As Accountants for Amazon FBA Sellers, one of the topics that we get the most questions about is VAT for Amazon Sellers. The reason for this is that VAT can be incredibly complicated as there can be a number of different rules that apply to your business depending on some very subtle variables. In this mini-series, we will do our best to explain the basics of VAT and how VAT usually applies to an Amazon FBA Seller.
We work with Amazon Sellers from all around the world to help them keep VAT compliant. If you are an Amazon FBA Seller and you are worried, confused or would like to about VAT for Amazon Sellers, then get in touch with us today.
VAT for Drop Shippers
If you are a drop shipper then different VAT rules will apply to you. In the future, we will write an article outlining the VAT rules for drop shippers and link to it here.
What is VAT?
If you are thinking about VAT for Amazon Sellers then you may also be wondering “what is VAT”? VAT stands for Value Added Tax and is a type of sales tax that is applied in both the UK and also in the EU.
Since VAT is a sales tax, this means that it is a tax on the actual price that you sell a product for as opposed to the profit that you actually make on it. This means that it is charged regardless of how much profit you actually make on the sale or whether you even make a profit at all.
This means that if you are an Amazon Seller then you will need to charge VAT to your customers based on the price that you sold the product to the customer for and not on the amount that Amazon paid you (since Amazon will deduct their fees before paying your disbursement).
This often means that when looking at VAT for Amazon Sellers we sometimes find our clients are paying almost as much in VAT when selling a product than they make when compared to their profit margin!
When do I need to register for VAT?
This answer actually depends on whether you are a UK based business OR an overseas-based business.
VAT for Overseas Amazon FBA Sellers (non-UK, non-EU)
If you are an overseas business and you aren’t based in the EU, then you will need to register for VAT as soon as you plan to start making sales in the UK. It does not matter what your turnover is, you must register for VAT immediately if you are planning on selling on Amazon in the UK.
Important: If you are an overseas individual and you own a UK Limited company that sells on Amazon then the UK limited company is treated as a UK business and does not need to register for VAT until it reaches the UK VAT threshold.
VAT for Overseas Amazon FBA Sellers (non-UK, EU)
If you are an overseas business that is based in the EU, then the rules are a little more technical. Essentially the rule here firstly depends on where your goods are stored (if your goods are stored in the Amazon UK FBA warehouse then you will need to register straight away) and then (if not stored in the UK and stored in your home EU country) on the value of your distance sales into the UK.
Since most Amazon Sellers (including US, Chinese and European) store their goods in the UK FBA warehouse and then make distance sales into other EU jurisdictions, the majority of non-UK FBA Sellers need to register for VAT in the UK and then only register for VAT in other EU countries once they pass certain distance selling thresholds.
We will talk more about distance sales in another article.
VAT for UK Amazon FBA Sellers
If you are a UK based business then you do not need to register for VAT until your turnover (sales) exceeds the VAT threshold.
UK based businesses can, however, voluntarily register for VAT before they cross the VAT threshold.
Should I voluntarily register for VAT?
If you are an ecommerce business then we do not recommend that you register for VAT until you have to. We will explain this more in another article.
What is the UK VAT threshold?
Currently (2018) the VAT threshold in the UK is £85,000 of sales in a rolling 12-month window.
A UK business needs to register for VAT when it expects that it is going to cross the VAT threshold within the next 30 days.
If a business applies to register for VAT slightly late (within a reasonable period, say 2-4 weeks) then it will not usually be penalised, however, it will be required to register from the date that it crossed the threshold and so will owe VAT on any sales past that point. Find out more about VAT penalties here.
How is VAT calculated?
You calculate and declare the amount of VAT that you need to pay to Her Majesty’s Revenue & Customs (HMRC) when you complete and submit your “VAT Return” each quarter.
There are two main components to VAT:
- Input Tax – This is the VAT that your suppliers charge you or that you pay when you import goods into the country.
- Output Tax – This is the VAT that you charge your customers when they purchase goods or services from you.
Each time you submit your VAT return to HMRC you are essentially calculating the difference between the amount of input tax that you have paid through your purchases and the amount of output tax that you have collected through your sales. You owe (or are owed) the difference.
Since FBA businesses usually purchase goods that they sell for a profit (e.g. they buy low, sell high), then there is usually less input tax than output tax, meaning that you will owe HMRC the difference.
However, this is not always the case and if you have paid more input tax than output tax then HMRC will owe you a rebate.
For example, let’s imagine the first three VAT quarters that an FBA Seller may face when considering VAT for Amazon Sellers:
Quarter 1 – Example
Firstly imagine that you have purchased goods from outside of the UK (incurring zero input VAT) and then imported them into the UK (which would have incurred import VAT). In this process let us also imagine that you also incurred some other UK expenses (which may have also included input VAT) to get the goods to Amazon’s FBA warehouses.
All of these are examples of input tax and should be used to offset your VAT bill at the end of the first VAT quarter.
If you made zero sales in the first quarter then you will have generated zero output tax to declare to HMRC in the first return.
Important point: You may still need to submit a VAT return even if you made zero sales in the UK.
In this example, since you have zero output tax (sales) and a number of input taxes (purchases) to reclaim, then your first VAT return will be negative and you will be owed a VAT rebate by HMRC.
Important point: Please note that HMRC is likely to look into VAT refund claims and that the penalties for fraud or even negligence are incredibly high.
Quarter 2 – Example
Following Q1, your business begins to make sales (output tax), however since sales are only slow you have not yet had to place a second order, nor have you incurred any other UK expenses.
At the end of this quarter, you will now owe all of the output tax that you have collected and will not be able to offset it with any input taxes (expenses) since your expenses were all claimed in the previous quarter and no more have been incurred.
Quarter 3 – Example
Following Q2 your sales are growing at a healthy rate, so you place an order for more goods. Once these arrive in the UK you are charged input VAT and you incur several other expenses that also incur input VAT.
At the end of the quarter, your return will show the total output tax (sales) and the total input tax (purchases) and you will owe the difference between the two.
If these examples aren’t clear enough, or if you need any help on VAT for Amazon Sellers please contact us.
How much (or what rate) is VAT in the UK?
Before you can charge/collect VAT you must first register for VAT in the UK. If you are an Amazon Seller and want to register for VAT then this is a service that we provide. Get in touch because we help Amazon Sellers register for VAT in the UK.
How much VAT do you need to charge to your UK customers?
Currently, the standard rate of VAT in the UK is 20%. This means that if you sell the majority of products on Amazon then you need to charge 20% on top of your sales price.
For example, if a product sold for £100 + VAT, then you must charge £120 (£100 + £20) to your customers.
If you are selling directly to consumers on Amazon then your sales price will need to include VAT. If you do not know how much VAT you should be charging your UK customers then this blog post will quickly discuss how Amazon FBA Sellers can calculate their VAT from their sales price.
The reason that we say “the majority of products” is that there are other VAT rates (such as zero-rate and 5%), however, these are unusual and only apply to particular categories of goods/services. For the full list of VAT rates, see HMRC’s website here.
What if you sell to customers outside of the UK?
This is where things start to get technical. Whether or not you charge VAT (and the rate at which you charge it) depends firstly on where you sent the goods from and secondly, where you sent the goods to. This article will assume that your goods are stored in the UK, we will talk about what do do about VAT if your goods are stored outside of the UK in another article.
If your customers are outside of the EU and you are shipping products from within the UK then you do not need to charge VAT. These sales are known as zero-rated.
If your customers are within the EU and you are shipping products from within the UK then this is known as a distance sale. You need to charge UK VAT on your distance sales until you cross the distance sale threshold in that country. Once you cross the distance sale threshold in that country you need to register for VAT in that country and start charging the local VAT rate (it is no longer recorded on your UK VAT return).
VAT Accountants for Amazon FBA
We are accountants that specialise in VAT for Amazon Sellers. If you have a question about VAT for Amazon Sellers or if you need help with VAT for FBA then use our Instant Quote feature to get in touch.