Online marketplaces continue to soar in popularity, so there’s no wonder hundreds of thousands of UK businesses put their products on them every year to reach new customers.
Whether your store is a hobby or your full-time business, you’re probably wondering – what are the rules surrounding VAT?
We’re here to help you understand what VAT is, and whether your e-commerce business needs to register for VAT in the UK.
What is an online marketplace?
An ‘online marketplace’ sounds self-explanatory – a marketplace that’s based online, but for a business to officially call itself one, it needs to hit a specific criteria.
For HMRC, an online marketplace is a business that has a website, app (or both) that manages the sale of goods to customers.
There are some other terms and conditions too, based on how the goods are listed and how much the business is involved in the selling of those goods.
The following criteria must be met when handling the sale of goods:
- The business must set the terms and conditions on how goods will be supplied to customers
- They must be involved in either authorising or facilitating customers’ payments
- They’ll also have involvement in either the ordering or delivery of the goods
Your business will not be classed as an online marketplace if you only provide one of the following:
- Either the listing or advertising of goods
- The processing of payments for the supply of goods to the customer
- Listing the products, but either redirecting or transferring customers to another website or app to purchase the goods (without any further involvement)
If you’re still scratching your head at what a marketplace is, think of sites like Amazon, eBay, and Etsy.
They host a range of independent sellers and businesses but also set the terms and conditions, handle the payments, and are often involved in the shipping process at some point.
What is VAT?
VAT stands for Value Added Tax and is a consumption tax added to most goods and services. Even if you haven’t heard of VAT before, you’ve probably paid it without actually realising.
Don’t worry though, you haven’t been scammed – all VAT-registered businesses must add VAT onto the goods and services they sell which qualify. The rate of VAT they must charge depends on what category the item comes under.
Who should be registered for VAT?
You’ll need to register for VAT if you either have a taxable turnover of £85,000 over the last 12 months (this is the current VAT registration threshold) or you expect your turnover to be over the threshold within the next 30 days. This could be for many reasons, for example, you’re hosting a Black Friday sale and anticipate the volume of your sales pushing you through the threshold.
You can also volunteer to register for VAT. Some businesses do this because they expect they’ll reach the threshold eventually, and don’t want it to look like they’ve raised their prices when it finally comes to adding VAT. Other businesses do it so they can claim VAT back on their purchases.
Why would I use an online marketplace for my business?
Running your business on an online marketplace is a cost-effective way of reaching a wider audience who will often be more comfortable purchasing your products on a site they trust. It’ll mean you pay less in advertising, and you don’t have to run your own website – or have any social media if you don’t deem it necessary.
This could be beneficial if you’re starting out, and you don’t have the time to build a brand outside of selling your goods.
Do I need to register for VAT if I sell through an online marketplace?
If your taxable sales are below the VAT registration threshold, you won’t need to register for VAT just because you sell on an online marketplace. That said, most online marketplaces are VAT registered in their own right, so platforms such as Etsy will automatically add VAT to your taxable sales.
Carrying on with the Etsy example, if your gross sales meet or exceed the VAT registration threshold in a 12-month period, Etsy will ask you to add your VAT number to your Etsy store – and your account will be placed on hold until this is complete. Once registered, you’ll need to provide the platform with your VAT registration details before you’re able to start selling again.
Being VAT registered means all the usual reporting rules will apply when you make VAT submissions to pay or claim back any VAT owed.
The VAT rules are different for:
- Overseas goods that are sold directly to customers in the UK
- Goods that are sold from the EU to customers based in Northern Ireland that are not registered for VAT in the UK
- If you move any goods between Northern Ireland and the EU
It’s worth noting the VAT threshold is based on all of your income, so if you sell on both Etsy and eBay, and your taxable turnover is £45,000 on eBay and £40,000 on Etsy – you’ve reached the threshold to register for VAT.
How do I register for VAT?
Registering for VAT is fairly simple, and most businesses can register online.
Before you can register though, you will need a Government Gateway user ID and passport to hand, as well as information about your business. For example, if you run a limited company you’ll need to fill in things like your company name, bank details, and turnover.
Keeping VAT records
Keeping VAT records is a legal requirement, and once you’re registered you’ll need to make VAT submissions to tell HMRC about the VAT you’ve charged to customers, as well as any VAT you’ve paid.
You’ll need to keep your VAT records for 6 years from the date any goods are sold, so it’s well worth investing in good bookkeeping software will ensure you don’t lose any important documents.
Need some help on VAT? Check out our VAT guide for more expert advice!