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Value Added Tax (VAT) accounts for 17% of the £732 billion of tax revenue collected a year by HMRC. While you’re hyper diligent about not underpaying VAT for your ecommerce business and being hit with costly interest rates or penalty fees, you also don’t want to end up overpaying and losing out on money that’s rightfully yours.
You deserve to be rewarded for your hard work. HMRC will always find a way to get the money they’re owed, but you need to look out for yourself and make sure you’re not giving an interest-free loan to the taxman.
Here are five of the most common mistakes we see that lead to overpaying VAT:
You’re not properly separating business and personal expenses
Once your business earns a turnover of more than £85,000 in the last 12 months, you’re legally required to become VAT registered. While this means you have to start charging VAT and passing those earnings on to HMRC, it also means you’re able to start reclaiming VAT on business expenses.
Business expenses are those that are wholly and exclusively necessary for the purpose of your trade. Think things like office supplies, transport costs, goods purchased for your inventory and even services like accountancy. Any and all VAT paid on expenses such as these can be claimed back on your VAT return.
That’s why it’s vital you keep your business and personal expenses separate. We recommend creating a separate bank account for your business, as well as keeping diligent records, so there’s no confusion over what you purchased for yourself and what was a business expense. This way, you’ll always claim back what’s owed to you.
You’re not accounting for seller fees
You’re all too familiar with the many fees Amazon charges sellers: referral fees, FBA or Fulfilment by Amazon fees, long-term storage fees, monthly costs for selling plans and more.
The good news is, all these fees are considered business expenses you can claim VAT back on!
It’s also important you remember to deduct these fees from your total revenue. Just because you sold a product for £X doesn’t mean you made £X in profit if Amazon is taking a piece of that pie (like 8-15% in referral fees!) Keep track of all the seller fees you’re charged by various e-commerce hubs to make sure you’re only paying tax on your business’ actual turnover.
You’re not setting the proper VAT rates on each of your products
There are currently three rates of VAT in the UK:
- The standard rate of 20% applies to most goods and services
- The reduced rate of 5% applies to certain goods and services, including health and welfare products
- The zero-rate of (you guessed it) 0% applies to most foods, children’s clothing and footwear, and other health and welfare products like sanitary pads
There are also some goods and services that are outside the scope of the UK VAT system and which don’t have any VAT rate applied to them. You can find a pretty exhaustive list of goods and services and their relevant VAT rates on the UK government website.
Despite these variations, most ecommerce platforms will automatically assume any product sold has a VAT rate of 20% unless you manually input the correct rate when adding your inventory to the site. Be sure you’re not skipping this vital step and unnecessarily overpaying on VAT.
You’re adding UK VAT to goods sold for under €150 to EU consumers
Amazon and Ebay both act as a VAT collector for the EU. This means they automatically deduct EU VAT on any goods with an intrinsic value of up to €150 sold to consumers in the EU.
If you’ve already paid EU VAT, make sure you’re not then applying UK VAT to the same sale amount and paying VAT twice!
If you sell goods with an intrinsic value of over €150 to EU consumers, then you may have to register for VAT in the EU. There is definitely a balance to be struck when deciding if this is worth doing or whether to restrict sales.
You’re relying on Amazon reports for your VAT calculations
Misapplying VAT rates isn’t the only mistake Amazon can make. Another common way of overpaying VAT is by solely relying on Amazon reports.
If you’re using Amazon’s VAT Calculation Service, you’ll have access to an Additional VAT Report auto-generated once a month using data provided in the Product Tax Files.
Unfortunately, VAT is incredibly complex, and all the intricacies, variations and exemptions can’t always be handled by an automated report generator. Amazon themselves suggest you review their VAT Transaction Report each month to confirm the details, but how can you confirm details if you don’t know the answers yourself?
We recommend using A2X to solve this problem. This software forms a link between ecommerce platforms, like Amazon, Shopify and Ebay, and your accounting system, giving you automated, accurate and reconciled numbers.
Like any system, the quality of your setup will impact the quality of your results, so we recommend getting a professional with experience in the ecommerce world (like Tailored) to help you. Our Financial Review uncovers any inconsistencies or errors in your books, including areas where you might be over (or under!) paying VAT. After the review, we provide you with a prioritised list of next steps to help you start tailoring your business to your lifestyle.
Get in control of your own path. Book your Financial Review today.