Worried about retail arbitrage VAT? We understand the unique challenges faced by UK sellers, particularly when it comes to VAT (value added tax). Many Amazon sellers view the £90,000 VAT registration threshold as a barrier to growth, fearing that crossing this line could severely impact their profits. However, with the right approach, UK VAT registration can be managed effectively, allowing your business to flourish. So before you despair when Amazon asks you for a VAT registration number, read this so you understand your VAT rules and whether you need to pay VAT on your sales, seller fees, and advertising expenditures.
UK VAT Dilemma for Retail Arbitrage
Retail and online arbitrage sellers on platforms like Amazon often find themselves in a UK VAT registration quandary, wondering when and how to register for VAT. The conventional wisdom suggests that VAT equates to 20% of sales being remitted to HMRC, with the ability to reclaim VAT on purchases. However, the reality for arbitrage sellers is more complex.
The crux of the issue lies in obtaining proper VAT invoices. When purchasing stock from retail stores, sellers typically receive standard receipts rather than VAT invoices. These receipts lack crucial information such as the retailer’s UK VAT number and the VAT rate applied to each item. This poses a significant problem because HMRC requires specific documentation to verify VAT claims, especially given that different products can have varying UK VAT rates.
Without valid VAT invoices, sellers operating under the standard VAT rules face a substantial hit to their profit margins, potentially losing 15-20% due to inability to reclaim VAT on stock purchases.
Amazon’s VAT Number Requirement
Adding to the complexity, Amazon has begun requesting VAT numbers from sellers. This move is part of Amazon’s efforts to ensure tax compliance across its platform, particularly for sales to UK customers, where VAT must be charged at a standard rate of 20%. For sellers approaching or exceeding the VAT threshold, this requirement underscores the importance of addressing VAT registration proactively. Failure to provide a VAT number when requested could result in account restrictions or even suspension, highlighting the critical need for proper VAT planning and compliance.
Enter the Flat Rate Scheme
Fortunately, there’s a solution tailored for smaller businesses: the Flat Rate Scheme. This alternative UK VAT arrangement is available to businesses with an annual taxable turnover under £150,000. Unlike the standard scheme, the Flat Rate Scheme simplifies VAT calculations by applying a fixed percentage to your gross turnover, regardless of your input costs. This really simplifies your VAT returns.
For UK sellers, the headline rate is 7.5%, with an additional 1% discount available in the first year of VAT registration. This means that the maximum VAT impact on your items is capped at 6.5%, significantly lower than the potential 15% loss under the standard scheme.
Comparing the Numbers – Value Added tax
Let’s illustrate the difference between each VAT scheme with a practical example of how you would calculate your VAT returns:
Scenario: You purchase a product for £10 from a high street retailer and sell it on Amazon for £30.
Pre-VAT Registration:
- Sales: £30
- Product Cost: £10
- Amazon Fees: £10
- Profit: £10 (33.3% margin
Standard VAT Registration (Retail Arbitrage VAT):
- Sales: £30
- VAT to HMRC: £5
- Net Sales: £25
- Product Cost: £10
- Amazon Fees: £10
- VAT Reclaim on Fees: £1.67
- Profit: £6.67 (22% margin, effective VAT rate of 11.1%)
Flat Rate Scheme VAT registration (Retail Arbitrage VAT):
- Sales: £30
- Product Cost: £10
- Amazon Fees: £10
- VAT Paid (6.5% of £30): £1.95
- Profit: £8.05 (26.8% margin, effective VAT rate of 6.5%)
As you can see, the Flat Rate Scheme preserves more of your profit margin compared to the standard scheme in this scenario.
Note on Amazon Seller Fees
From the 1 August 2024 Amazon are changing their VAT rules, Amazon will be charging VAT on all seller and FBA fees. Before this Amazon would remove VAT from your seller account if you had a valid vat registration number. However, everyone will be charged VAT from the 1 August. So the flat rate scheme is not as beneficial as it once was but its still significantly better than the normal scheme for retail arbitrage sellers.
Watch our video on the August 2024 VAT changes for Amazon
How often do I need to submit a flat rate VAT return?
When you have a VAT registration number, you still have to complete four VAT returns a year so your VAT obligations are the same under both schemes. The only difference between the flat rate scheme and the normal VAT rules is the calculation. Sales tax is calculated based on sales under the flat rate scheme whereas under the normal VAT rules, you would charge VAT on your sales and get a VAT refund from your purchases.
Import VAT – VAT Compliance
You need to be aware that if you import goods from China you will not benefit from reclaiming the VAT on import or be able to postpone the import VAT. In most cases people who sell via the arbitrage method do not do this but when you move towards private label then you may want to reconsider if the Flat Rate Scheme is good for you.
The Bottom Line – save money on your VAT obligations
For many ecommerce sellers, particularly Amazon FBA sellers, the Flat Rate Scheme can be a game-changer. On £100,000 of revenue, this approach could save you approximately £4,000 in annual profit compared to the standard UK VAT scheme.
It’s crucial to note that while the Flat Rate Scheme offers advantages for many, it may not be the best fit for all businesses. Factors such as your specific product mix, profit margins, and business model all play a role in determining the most beneficial VAT arrangement for your company.
Moving Forward
Before assuming that VAT registration will spell the end of your business, take the time to carefully calculate the impact of different VAT schemes on your specific operations. Consider seeking professional advice to ensure you’re making the most informed decision for your ecommerce venture.
Remember, VAT doesn’t have to be a roadblock to growth. With the right strategy, your VAT obligations can be managed effectively, allowing you to scale your business beyond the £90,000 threshold and unlock new levels of success in the ecommerce world.
At Your Ecommerce Accountant, we’re here to help you navigate these complex waters and find the best VAT solution for your unique business needs. Don’t let VAT hold you back – embrace it as part of your growth strategy and watch your ecommerce business thrive.
If you have any worries or concerns about how this will impact your business or if you think you may need to change from the FRS, then you should contact an Accountant. To book a free call to discuss these changes (and any other Amazon/Ecommerce queries) with one of our Amazon Accounting Experts then click here.
