Our guide covers the basics of VAT, including the different types of VAT rates, VAT registration, VAT accounting schemes and more. We also outline the post-Brexit VAT changes for ecommerce businesses, and answer FAQs these businesses have about VAT.
At Forma, we work with startups and small businesses across industries. As such, we’re familiar with many of the challenges that ecommerce solopreneurs and small business owners face on a day-to-day basis.
You need to wear multiple hats and juggle numerous tasks—including dealing with VAT. It can be complex, and is one of those things that can make even an experienced entrepreneur break out in a cold sweat.
To help you along, we’ve put together a resource to help you understand the basics of VAT, and stay ahead of post-Brexit changes.
What is VAT?
Simply put, VAT is a type of consumption tax added to the cost of most goods and services for both B2C and B2B markets.
In this article, we won’t delve into the basics on VAT—instead, we’ll be focusing more on recent VAT changes and FAQs. But if you need more information on VAT essentials, you can refer to our guide on VAT registration, thresholds and schemes. It covers the following:
- Different VAT rates in the UK: Standard rate, reduced rate and zero rate.
- VAT registration, invoices and record keeping requirements
- Cancelling your VAT registration
- VAT accounting schemes
When is VAT registration mandatory?
UK businesses must register for VAT if the following conditions apply:
- Your VAT taxable turnover exceeds the current threshold of £85,000 (for a 12-month period ending in 2020/21). The VAT taxable turnover refers to the total value of everything that you sell that isn't exempt from VAT.
- You expect your VAT taxable turnover to exceed £85,000 in the next 30-day period
- Your business had a taxable turnover exceeding £85,000 over the last 12 months
Businesses selling goods in the UK using online marketplaces must register for VAT if these conditions apply:
- You’re an overseas seller, and the online marketplace provides you with the VAT details of a business customer
- You’re an overseas seller selling goods located in Northern Ireland at the point of sale and sold to customers in Northern Ireland
- You’re an overseas seller with goods stored in the EU, and your total annual sales to customers in Northern Ireland exceeds £70,000
If you’re an EU business selling to UK customers, VAT registration may be mandatory if you’ve determined that the post-Brexit VAT changes apply to your business. We’ve outlined these changes in the section below.
What happens after you’ve registered for VAT?
Once you've registered for VAT, you'll need to:
- Abide by HMRC's record keeping requirements
- Issue VAT invoices
- Submit your VAT returns on time
There are additional requirements if you’re using online marketplaces:
- Provide your VAT registration number to every online marketplace you offer goods for sale in the UK. The OMPs will need to verify your registration number and display it on their website.
- Use the same business name indicated in your VAT registration when you open a trading account on an online marketplace.
What are the post-Brexit UK VAT changes?
Below, you’ll find an overview of the post-Brexit VAT changes. Bear in mind that this is just a summary of the key changes. If you need further information or personalised advice, reach out to our VAT consultants.
Exporting goods to the EU:
- VAT registered UK businesses are still able to zero-rate sales of goods to EU businesses.
- EU member states will treat goods entering the EU from the UK in the same manner as goods entering from other non-EU countries. Import VAT, along with any other customs duties are due upon the arrival of goods in the EU.
- Common Transit Convention: The UK remains in the Common Transit Convention (CTC). This simplifies trade and reduces the administrative burden for UK businesses exporting their goods. For instance, businesses can defer import VAT and custom duties until the goods arrive in their destination country, and are able to do away with completing additional import or export declarations.
- Additional resources: HMRC, European Commission: Brexit FAQs
- EC Sales List: Previously, UK VAT-registered businesses that met specific conditions and were supplying goods to VAT-registered customers in the EU had to complete an EC Sales List.
- This is no longer required. Businesses will have until 21 January 2021 to submit EC Sales Lists for sales made on or before 31 December 2020. Submitting EC Sales Lists is still required if you’re selling goods from Northern Ireland to VAT-registered customers in the EU.
- Distance selling threshold: Previously, smaller businesses selling to EU customers were able to benefit from the distance selling threshold. Businesses did not need to register for VAT in the EU country they were selling to, unless their annual sales exceeded the distance selling threshold (£70,000).
- Starting from 1 January 2021, UK sellers can no longer take advantage of the distance selling thresholds.
- Additional resources: HMRC’s guide to exporting goods from the UK
Importing goods from the EU to the UK:
- Abolition of Low Value Consignment Relief (LVCR): The LVCR, which relieves import VAT on goods valued at £15 or less will no longer apply to goods imported into the UK, or for goods supplied to Northern Ireland from outside the UK and EU.
- Postponed VAT accounting: Starting from 1 January 2021, UK VAT registered businesses importing goods from locations worldwide into the UK can use a new system known as postponed VAT accounting. This enables them to account for import VAT on their VAT return, rather than paying for it when the goods arrive at the UK border.
- Custom declarations and payment of other duties are still required. Tariffs will apply to certain goods. Excise duties will continue to apply to tobacco, alcohol and certain types of energy products.
- Duty deferment account: Payments for customs and excise duty can be deferred, and settled through monthly payments. Sellers need to register with HMRC to open a duty deferment account.
- The £135 threshold: Starting 1 January 2021, the point at which VAT is collected on imported goods valued at up to £135 is moved from the point of importation to the point of sale. UK supply VAT—not import VAT—will be charged at the point of sale.
- If the sale is facilitated through an online marketplace (OMP), the OMP will be responsible for collecting and accounting for the VAT.
- If the imported goods are sold directly to consumers in the UK, the overseas seller will be responsible for registering with HMRC and accounting for the VAT.
- The new rules will also apply to B2B sales up to £135 in value. There’s an exception: if the business customer is VAT registered in the UK and provides its VAT registration number to the seller, the customer will account for the VAT through a reverse charge mechanism.
- HMRC’s step-by-step guide to importing goods into the UK
- HMRC’s policy paper on changes to VAT treatment of overseas goods sold to customer from 1 January 2021
EU VAT refund system:
- UK businesses can continue to claim eligible refunds of VAT from EU member states, but this will need to be done using the existing refund system for non-EU businesses.
- The way in which the refund system operates varies across each EU country, so businesses will need to check the requirements in each EU country where they incur VAT.
- ICAEW’s resource on VAT refunds
- HMRC’s policy paper on claiming a refund of VAT paid in an EU member state
EU VAT Registration Number Validation service:
- The EU VAT Registration Number Validation service enables businesses to check the validity of a customer or supplier’s VAT number. UK businesses will be able to continue to use the EU VAT number validation service to check the validity of EU businesses, but UK VAT registrations will cease to be included.
- Use HMRC’s online service to check UK VAT numbers
- Use the European Commission website to check EU VAT numbers
VAT flat rate scheme:
- The VAT flat rate scheme no longer applies to any sales a seller makes through an online marketplace, where the OMP is liable to account for VAT. Sellers may choose to leave the scheme at any time. Those who remain in the scheme are required to abide by its conditions, including the restriction on VAT recovery.
FAQs on VAT
Does VAT apply to delivery charges?
This varies depending on the circumstances in which the goods are supplied.
If a seller imposes a delivery fee, VAT will apply on the charges at a similar rate. This means that there will be a 20% VAT on delivery for goods that are standard-rated. If delivery is provided free of charge, then VAT will not apply as it is accounted for on the value of the goods.
Is zero-rated the same as VAT exempt?
No, zero-rated is not the same as exempt.
If an item is zero-rated, it is still VAT taxable, but the rate of VAT that you charge to customers is 0%. You’re still required to record these sales in your VAT accounts, and report them on your VAT return. Additionally, sales of zero-rated goods will count towards your VAT threshold.
You don’t have to record sales of exempt goods on your VAT return, and they don’t count towards your VAT threshold.
Does Making Tax Digital (MTD) for VAT affect my business?
MTD for VAT Phase 2 was rolled out on 1 April 2021. For the time being, the new requirements will only apply if your taxable turnover exceeds the VAT threshold (£85,000).
From April 2022, it is mandatory for all VAT-registered businesses to comply with MTD, regardless of their annual turnover.
- HMRC's VAT Notice
What happens if my business fails to meet VAT requirements?
UK ecommerce sellers may face HMRC penalties. HMRC may also notify online marketplaces you trade through about your VAT non-compliance, which may result in your business being removed from the marketplace.
If you’re an overseas seller, HMRC may impose a penalty, ask you to pay a cash deposit or bond or direct you to appoint a VAT representative established in the UK. If you fail to comply with these measures, HMRC may notify online marketplaces you trade through about your VAT non-compliance, which may result in your business being removed from the marketplace.