For e-commerce sellers, it’s vital to incorporate VAT (Value-added Tax) considerations into your financial strategy. The penalty for not registering and filing VAT at the right time can lead to damaging complications for your business.
With this in mind, it pays to know exactly what VAT is, why it’s essential, and how to stay compliant with all the dependent rules and regulations. In particular, you’ll want to know how to register, file and charge your VAT online sales.
At Zee, we know that understanding the ins and outs of e-commerce VAT isn’t always easy. It’s a topic that requires thorough investigation for you to know exactly how to avoid any nasty surprises.
Luckily, whether you’re new to e-commerce or an experienced seller, our comprehensive guide will break down all the key information for you and run through the advantages that working with a third-party trade partner can bring.
What is VAT (Value-added Tax) for e-commerce sellers?
Value-added Tax (VAT) is a sales tax, sometimes known as a consumption tax, that is applied after you sell a product. The tax is based on the actual price of a product rather than any difference or profit you have made in selling the product.
It’s most commonly present in EU countries – in France and Germany, for example, the VAT rate is set as 20% and 19%, respectively¹. But other countries apply VAT as well, such as Japan, South Korea, India, and China.
The main takeaway about VAT is that your product will inevitably gain more value throughout its journey from point A to point B. In most countries, this value is attributed to external factors such as:
- The wages paid to laborers involved,
- Worker benefits, such as health care, offered by a shipping service,
- The various resources used in the transportation of goods.
So, what does this mean for e-commerce sellers?
As far as e-commerce sellers are concerned, the top-line process is relatively simple. With any sale you make in applicable countries, you’ll have to add the VAT rate to the total sales price. However, there are different rules for VAT depending on what type of seller you are.
For example, different regulations are at play if you’re dropshipping or distance-selling. Likewise, there are specific rules if you are buying from a company that is required to collect VAT (more on this below).
In some countries, Amazon collects and remits VAT on behalf of its sellers, but this isn’t always the case. Sometimes, especially since the EU’s new e-commerce laws came into effect from the 1st of July 2021, the seller may be the one who has to register, file and remit ².
And as a further consideration, there are some places where Amazon may register as a VAT-registered business and charge VAT on its own sales.
How Import VAT Works
As part of the customs clearing process, international FBA businesses will pay import duties and taxes to customs authorities at the destination country’s border.
In some countries, like the UK, businesses can meet VAT requirements in their destination country in one of two ways:
- Paying VAT to a customs authority up-front at the border,
- Or using the destination country’s postponed VAT accounting system, where they can declare their VAT value and reclaim it on their tax returns.
That said, the VAT reclaim process can be incredibly complex and convoluted. Businesses operating globally will need to work with a knowledgeable third party to walk them through the process legally while maximizing returns.
How does VAT for e-commerce sellers work?
For e-commerce sellers, how VAT works depends on what type of seller you are, what you are selling, and where you are selling it.
It’s worth remembering that VAT in Europe applies to each stage of the supply chain. For example, if a shoe manufacturer needs to buy the raw materials required for making shoes, they’ll need to pay VAT for those purchases, just like the consumer would when they are buying the shoes themselves.
The former is known as the input tax, whereas the latter is known as the output tax.
A typical step-by-step process of how VAT works for Amazon sellers is:
- The Amazon seller, with a VAT registration number, registers their products for VAT via their chosen method (more below).
- Depending on the customer’s location, Amazon will automatically charge and calculate the right VAT price for the product.
- Amazon passes on this money to the relevant tax authorities.
- Within their seller’s account, sellers can see all VAT charges and payments that Amazon has made, and, if applicable, they can claim VAT back.
More generally, there is a similar but different process for e-commerce sellers not selling with Amazon. This involves:
- The e-commerce seller registers for VAT based on the requirements of their country, along with their VAT registration number.
- When a product is sold, the e-commerce seller will charge the customer VAT.
- VAT returns are then filed monthly or quarterly, and it is up to the e-commerce seller to remit the payments to the correct authorities.
With Amazon or any e-commerce selling, it is important to check and review the specific documentation and rules that apply to your situation.
How is VAT calculated for sellers?
Understanding how to stay VAT compliant and knowing how to calculate VAT is important.
First, you need to know the current VAT rate in a particular country. This is likely to be around the 15% to 20%, but you’ll need to find out what the exact rate is for your country. Once you’ve established this, it’s time to calculate.
The two different ways VAT is usually calculated are either by the standard VAT rate or the flat rate. Most products sold on the site fall under the former.
So, to illustrate this, calculating VAT on a £100 product under a 20% standard rate, the VAT amount would be £20, making the final sales price on Amazon £120. Keep in mind that the VAT is deducted from the sales price before any Amazon fees and charges are applied.
To determine the VAT amount from the final sales price, divide the final figure by 6.
If you are registered under the flat rate VAT scheme, your VAT liability is calculated differently. Here, you cannot reclaim VAT on your expenses – the amount you pay will be a percentage of your gross sales. The flat rate percentage for most e-commerce businesses is 7.5%.
Let’s look at the example above. If you sell a standard-rated product for £100, you would add £20 of VAT, as usual, to arrive at a gross selling price of £120. Then, 7.5% of the gross selling price, or £9, would be due to HMRC.
As with all VAT planning, it is important to double-check the rules and regulations of the specific country you are selling to, as each can have different requirements.
How do you register VAT?
In order to register VAT, you’ll need a VAT registration number. But you’ll only need to register for one if you’ve either reached your First Day in Europe (when your inventory reaches Europe) or, since July 2021, the EU-wide Selling Threshold. This is the limit at which you can no longer send your products to another VAT country)³.
To get your VAT number, consider the current status of your business. If you’re an American company looking to expand internationally, the best bet is to go through a representative or fiscal agent who will walk you through the process.
Or the alternative is to set up a European company, although doing this is naturally very time-consuming and can come with its own set of issues. For each company, you’ll need to register for VAT separately.
When registering VAT, you will need to provide all the relevant documentation, such as business documents, passports, invoices, and other key information. Once this is provided, you should be given a validity date, from which point you can start selling your products.
However, you may take up to two months to receive your actual VAT number.
How do you file VAT?
Once you’ve registered for VAT, it’s time to file your returns. It’s worth noting that they will be due at different times depending on which country you are filing them in. For instance, the UK requires quarterly returns, while Germany has monthly or quarterly.
Ultimately, you must pay your VAT returns via bank transfer within two weeks – should this pass, you may be penalized. To know you have paid on time, you should receive written confirmation from your e-commerce platform.
If you have any concerns regarding registering and filing your returns, consult professionals or third-party VAT service providers who can help guide you through the process.
When do you need to register for VAT (Value-added Tax)?
When a business reaches a certain level of taxable turnover, it becomes mandatory for them to register for VAT in the jurisdiction where it operates.
However, even if they have yet to reach this level, businesses can elect to voluntarily register for VAT, which may be a good way of ensuring you are VAT compliant the moment you hit the threshold.
Why VAT is important
VAT is a vitally important part of your importing operations to decrease the risk of penalization and increase profits. However, in order to optimize profits, sellers need to account for the changing VAT rate ahead of time.
Getting ahead on VAT can:
- Ensure customs compliance and avoid any unforeseen fines, penalties, or even legal trouble with the local authorities,
- Document and track the value throughout the supply chain to avoid hemorrhaging manufacturing and shipping expenses,
- And ensure their final price point is suitable for their customers and competitive enough to sell.
Frequently asked questions
Can you sell on Amazon without VAT registration?
The short answer is yes. A company can sell on Amazon without registering for VAT. But, as mentioned previously, this is only if its taxable turnover is lower than the VAT threshold in their country. They will not be able to sell products with VAT registration should this turnover exceed this threshold.
In some cases, companies that sell products to customers in the EU may have to register regardless due to distance selling regulations. This is especially something to watch out for if you are registered in one VAT country but are selling commodities in another.
What are the penalties for e-commerce sellers if they are not VAT registered?
The penalties that may be incurred for e-commerce businesses that are not registered with VAT can differ from country to country. They can range from simple fines, representing a percentage of the amount owed and interest, to legal action in the worst cases.
More indirectly, it’s probable that any companies that become VAT non-compliant may suffer reputation damage. And this may impact the ability of a business to conduct trade in the future.
How can I claim back VAT on Amazon (Value-added Tax)?
After you have filed your VAT payments, you may be in a position to claim back VAT on Amazon. To do this, you must calculate the refund you are owed by working out the difference between the VAT you have paid and what you have charged.
Once you have done this, you can submit a VAT refund claim to your relevant tax authority. This may change depending on which jurisdiction your company is selling products in.
Clear customs stress-free with Zee’s VAT solutions
The volatility of trade laws, which are constantly updated and revised in every country, makes accounting for taxes like VAT enormously onerous for e-commerce businesses.
This is why it’s essential to work with a partner who prioritizes staying on top of VAT laws in a suite of countries with desirable marketplaces. Few freight forwarders, shipping partners, or IORs (Importers Of Record) can take this process on—but Zee is an exception.
With Zee, you can trust our team of experts with over 10,000 hours of experience in the e-commerce industry to handle all of your international freight needs.
Think of Zee as your one-stop shop for all things shipping-related. In addition to taking care of import VAT, Zee can help with the following:
- Taking the reins on your goods’ shipment comprehensively, including brokerage, duties and taxes, and even shipping tracking,
- Intervening on any arrested shipments and working with our contacts to spring them out of hostage if seized by a customs authority,
- And ensuring all of your goods concord with the customs compliance regulations in their destination country so they can stick the landing.
Keep the obstacles of FBA setup from slowing you down! Let us help you navigate the process and keep your shipments and products ready to go at all times.
Learn more about our VAT services.
Read More
When Do I Pay VAT On Imported Goods?
EU E-Commerce VAT Laws Are Affecting Online Businesses
Eastern Europe To Impose Global Digital Services VAT
References
¹Enache, Cristina. “2022 VAT Rates in Europe.” Tax Foundation, May 23, 2022. https://taxfoundation.org/value-added-tax-2022-vat-rates-in-europe/.
²Risicaris, Giorgio. “Forums.” Amazon. Région Toscane, 2006. https://sellercentral-europe.amazon.com/forums/t/eu-vat-on-e-commerce-eu-voec-legislation-2021/433285.
³Distance Selling Regulations: Definition, Requirements, Exceptions 2021.” hellotax Blog, January 31, 2022. https://hellotax.com/blog/taxation/distance-selling/.