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Online marketplace - VAT & disbursements

Understanding role of VAT and disbursements in marketplace transactions

Hi there, 

I am setting up an online marketplace for products. These products will be from a number of small producers. I am currently evaluating the options for the business model. 

Current thoughts are: consumer buys a VAT rated product from the site, the marketplace pays for postage, provides packaging, covers the payment processing costs & takes a commission to cover marketing / people / other operational costs. The producer then sends the product directly to the consumer using the postage provided & is then paid the remainder of the sale price (Sale price inc. the VAT, minus postage, packaging, payment & commission). The contract from the sale is between the consumer & the producer, we just sit in the middle. I am lost in trying to understand the impact of VAT on this transaction. As I understand it:

Sale price inc. VAT (VAT responsiblity passed to producer)

Postage cost: can be treated as a disbursement & is therefore not VATable on the invoice from the marketplace to the producer

Packaging cost: can be treated as a disbursement & is therefore not VATable on the invoice from the marketplace to the producer

Payment processing: not treated as a disbursement & is therefore VATable on the invoice from the marketplace to the producer

Commission: not treated as a disbursement & is therefore VATable on the invoice from marketplace to the producer.

Does this make sense? Am I correct in thinking these are disbursements? I'm primarily trying to understand this model's profitability vs. the model whereby the consumer has a contract with the marketplace, and technically at the time of purchase the marketplace buys the product from the producer for a defined price & then the producer still ships to the consumer (using postage etc., which is covered in the margin)

1 further question:

1) If both the marketplace & producer are below the VAT threshold, we wouldn't have to charge VAT on any of the transactions between the marketplace & the producer, or the producer & the consumer. However, if the producer was VAT registered & the marketplace was below the threshold, we would have to charge VAT on the sales price & pass this on, but we would not have to charge VAT on the commission. 

I hope this makes sense. I'd really appreciate any help on this as it has been racking my brains!

Thanks 

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By spilly
25th Feb 2018 23:23

I think you need to look at the HMRC guidance for how to treat postage and packaging for VAT (VAT Notice 700/24). Why don’t you ask an accountant or business mentor to look at the viability? They may charge for this, but it could save you making fundamental errors initially.

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25th Feb 2018 23:36

Hi there,

Thanks for the info. Really appreciated. Yes, we're going to get professional advice - I've just found in the past that going in with the right questions often helps you get the best answers, so I'm just personally trying to get my head around the issue first.

Thanks,

Will

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26th Feb 2018 08:48

You’ve made lots of wrong assumptions re the disbursements. As suggested, read the HMRC guidance provided by spilly.

Your paragraph starting “Current thoughts...” with you paying for disbursements describes you buying & selling the product with the producer drop-shipping on your behalf. If your vaguely successful you will breach the VAT threshold quickly and your prices will rise/profit drop and possibly price yourself out of the market for consumers.

You want to pass everything (details, responsibility, money) onto the producer, just taking your %. This way you won’t charge the consumer VAT and only your % will count towards the VAT threshold.

It may be worth you registering voluntarily and charging vat on your commission to the producer - speak to your accountant about this.

If you consider NotInTheHighstreet, the correspondence comes from the producer, albeit within a NoTHs portal/email.

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