Foreign sellers who wish to approach the UK market these days are faced with the immediate requirement from HMRC (British tax authority) to register for VAT tax. Most of them fall under the category of NETPs (non-established taxable persons). This article deals with commons questions with regards to VAT for Amazon sellers.
Although we know that the US does not have this concept in their tax system, Value Added Tax can be called the equivalent of the sales tax in the US. Like in the US, businesses are responsible for collecting this tax from the final buyer and paying over to the tax authority. In the UK the tax percentage does not vary and is the same 20% for all areas of the UK. It is the seller’s responsibility to charge VAT on all their sales.
As opposed to resident businesses that have £85,000 registration threshold before they should register for VAT by law, all NETPs must obtain a VAT number as soon as they start making taxable supplies in the UK or intend to do so within the next 30 days’ period. Thus, for them there are no triggers, thresholds or any other conditions that have to be met before they start complying with VAT Regulation. The recent changes of how HMRC control and regulate the sales of NETPs via on-line portals have created an increased demand for VAT registration services. Amazon and EBay have been made responsible to make sure that all sellers have got VAT registration before they register their accounts with them.
Businesses can apply for registration via HMRC portal. Most traders from China, New Zealand, Canada and US face the problems of big time gaps and distances. HMRC tend to communicate with applicants by mail which may take weeks to get through to their addresses. They place deadlines to receive additional evidence questionnaires back. A lot of clients complained that they cannot meet deadlines due to receiving their correspondence too late. The best way to avoid such problems would be to place your VAT compliance procedures with an experienced professional (tax agent in the UK) who will guide you through all the stages and help avoid all ‘stumbling stones.’
The standard rate of VAT applicable in most cases is 20% and will be charged on the sales price of all items. The reduced rate of 5% is levied on such goods as children’s card seats, sanitary products, fuel and energy saving measures. The zero rate VAT applies to
- most food
- books*
- newspapers
- safety equipment
- children’s footwear
- children’s clothes
*Audio books and CD-ROMs are charged at standard rate.
Zero VAT is not charged but should be shown in the VAT invoice as zero. Such supplies are included in the VAT return as taxable supplies. Technically, it is a zero tax and the business making zero rated supplies can still register for VAT and recover VAT on their costs and overheads through their VAT returns.
Exempt VAT supplies are outside the VAT regime. The business making exempt supplies cannot register for VAT and cannot recover the VAT they incur on their costs and fees.
Amazon sellers in most cases are not likely to make exempt supplies. Instead, a lot of sales may be zero-rated which does not provide them any exemption from VAT registration.
Apart from pros and cons of using Amazon Fulfillment Facilities versus third-party fulfillment centers which is not within the scope of this article, as far as VAT is concerned, the major difference is the fact that FBA sellers do not get charged VAT on their fees and services provided the seller has given them their VAT number. The third-party fulfillment centers in the UK will charge the seller 20% on top of their prices which will be refunded as the input VAT through VAT return filing process.
Sellers do not have to worry about keeping track of various rates as Amazon UK will automatically apply the relevant rate as applicable. Sellers will be able to see the breakdown of the selling price and the VAT element for each selling entry in their statements.
As soon as the VAT Registration has been received and out of the way, the next step will be to start filing VAT returns on a quarterly basis. The filing periods do not necessary coincide with calendar quarters. The first period may be shorter or longer than the standard 3 months. The output VAT (VAT received through selling product and services) is offset against the input VAT (VAT paid for product and services). If the output VAT is bigger, the difference should be paid over to HMRC no later than the filing deadline (the 7th of the second month following the end of the filing period). If the input VAT is bigger, the difference is refunded to the seller within 20 days after the return is filed.
Any business filing VAT returns should be prepared for VAT inspections. This especially applies to businesses who start filing returns with VAT refunds or whose VAT returns patterns have changed for some reason. These procedures are standard and apply to all VAT registered businesses in the UK irrespectively of the size, nature of business or the way they trade in the UK.
VAT officers can request financial records to get the evidence and make sure the business is paying or reclaiming the right amount of VAT. VAT inspections can be daunting and sometimes require help of an accountant or a VAT advisor to make sure inspectors are satisfied with all the evidence you provide. You should not be alarmed too much if at the beginning, a tax inspector calls or writes to you giving you a notice to prepare for their visit. As long as you can give them the evidence of all transactions that have been processed and paid over everything you owe, there is little to worry about. If you employ a tax agent in the UK, they will be the first point of contact and will handle procedures on your behalf.
For over four decades the VAT rules in the UK have been governed by the EU VAT Directive. It is predicted that the post-Brexit UK VAT system will mirror what has been used before. It is also possible that the UK not tied by the EU Directive decide to overturn the VAT tax system. This may make possible the following changes:
- changes of VAT tax rates
- adding or removal of particular supplies of goods and services from or to the zero-rate, reduced rate or exemption schedules
- introduction of UK place of supply rules.
In terms of Customs formalities, relating to movement of goods between the UK and EU, it is unlikely, that there will be significant changes in the short-term. However, in the post-Brexit the UK will be outside the Customs Union which will bring the reintroduction of Customs controls leading to more time and cost implications for businesses.
Tariffs are not the only area that is likely to be affected. Non-tariff barriers may even be more problematic. Once the UK is outside the UK, other EU states will be free to increase the non-tariff barriers to UK goods. Likewise, if the UK decide to introduce their own standards, this will have a tremendous impact on businesses as they will have to meet both the UK and EU standards for sales.
In reality, no one knows what the true impact Brexit will have on businesses. However, this does not mean one should not start preparing and planning for it now. If your business is registered for VAT in the UK, and is involved in cross-border trade with other EU counties, we recommend to consider the impact assessment as soon as possible.
Spiria Limited has got a dedicated team of VAT consultants who can help you with all aspects of your VAT registration and post-registration filing procedures. Please get in contact if you would like further information.
Senior Partner
Lana Johnson