Navigating your way through VAT is one of the complexities of being an ecommerce trader, and it can be especially confusing when managing PayPal and Stripe transactions.
To understand how VAT works with PayPal and Stripe, you first need to understand what services are VAT exempt, and where reverse charges apply.
We’ll come to reverse charges later. First, let’s look at VAT exempt services concerning ecommerce.
VAT Exempt Services
PayPal is a VAT exempt service. This is because PayPal is a financial service. Generally, financial services are exempt from VAT.
This means that PayPal won’t charge you VAT for using its services for ecommerce traders.
So far, so good. But what does it mean if you’re not getting charged VAT by some service providers but you are by others?
What appear to be very similar services may be treated differently depending on who’s providing them.
Stripe is an alternative payments platform to PayPal. But while it offers tools to help ecommerce traders manage payments, it’s not a financial service.
Stripe allows the merchant to collect card data from customers and transmit this information to the merchant acquirer for processing. But, unlike PayPal, Stripe doesn’t actually process payments.
Because of this subtle but critical difference between a financial service (PayPal) and a payments facilitator (Stripe), you can see differences in VAT charges.
When, therefore, do VAT charges apply to Stripe services? When the reverse charge applies.
What is the Reverse Charge?
In the reverse charge system for VAT, the customer doesn’t pay VAT to the supplier but instead declares it on their own VAT return.
There are two main reasons for the reverse charge:
- It applies to services purchased from abroad, and
- It’s an anti-fraud measure.
The reverse charge applies to services you purchase within the EU but post-Brexit, obviously, are now outside the UK.
It is the amount of VAT you would have paid on a service, had you bought it in the UK. You add this amount to the total you’re paying HMRC for a particular quarter, but also to what you’ll reclaim for this quarter.
Essentially, you should end up not paying or reclaiming any extra. The accounting system you use should handle this smoothly and straightforwardly.
Why does Stripe come under the reverse charge rule?
We’ve already seen that they’re a payment facilitator, not a financial services provider. But also, they’re based in Ireland in the EU.
So, unless you’re located in Ireland too, the reverse charge will apply.
You will need to reflect the reverse charge invoice as both a sale and a purchase in at your home country’s VAT rate. This means that you need to gross up your sales and purchases and could push you over a threshold for VAT registration if not already registered.
VAT Fees on Payment Services, Yes or No?
If your ecommerce store uses PayPal, you won’t be charged any VAT by the provider.
If your store uses Stripe, you will be charged VAT, but this will be through the reverse charge system, where you declare the amount and reclaim it.
It may sound a bit tricky but it does make sense once you understand the rules.
Help and Support with Your Ecommerce Accounting
Growing your online business and keeping a keen eye on your finances can end up pulling you in too many directions at once.
The answer is to have a dedicated ecommerce accountant, a reliable, professional source of support and advice in place when it comes to looking after the money.
Contact us for a FREE consultation. It’ll be a well-spent 30 minutes of your time.