VAT for Online Sales: What Small Business Owners Need to Know
- 21 Jan 2022
- 3 minutes read
Setting up an online business is an excellent choice for those looking to start, particularly after the Covid-19 pandemic.
Instead of a physical shop, an online presence will save small business owners from extra expenditures, including business rates, utilities, and rent. But, there are various taxes that online firms can't avoid.
Individuals need to consider their tax responsibilities as small business owners and obey the same rules as any new business owner when they start an e-commerce business.
There are taxes to pay, just as there are for offline businesses, and the government is proposing a new 2% sales tax for online businesses.
The aim is to improve the high street by creating a competitive environment for physical stores.
Another proposal they're considering is charging a fee for online products shipped to consumers' residences.
- Taxes to pay as an online or e-commerce seller
- Value Added Tax (VAT)
- VAT rates
- What is the differentiation between zero-rated and VAT-exempt?
- Is there a difference in VAT laws around the UK?
- Tips on paying VAT for e-commerce sellers
Taxes to pay as an online or e-commerce seller
Based on how your business is set up, the taxes a small business owner has to pay are:
- Income tax
- Corporation tax, if you are incorporated as a company
- Employer National insurance contributions, if you have employees
- Business rates
In this post, we will focus on the VAT
VAT, or Value Added Tax, is a percentage charge customers pay when buying certain goods and services in the UK.
Most goods and services in the UK have been subject to a standard rate of 20% VAT rate since January 2011.
Businesses in the United Kingdom must apply for VAT only if their annual taxable revenue exceeds the VAT level in the previous 12 months or is expected to exceed in the coming 30 days. The current VAT threshold (VATable sales) is £85,000.
Sales of Vatable products or services made by a VAT registered business are called 'VATable sales.'
- The standard rate of VAT is currently 20%
- The reduced rate is 5%, for (health or energy-related goods)
- There is a 0% (Zero) rate for some exceptional products such as children's clothing and boots, exports.
- Some goods are exempted from VAT, like bank charges.
What is the differentiation between zero-rated and VAT-exempt?
It's crucial to understand that zero-rated and VAT-exempt are not the same.
When an item is zero-rated, it is still VAT taxable; the only difference is that you charge your customers 0%. Even if you paid 0%, you must still keep track of the sale and document it on your VAT return.
And, most importantly, sales of zero-rated products count against your £85,000 12-month threshold. Most exports to other countries are zero-rated.
Exempt products aren't required to be recorded on your VAT return, and they don't count against your VAT threshold. An example would be bank fees.
No, it's not true. The VAT laws are the same anywhere in the UK, whether you're in Dorset or Dundee. Thresholds and percentages are the same all over in the UK.
- Invest time: As VAT tax law has many complicated aspects, it is not excessively detailed to create a basis to be compliant. Take some time to consider what the organization is searching for.
- Knowledge about Platform: Go through everything written by your e-commerce platform(s) about the setup and management of collecting VAT tax. If a small business owner can maintain this set-up correctly from the beginning, it can make their life significantly simpler when their business expands.
- Set reminders: Due dates and tax deadlines differ according to state. Set calendar reminders to avoid late filing and penalties, and sync your calendar with your phone to message reminders.
- Leverage technology: For saving time and prevent costly mistakes by converting the VAT tax data for your easy, use accounting software. Popular accounting software in the UK are Xero, Quickbooks, Sage, Zoho books, FreeAgent.
As a small business owner, it's essential to keep track of your VAT taxable turnover. If your turnover exceeds £85,000, you must pay for VAT and begin charging it on your sales.
Small business accountants will help you keep track of the VAT you owe and the tax you remit to HMRC, which is more relevant than ever because of HMRC's Making Tax Digital (MTD) initiative.