be collected on your sales—even if you’re not VAT-registered. This happens due to the Marketplace Facilitator Rules introduced by HMRC.
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Selling on Amazon or Other Online Marketplaces: Deemed Supplier Rules
Under the Marketplace Facilitator Rules, platforms like Amazon, eBay, or Etsy act as the deemed supplier when selling goods to consumers in the UK or EU. This means that:
- The platform (e.g., Amazon) is responsible for charging and collecting VAT on your sales to UK and EU customers.
- Amazon collects VAT on your behalf even if you are not VAT-registered, and then pays this VAT directly to HMRC.
In practical terms, your customers are still charged VAT at the applicable rate (20% in the UK) on their purchases, regardless of whether you are VAT-registered. But since you’re not VAT-registered, you lose out on an important advantage—reclaiming VAT on your business expenses.
Example:
Let’s say you’re selling phone cases on Amazon UK. You’re not VAT-registered because your annual turnover is below £90,000. Even so:
- Amazon charges 20% VAT on the phone cases sold to UK customers.
- Amazon collects this VAT from your customer and pays it to HMRC.
- You receive the sale proceeds excluding the VAT that was collected.
As a result, VAT is charged to your customers anyway, but you don’t get to reclaim the input VAT you pay on your business purchases (e.g., product imports from China or platform fees).
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How Does This Affect Your Competitiveness?
When Amazon collects VAT on your behalf, your customers are paying VAT whether or not you’re VAT-registered, making it appear as if your products are 20% more expensive. This can impact your business’s competitiveness in several ways:
- Price Sensitivity: Your prices may seem higher to customers because VAT is added by Amazon, potentially making you less competitive compared to businesses that are able to absorb VAT costs or adjust pricing strategies.
- Margin Pressure: Since VAT is being collected on your sales but you’re not VAT-registered, you’re also unable to reclaim VAT on your costs. This reduces your profit margin because you’re paying VAT on your inputs but cannot recover it.
By not being VAT-registered, you effectively miss out on the ability to reclaim VAT on expenses like goods bought from suppliers (whether they’re domestic or international), shipping fees, software services, and other costs. This can lead to higher operating costs compared to businesses that are VAT-registered and can reclaim their input VAT.
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Voluntarily Registering for VAT: A Strategic Move
Given that Amazon is already collecting VAT on your behalf (making it unavoidable for your customers), it can be a good idea to voluntarily register for VAT—even if your turnover is below £90,000. This way, you can at least reclaim VAT on your business expenses, improving your profitability and potentially lowering your overall costs.
Advantages of Registering for VAT:
- Reclaiming Input VAT: Once VAT-registered, you can reclaim the VAT you pay on your business expenses, such as:
- Import VAT on goods bought from China or other countries.
- Platform fees or software services (like Amazon’s selling fees, advertising, or Shopify subscriptions).
- Other professional services (accountants, marketing services, etc.).
This can significantly reduce your overall costs and improve your cash flow.
- Fairer Competition: Since VAT is charged on your sales through Amazon anyway, registering for VAT ensures you’re on equal footing with larger competitors who are VAT-registered. They can reclaim their VAT, and you should be able to do the same to keep your margins healthy.
Example:
You import phone cases from a supplier in China, and your total purchases for the year amount to £10,000. If you’re VAT-registered, you can reclaim the 20% VAT you pay on these imports (£2,000). Without VAT registration, you miss out on reclaiming this input VAT, effectively increasing your operating costs by £2,000.
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Selling on Your Own Website: Who Collects VAT?
When selling through your own website (e.g., Shopify or WooCommerce), if you’re not VAT-registered and below the VAT threshold, you do not charge VAT to your customers. You also don’t need to pay VAT to HMRC. However, this means:
- No VAT is collected on your sales, and your customers pay the listed price (no additional VAT).
- You cannot reclaim VAT on your business expenses, which could hurt your margins if you have significant costs.
Example:
If you sell a £10 phone case on your Shopify store and you are not VAT-registered, your customer pays £10 and you keep the entire amount. However, you still can’t reclaim any VAT you pay on related business expenses like shipping or advertising.
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Why Registering for VAT Can Make Sense
In summary, voluntarily registering for VAT can be a strategic decision, especially when selling on platforms like Amazon where VAT is collected from your customers anyway. Registering allows you to:
- Reclaim input VAT on all business-related purchases, including product imports and platform fees.
- Maintain competitiveness by reducing your costs and increasing your margins.
- Avoid being at a disadvantage compared to VAT-registered competitors who can reclaim their input VAT.
Final Thoughts: Is It Worth Registering for VAT?
If you’re selling on online platforms like Amazon or through your own website, understanding how VAT works is crucial. Even if you’re below the £90,000 threshold, voluntarily registering for VAT can help you:
- Reclaim VAT on business expenses, improving your profitability.
- Avoid losing out on a key competitive advantage, since your customers are paying VAT regardless when using online marketplaces like Amazon.
While VAT registration adds some administrative burden, the potential savings from reclaiming input VAT—especially on imports and other business expenses—can make it well worth the effort.
As always, it’s a good idea to consult with a tax professional to ensure you’re making the best decision for your business.
If you need help in VAT compliance and ensuring you are not paying the wrong amount of VAT on your online sales, contact MSA Accountants, VAT Accountants, who will make sure you pay the right VAT.