VAT for Online Sales: What Small Business Owners Need to Know

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.


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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
  • ● VAT
  • ● Business rates

In this post, we will focus on the VAT

Value Added Tax (VAT)

VAT, or Value Added Tax, is a percentage of the charge customers pay when buying certain goods and services in the UK.

Since January 2011, most goods and services in the UK have been subject to a standard 20% VAT rate. 

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 £90,000.

VAT rates

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.

Most importantly, sales of zero-rated products count against your £90,000 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.

Is there a difference in VAT laws around the UK?

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.

Tips on paying VAT for e-commerce sellers

  • 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: To save 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.

Hire VAT Accountants

Work with UK-based Experts for tax, audit, accounting, payroll, & EIS/ SEIS needs.

Have a question? Call us on
0203 983 8100
Monday to Friday 9am – 4:30pm


As a small business owner, it’s essential to keep track of your VATable turnover. If your turnover exceeds £90,000, 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.

Experlu Editorial Team
The editorial team at Experlu is comprised of seasoned financial professionals dedicated to providing high-quality content on accounting and finance. With a wealth of experience and diverse expertise, the team produces insightful articles that have established the Experlu blog as the UK's leading financial and accounting resource. The team includes accountants, auditors, and business advisors who stay updated with the latest industry developments. Their commitment to excellence ensures that Experlu remains a trusted source of information, helping readers stay informed about audit, business, finance, and tax matters.