VAT and online trading: Part 3 – Selling goods
Neil Warren spots an issue in statements from online marketplaces that could cause sellers to understate their VAT. There are also complications with stock held in other countries.
It is very common for UK businesses to sell their goods on an OMP such as Amazon or eBay. These arrangements can present some tricky VAT challenges, for both the income received from these sales and the payments to the OMP for their fees. I recently dealt with a query where it turned out the business was underpaying VAT.
Statement of sales
The statement from the OMP was quite straightforward; it contained a gross UK sales figure for VAT purposes eg £2,400 including 20% VAT. It also detailed the deduction of the OMP’s fees, let’s say £360. A net amount of £2,040 was paid to the seller.
It is tempting for clients to account for output tax based on 1/6 of the net payment. This is not correct and that was happening in the example referred to me. In the statement above, the output tax is £400 ie 1/6 of gross sales, assuming all sales are standard rated.
Care is needed with the VAT accounting for the fee charged by the OMP. It is likely that the OMP will be based outside the UK. In this case the reverse charge needs to be calculated on this fee, ie an entry of £72 (£360 x 20%). This must be included in the output and input tax boxes of the relevant VAT return, in boxes 1 and 4.
Don’t forget that the reverse charge applies to services purchased from abroad and not just from EU countries. An online platform fee is a service, even though it relates to the sale of goods.
Goods stored outside the UK
A business selling through an OMP (or otherwise) could be storing goods in other EU countries so that stock is readily available to meet online orders from customers in that country. This will increase sales because customers get their goods quicker. The holding of stock creates a requirement to register for VAT in that country.
Don’t forget that a nil registration threshold applies if a business is not established in that country. In other words, a UK based business can take advantage of the £85,000 UK registration threshold but is not entitled to a local VAT threshold in any other EU country.
Domestic VAT is then charged on future sales and declared on VAT returns in that country. Until 31 December 2020, the transfer of stock from the UK to the other EU member states is a zero-rated sale between two VAT registrations. From 1 January 2021, the movement of goods will be an import into the other country, subject to duty and VAT on arrival.
If a UK seller is not registered for VAT, there will obviously be no output tax to pay on UK sales made on an OMP. However, the main difference is that VAT will be charged by the OMP on platform fees (possibly Luxembourg VAT), which will be a cost to the business. This is logical because the VAT reverse charge process cannot deal with the situation if the seller is not registered.
Overseas sellers – change on 1 January 2021
In the next three months, I’ll be writing a series of articles about new VAT procedures that will apply from 1 January 2021 when the UK’s transitional period with the EU comes to an end.
A major change is that overseas sellers who sell goods directly to UK customers (not through an OMP) where the value of a shipment is less than £135 will need to register for VAT in the UK and charge ‘supply’ VAT on the sale to the customer. In other words, no ‘import’ VAT is payable when the goods arrive in the UK. A sales invoice must be included with the goods in transit.
If this measure is implemented successfully it will take away a competitive disadvantage for UK businesses who sell their goods online to UK customers. There will be a level playing field for all suppliers. The volume of shipments that arrive from abroad and avoid VAT is like to reduce, which currently place UK domestic businesses at a price disadvantage.