Starting an eCommerce business is an exciting venture, but so many business owners believe the myth: “you should stay under the VAT Threshold”
I have worked with thousands of businesses and this belief does not work for ecommerce, you will be wasting your time. You may as well go get a part time job in McDonalds if you want to do this. VAT needs to be a target rather than a hurdle.
In this guide, how you can plan for VAT from day one, so reaching the VAT threshold is not a burden but just a milestone onto real profit.
Understanding VAT for eCommerce Businesses
What is VAT, and When Do You Need to Register?
VAT (Value Added Tax) is a tax that businesses must charge on goods and services. In the UK, you need to register for VAT once your UK taxable turnover reaches £90,000 in a 12-month period.
A few key things to note:
You don’t need to register for VAT immediately when starting your business – This is actually a huge mistake. While you can claim back the initial VAT on purchases, as soon as you turn a profit you will lose the extra margin that VAT registered businesses don’t have.
Only UK sales contribute to the VAT threshold. For example, if you are selling through Fulfillment by Amazon (FBA) in the US, these sales do not count towards your VAT threshold.
Once registered, you must submit VAT returns quarterly to HMRC.
Many eCommerce business owners reach the VAT threshold without planning for it, leading to a sharp drop in profit margins and if they haven’t thought about it they make a loss.. But this can be avoided with the right approach.
Why You Should Plan for VAT From Day One
Avoiding the Profit Drop
Most people start a business and focus on turning a profit and have no idea how VAT will impact their business. This is because they are focused on just making sales and turning a profit. The problem is ecommerce businesses generally have margins of 20-30% (at least that’s your target). So to to make a £100k profit, you will need to turnover £400k to £500k in revenue to do this. That means you need to smash through the VAT threshold to make a decent living.
Imagine an eCommerce seller making an 8% profit before hitting the VAT threshold, they are just happy they are turning a profit. However, as soon as they hit £90,000 they need to start paying HMRC 20% of their Sales and reclaiming 20% from VATable invoices. A VAT registration will erode your businesses profit margins by up to 10%. So if you are making an 8% profit before VAT registration, you are now making a 2% loss. That means as your business has finally made sustainable sales, you need to change your whole price strategy, you need to increase prices, maybe there is too much competition and you can’t increase prices and you ultimately have to stop selling your product
If pricing strategies aren’t adjusted, you can end up making a loss. This is bad business. By ignoring VAT you are building a business on sand. It doesn’t add up when you start hitting £90,000 in sales.
This happened to one Amazon seller who failed to account for VAT in his business model. He was making a margin of 5% and thought all he needed to do was increase sales and that low margin will mean a lot of money if he sells enough. So he registered for VAT, his profit margins collapsed, he wasn’t making a loss and he now couldn’t win the buy box and stay profitable at the same time. He eventually shut down his business. The key lesson? You must build a business that can survive VAT registration from day one.
Strategy to Prepare for VAT Registration: Pretend to be VAT Registered
One simple yet effective strategy is to pretend you are VAT registered from day one. I don’t mean you start invoicing people with VAT or say you are VAT registered, that is illegal.
What you need to do before you start selling anything is calculate your margins. Not just as a non VAT registered business but as if you were a VAT registered business. This means incorporating VAT into your pricing structure before you even reach the threshold. By doing this, you ensure your business remains profitable even after registration.
Here’s how you can do it:
How to do this
We would advise starting off simply – make sure you calculate these 4 things.
Product Price – How much will your customer pay you for your Product. So if its £30 when non VAT registered, it will still be £30 when you are VAT registered. Except you will only keep £25 as HMRC will be paid £5 in VAT.
Cost of Goods Sold (COGS) – You want to check how much your product costs and if there is VAT on the invoice. When not VAT registered your cost is the whole price and when you are, you are going to reclaim the VAT so it should be less.
Selling Fees – Marketplace fees (e.g., Amazon, eBay) that impact your bottom line. Amazon now have VAT on their fees, so understanding what fees have VAT on and which don’t is key at this stage.
Profit Margins – Your net profit after all expenses and VAT.
Pricing Example: Good vs. Bad Planning
Example 1: Business Not Prepared for VAT
| Without VAT | With VAT | |
|---|---|---|
| Selling Price | £25.00 | £20.83 (price divided by 1.2) |
| Cost of Goods Sold | £12.00 | £12.00 |
| Selling Fees | £11.00 | £9.17 (fees divided by 1.2) |
| Profit Margin | £2.00 | -£0.33 (loss) |
| Profit Percentage | 8% | -2% |
In this example, the seller is just happy to make a profit, he has found a product which he can sell for £25, he can source it for £12 from a non VAT registered seller. He then has £11 selling fees. So before VAT registration he has an 8% margin but when we convert this into a VAT registered business, his pricing strategy does not make sense. He is now making a loss because he didn’t calculate the impact of VAT from day one. This is an unsustainable business model.
The key to a great business is finding a price a customer wants to pay and charge that. So the overall price to the customer should be the same to the customer when you are VAT registered and when you are not.
Changing price at the point of VAT registration is a business killer.
Example 2: Business Prepared for VAT
| Without VAT | With VAT | |
| Selling Price | £30.00 | £25.00 (price divided by 1.2) |
| Cost of Goods Sold | £9.00 | £9.00 |
| Selling Fees | £9.00 | £7.50 (fees divided by 1.2) |
| Profit Margin | £12.00 | £8.50 |
| Profit Percentage | 40% | 34% |
This is how you approach it. This seller has found the right product, he can sell it at a decent price, £30. He has found a low cost supplier who doesn’t charge VAT and his seller fees are lower. This means that he makes a profit of 34% even when he is VAT registered.
The great thing about this method is that you are charging the customer the same price for the product when you are VAT registered and non VAT registered. So when you become VAT registered its basically all about scaling without touching the price, you know the demand is there at that price point.
What is even better is that when you are not VAT registered you are making a bumper bonus profit of 40%!
This is the formula to scaling a business way beyond the VAT threshold.
Use our excel template to calculate this for you
If you want to do this yourself, download our excel template where you can put your pricing, costs and selling fees so you can calculate the margin of the product even when you have a VAT registration.
Just enter your email and get the download straight away
The Takeaway: Make sure your business is a real business from day one
If your business can’t survive a VAT registration, it’s not built on solid ground. By pricing your products as if you are already VAT registered, you eliminate the risk of profitability dropping when you cross the VAT threshold.
Test your pricing models before launching a product.
Adjust costs if your margins don’t hold up after VAT registration.
Plan for growth, not just short-term survival.
While there is a Flat Rate VAT Scheme available, we recommend calculating VAT under the standard VAT scheme to ensure your pricing strategy is robust.
Bottom line: VAT should be a stepping stone, not a stumbling block. Plan for it, and you’ll scale your eCommerce business profitably beyond the £90,000 threshold.
