What Is VAT?

Value Added Tax (“VAT”) is a consumer tax in the UK and EU. VAT is imposed at each stage of the supply chain. As a business, you can claim back any VAT you pay your suppliers on your costs. However, you must add VAT to your sales prices and collect and remit that to the tax authorities after deducting VAT you are claiming back on your costs. In doing so, a business only pays VAT on the value it has added. Hence, it is called Value Added Tax! In the UK, the current standard rate of VAT is 20%, but in the EU is ranged from 17 to 27%. There are also reduced rates across the EU on certain products and services (e.g. domestic energy), zero-rated products (e.g. basic foodstuffs or children’s clothing) and some items are exempt (e.g. insurance).

Outside the UK and EU, similar taxes apply, but the tax is more widely known as Goods and Services Tax (“GST”). In some countries (e.g. USA) there is no reclaim of GST on costs, but GST tax rates tend to be lower as a consequence.

Do I Need to Register to Pay VAT?

The UK VAT registration threshold is currently £90,000 on a rolling 12 month basis, and you will need to register with HMRC once you achieve this milestone. It is important to measure your income correctly. A common mistake is to measure income based on the payouts received from eBay. However, payouts are after deduction of eBay fees and this will therefore understate your income.

Other factors to consider when determining registration requirements are the location of a business and the location of your inventory. Holding inventory in the UK or the EU will create an obligation to register for VAT in the country where the inventory is located if the business is located outside the UK or EU. For instance, a French business that stores inventory in the UK would be required to register for VAT in the UK regardless of the level of UK income. And vice versa, a UK business storing inventory in France would be required to register in France. An Australian business storing inventory anywhere in the UK or EU would have a registration obligation in the UK or any EU country where inventory was stored.

Do I Have to Pay VAT on eBay Sales

If you are VAT registered (whether by requirement or voluntarily) you are required to pay eBay VAT on your Sales. The rate of VAT will depend upon the products you sell, but most products will be charged at 20% in the UK. In some circumstances, eBay will account for VAT for you. This is due to the marketplace rules, which make eBay responsible for VAT where the goods are located outside the country of the customer or the seller is a foreign seller. This means that for a sale of say £24, you will only receive £20 from eBay (less their fees), but will not have to pay VAT to HMRC. This does mean that, in these circumstances, you will be paying VAT on your sales even if your income is below the registration threshold, and you are not VAT registered. A UK business selling on eBay in the EU will have VAT deducted from its eBay settlements on all of its EU sales.

Should I register for VAT Voluntarily?

There are circumstances where a voluntary registration is beneficial. If your sales are zero-rated, then this means you have no VAT to pay on your sales, but you can reclaim any VAT on your costs. In addition, if eBay are accounting for VAT on your behalf because, for instance, you fulfil from outside the UK, then you could also benefit from a voluntary registration for the same reason. However, if you have income from other sources, such as a Shopify store, where marketplace rules do not apply, then this may not be the case.

VAT on eBay

EBay charges VAT on all of its various fees, except for Royal Mail and Pack link fees. This VAT can be reclaimed on your VAT return.

VAT schemes

Rather than accounting for VAT on sales and then deducting VAT on expenses to arrive at a net value payable to HMRC each quarter, the Flat Rate Scheme can be attractive to small businesses. In order to reclaim VAT under the standard scheme, you must have valid VAT invoices or receipts. Sometimes this can be problematic, especially for anything purchased from a retailer. Under the flat rate scheme you do not reclaim any VAT (except in some exceptional circumstances) but as compensation you pay VAT to HMRC based on a reduced percentage of your gross income. For e-commerce businesses this tends to be 7.5%, but other lower rates may be applicable dependent upon what you sell.

There are nuances to the scheme that can mean that you pay VAT on income you would not otherwise pay VAT on, but this can still be worthwhile if that income is a small percentage of total income. The scheme is only available to businesses with annual income of less than £150,000 net income, and you must exit the scheme on the anniversary of your VAT registration is gross income has reached £230,000.

In the EU, there are schemes to simplify VAT and reduce the burden of having multiple registrations across the EU. You will still need registration where you store inventory, but the One-Stop Shop (“OSS”) allows you to have one registration to account for all sales across the whole of the EU (sales to consumers in border where you have VAT registrations because of inventory being stored in that country would still be reported on the return for that country).

If you are selling second hand goods on eBay, then the Second hand Goods Margin scheme may be of benefit. There are two different schemes dependent upon whether your product sales value is over or less than £500. The Global margin scheme, for sales of less than £500 per sale, is less onerous in terms of the record keeping. The issue with second hand product is that this will most likely have been acquired from a consumer, and you will not have a VAT invoice for the purchase. In the absence of a VAT invoice, you would not have any VAT to reclaim and would therefore pay VAT on the full sales value, rather than the value added. The second-hand scheme allows a business to only pay VAT on the margin they make on a sale.

Accounting for eBay Income and VAT

eBay settlements are after the deduction of fees, the majority of which attract VAT. It is therefore necessary to account for each element of a settlement in order to account for the correct VAT treatment of each element. More complex business could potentially have a mix of standard and zero-rated sales, fees with VAT charged and some zero rated fees on Royal Mail charges all within the same settlement. Whilst the required analysis of each settlement can be found within your eBay seller account, it is a time-consuming process to do this manually which is why we recommend Making Tax Digital software like Xero combined with A2X, an app that connects eBay (and other marketplaces and platforms) to your accounting software to streamline the whole process.

EORI numbers

An eBay seller that imports into the UK or EU will require an Economic Operators registration and Identification (“EORI”) number. You would need a UK EORI to import into the UK and an EU EORI to import into the EU. This can be applied for at the same time as your VAT registration, or independently if you need one beforehand or at a later date. Customs use this number to track and identify cargo as it is imported, and if the number is missing, they may hold cargo at the border and charge you for storage until you provide it, so it is important to obtain one before you import any goods.

Setting up VAT on eBay

Once registered for VAT, you will need to add your VAT registration number to your eBay account. You cannot charge VAT before you are registered, and will not be able to charge VAT after a customer has placed an order.

Final Thoughts

As always, seeking professional advice is recommended to address specific concerns and optimise VAT management strategies. For tailored guidance and assistance with e-commerce accounting and VAT compliance, businesses can reach out to Elver E-Commerce Accountants. Our expertise in e-commerce accounting and tax matters can provide invaluable support in managing VAT obligations related to eBay sales or those on other marketplaces and platforms.

As specialist e-commerce accountants, here at Elver E-Commerce Accountants, we have the tools, knowledge, and expertise to provide you with the right level of accounting support for your eBay business.