In the last decade e-commerce has taken off. Internet sales now account for an estimated 15.5 percent of all consumer expenditure, up from just 3 percent at the end of 2006. While online stores from leading retailers account for a fair proportion of these sales, there are also plenty of SMEs that are capitalising on the growth of this burgeoning marketplace.
If you are one of the many e-retailers with sales going from strength to strength, you’ll soon need to think about registering for VAT.
When must you start paying VAT?
You must legally start paying VAT if your business is involved in the sale of what HMRC calls ‘taxable supplies’ and your turnover for the previous 12 month exceeds the £83,000 (2016/17) threshold. If you are selling digital goods and services, such as eBooks or music downloads, different VAT rules apply.
It’s important to note that the VAT threshold is not based on your turnover for a calendar year, but for any 12-month period on a rolling basis. As soon as your income for the last 12 months exceeds £83,000, you must register. You will then have to submit a return every quarter and include your VAT registration number on your website.
Registering for VAT voluntarily
You can also register to pay VAT at any time, even if your income does not meet the threshold. It might make sense to voluntarily register for VAT if:
- The majority of your sales are made to VAT registered businesses who will be able reclaim any VAT that you charge on your sales.
- You buy lots of products and services from VAT registered businesses and would like to have this tax deducted from the VAT charged on sales;
What VAT rates apply?
- Standard rate (20 percent) – Applies to most products and services
- Reduced rate (5 percent) – Applies to fuel, power and energy-saving materials
- Zero rate (0 percent) – Includes books and newspapers, children’s clothes, public transport and food.
- Exempt from VAT – Education, insurance, training and medical expenses are all VAT-exempt
There is an important difference between zero-rated and VAT exempt. If you sell a zero-rated product, such as children’s clothing, you must still include these sales on your VAT return, even though your customers will not actually pay any VAT.
What about sales to other countries?
If you are a UK-based online retailer selling goods to customers in the EU, you should charge the VAT rate that applies in the UK. If you are selling goods to a VAT-registered EU company, you might be able to ‘zero-rate’ the goods. If you are selling goods to customers outside of the EU, VAT is not charged, although there are some exceptions. You can read detailed information on each of these scenarios here.
How do you pay VAT?
As a VAT-registered business, you essentially act as a tax collector for HMRC and pay the money you collect to HMRC every quarter. The deadline for each quarterly payment will be shown on your online return, and will usually be one month and seven days after the end of the VAT period. All your VAT payments must be made electronically.
How can we help?
Prosper provides a comprehensive approach to accountancy, tax & business growth services for start-ups, SMEs and growing companies across the UK. We are your bookkeeper, accountant and finance director all rolled into one. Check out prosper.accountant to learn more about how we can help your business.