When we talk to new ecommerce customers in the UK, we are shocked by how easy mistakes are being made. VAT is the area which sounds simple but if you get it wrong it can cost you thousands and even your business.
This will cover what are the most common mistakes
And information on how you can save money by making the right informed choices.
Ecommerce Sellers, read this before registering for UK VAT!
Do not register when you create the company!
We find a lot of people make the mistake of registering for VAT at the same time as creating their limited company. Why? Well when you create your company, you go through a very easy and well thought out form. It is one of the easiest registrations of a company in the world and means that anyone can competently do it themselves. However, right at the end of this process the form asks, “do you want to register for VAT” and in our experience a good proportion of people select yes.
Find out more about if you need toregister for VAT on Amazon.
That means from day one, the company is registered for VAT. Every sale they make from day one is attracting VAT. It makes you either 20% more expensive than your competitors or erodes your margin by around 10%. You therefore do not benefit from the £85,000 of revenue which would have been VAT free.
This can really impact a start up as many are making a loss in the first 6-12 months, being VAT registered means they not only lose margin but will have to employ an accountant sooner to deal with the quarterly VAT returns.
If you are reading this, and thinking “that was me”. Not all is lost. For most ecommerce businesses, getting over £85,000 revenue is required to start turning a worth while profit. Your business needs to be able to survive VAT registration at some point and an early VAT registration will mean you know you can scale your idea from the start.
Do not back date your registration
Another area we see sellers making mistakes is the date they choose to register. Some ecommerce business owners get to the threshold and rightfully register for VAT. However, HMRC allows you to choose the date which you register. This means that some people think they should register from when their company was first setup. This effectively back dates your VAT registration, why is this bad?
Let say you went over the threshold in June 2022 and started your business on 1 January 2022. You should register from July 2022 and start collecting and claiming VAT back from that date. So if you selected 1 January 2022 as your registration date, all sales you have made between 1 January 2022 and 30th June 2022 will now be VATable. This means that you would have to take 20% of your sales in that period and send it to HMRC.
It is more than likely that you did not plan this and could take your business from profitable for that 6 months to a large loss.
Be really clear when you NEED to register and the consequences of registering early.
Be aware of the Schemes FRS or Accrual
There are two types of VAT for an ecommerce seller to choose from. Normal VAT, where the you collect 20% VAT on your sales and offset that against 20% on eligible purchases. This is time consuming, requiring documentation for everything you are claiming.
The other type of VAT, is the Flat Rate Scheme. HMRC allocate you a set % on your revenue to be paid in lieu of your VAT bill. In most ecommerce businesses this is 7.5%. This scheme is great because you can actually save money on your VAT bill and pay a lower effective rate.
Example, You make £120,000 of gross sales and £60,000 in VATable purchases. If you were registered under normal VAT regime you would:
1. Collect £20,000 VAT to be paid to HMRC
2. Suffer £10,000 VAT to be offset against what is owed to HMRC
3. Net your VAT bill will be £10,000
If you were Flat rate scheme under the same circumstances
1. You would multiply your gross sales by the flat rate of 7.5% resulting in £9,000 of VAT owed to HMRC.
In this example, you would be saving £1000 by choosing the flat rate scheme. Lets take it further
Example 2, you make sales of £120,000 gross sales and suffer £60,000 in purchases which do not have VAT applied (no vat registered suppliers).
Under normal VAT
1. Collect £20,000 VAT to be paid to HMRC
2. You cannot claim on the £60,000 purchases as they are not vatable
3. Net your VAT bill will be £20,000
If you were Flat rate scheme under the same circumstances
1. You would multiply your gross sales by the flat rate of 7.5% resulting in £9,000 of VAT owed to HMRC.
Under that more extreme, but not unheard of, scenario you would save £11,000 by registering for the flat rate scheme.
There is also a 1% discount in the first year, so there is even more upside. However, I have kept the example super simple!
Work out your margins
A piece of advice we give all clients is, pretend you are VAT registered from day one. That doesn’t mean you charge people VAT. However, you should set your prices at the same prices as if you were VAT registered. This will mean that when you get to VAT registration you do not need to rethink your entire business model.
A ecommerce business which doesn’t do this, running on a margin of 5%-10% may think they are onto a great scalable idea. However, they get to a VAT registration and their margins are eroded by around 10% and as a result their successful scalable online business now has to rethink their pricing strategy which may end up not working!
Know what you can claim and what you can’t
When reviewing your business for Vat registration, you need to know what you can claim and what you cant claim. Do not assume everything you pay for is attracting VAT. Heres why:
• Not all suppliers are VAT registered, some may be too small and therefore not register for VAT
• Advertisers like Google, Bing and Facebook are based in Ireland and services b2b do not attract UK VAT. Therefore you cant claim VAT on those costs.
• Not all costs are 20% Vat, some are zero rated or exempt. This is especially tricky when you are buying items from retailers who sell a basket of goods. So if you are doing retail arbitrage, know that not items you buy are VAT claimable.
Knowing this will allow you to work out your margin (point 4) and let you decide what scheme you should joint (point 3)
Further information:
All you need to know about about VAT on Shopify
DO NOT REGISTER IN EUROPE YET
You may have logged into Amazon as a brand new seller and been enticed by the pan European programme. You may think, WOW, more customers ill sign up. Amazon has also partnered with Avalara to make VAT registrations in the EU really easy.
However, before you know it you may have registered for 5 further VAT countries and have to submit up to 60 VAT returns a year! What is worse, you may only make a handful of sales in each country.
Not only this, the cost of VAT returns in the EU is around 100 EUR per return which starts to add up if you are registered in 5 countries.
Our advice is to focus on one market with your product and then review each EU country before registering for VAT. You could end up paying expensive professional fees for a handful of sales.
European Vat is a whole different article, so we will leave that warning there.
This advice is very general and not specific to your business. If you want to have a chat about when and which VAT scheme you should sign up to then book a 30 minute consultation with us.
We are specialist ecommerce accountants that can assist with any VAT queries you may have.
Watch our video below.
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