The Ultimate VAT Guide for Amazon Sellers in UK and Europe
If you’re an Amazon seller trading into or within the UK and Europe, you’ll no doubt have noticed a lot of VAT changes over the last few years.
First as a result of Brexit, and most recently, the 2021 Ecommerce VAT Package, which shifted the goalposts in a few different ways.
In this guide, we’ll break down what you need to know about VAT, the current regulations, the options for those filing, and creating your own Amazon VAT strategy.
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Table of Contents
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An introduction to VAT
Like sales tax and GST, VAT is paid by consumers.
Unlike those though, it is added at each stage of the supply chain.
According to Claire Taylor, CEO of SimplyVAT.com, VAT (Value Added Tax) gets charged whenever “value” is added in the supply chain. E.g., when a supplier of raw materials sells goods to a manufacturer, VAT is added to the sale. VAT is added once again on the sale from the manufacturer to the wholesaler, and from the wholesaler to the retailer, and from the retailer to the consumer.
VAT is designed to be paid by the end-user, although it is collected and managed by the companies that make up the supply chain, from the manufacturer to the retailer.
How does VAT work?
If a business is required to collect VAT, the process goes like this:
- For companies buying goods or services, they will pay VAT on top of the purchase price. The supplier will need to remit that VAT to its relevant tax authority.
- If a customer buys goods or services from a company, they will also pay VAT on the purchase price. The company will remit the VAT to its relevant tax authority.
- The tax authorities will set out how often entities need to file the VAT they have collected. This is usually monthly or quarterly, and depending on where the company operates, they might need to do this with more than one tax authority.
- VAT amounts can sometimes be owed or be refunded, depending on whether the records were accurate.
For example: If a company in the UK charges £2000 of VAT on products sold, but pays £1000 of VAT on purchases made, then they would still owe HMRC £1000 in VAT.
VAT passes through the collector.
This is a simplified example. In the case of ecommerce in particular, things can get very complicated with different requirements across Europe.
The latest changes, however, do seek to make things more simple. It used to be the case that every EU member state had its own filing process and thresholds for VAT eligibility. This is no longer the case.
But we’ll get to that.
VAT for distance selling
Distance selling happens whenever goods or services are sold without any face-to-face contact between the supplier and the buyer.
Ecommerce has changed the way that we buy and sell. As a result, it’s easier than ever for people to trade with companies that are located in other countries. While this gives end users a wider range of options to choose from, it becomes much harder for tax agencies to collect VAT on the money spent in their economy:
- On one hand, if they were to collect VAT from every company that sells goods to people in their country, it would be almost impossible to administer.
- On the other hand, if they didn’t collect VAT from foreign suppliers, local companies would be disadvantaged (because they pay VAT when their competitors don’t), and less tax would be collected for public spending.
To ensure that collecting VAT is practically manageable for companies that do business in the EU, and to ensure that the vast majority of VAT is collected, governments have distance-selling thresholds in place.
When your business sells more than the threshold in any particular country, you are required to register locally for VAT and start filing returns.
For example: Following the 2021 changes in Europe, all member states now have the same distance-selling threshold of €10,000.
If your business exceeds this revenue threshold in any EU country, say Germany, for argument’s sake, you are obligated to begin collecting and remitting VAT there.
This is how tax collection works according to distance-selling thresholds:
- You are required to pay VAT only to your local tax authority until you sell €10,000 to customers in Germany within a tax year.
- When your sales exceed €10,000 to customers in Germany, or when you expect your sales to exceed €10,000 in the next 30 days, you also need to register for German VAT and file returns on a regular basis.
- Before you meet the distance selling threshold, you charge VAT at your local rate (i.e.: 20% in the UK) and pay it to your local tax agency.
- Once you have registered for VAT in the destination country, you need to collect VAT at the destination country’s rate (i.e: 19% in Germany) and pay it to their tax agency.
Thresholds and VAT rates by country
Member states of the EU are governed by a broad set of VAT rules and are required to set a minimum VAT rate, and up to two reduced rates within set parameters. Since April 2022, EU states have had more control over their own rates.
To make things easier both for sellers and for tax authorities, all EU member states now have the same distance-selling threshold.
The UK, which is no longer a member of Europe, has its own threshold.
In this table, you can find the VAT standard rates for each country, its thresholds for sellers and links to their official pages for more information.
These were correct as of insert update date. Please see the linked official pages for the most current rates.
|Country||VAT Rate*||Resident VAT threshold||Distance-selling VAT threshold|
|Czech Republic||21%||CZK 1 million||€10,000|
|France||20%||€86,900 (goods) €34,600 (services)||€10,000|
|Hungary||27%||HUF 8.8 million||€10,000|
|Ireland||23%||€75,000 (goods) €37,500 (services)||€10,000|
|Malta||18%||€35,000 / €24,000 / €14,000||€10,000|
|Norway (non-EU)||25%||NOK 50,000||N/A|
|Switzerland (non-EU)||7.7%||CHF 100,000||N/A|
|United Kingdom (non-EU)||20%||£85,000||-|
*The “standard rate” is without any exemptions or reductions applied.
Sources: Avalara (1), Avalara (2), Europe Taxation Resource, National Customs Websites.
When you’re just getting started, you might decide to see how your sales are performing before applying for VAT registration.
If your business is located in the country where you are registering for VAT, then you may be able to sell products without needing to register for VAT until you reach a certain level of turnover.
VAT for selling internationally
If you’re based in the UK or Europe and selling internationally, the way you deal with VAT will be different.
It will also depend on your circumstances.
You can see some example scenarios below:
- If you are supplying end consumers in other EU countries, don’t have a physical presence (i.e: no inventory or offices) and you haven’t passed the distance selling threshold for the destination country, you simply collect VAT at your local tax rate (if you are registered) and pay it to your local collections agency.
- When you pass the distance selling threshold for a region or begin storing inventory in a country, you are then required to register for VAT in that jurisdiction, charge VAT at the destination country’s rate (when you do business with customers in that country), and pay the taxes collected to the tax department in the destination country.
- If you are registered for VAT in the UK or EU, but you are exporting products to customers outside of the EU, taxes are charged at the customer’s end. In other words, you don’t charge any VAT in your country, but when it’s received by customs, the destination country might pass on sales taxes (and import tariffs) to the customer.
- If you are not located in the UK or EU (or registered for VAT), and are selling products to consumers in the UK or EU, you don’t charge any VAT as it is paid on the buyer’s end. For example, if you sold a product from your Amazon US account to a customer in France, the VAT would be charged on arrival (not by you).
It’s important to note that this is a simplified explanation to demonstrate how VAT works based on the structure that many Amazon sellers operate with.
Your individual situation might be different, so make sure you get tailored advice from your accountant.
Need an ecommerce accountant well-versed in EU and UK VAT requirements? Find one of the A2X Accountant Directory.
What is an EORI number?
An Economic Operators Registration and Identification number (EORI number) is a European Union registration and identification number for businesses that import or export of goods into or out of the EU.
If you’re planning to import products into the UK or EU, you’ll need to get an EORI number.
This number is used by customs to track and identify who is importing cargo, and register customs information to the importer.
If you import a shipment of products without having an EORI number, your merchandise will be held at the border and additional storage fees may be charged until you provide this number.
How do I get an EORI number?
The process of applying for an EORI number is simple and straightforward. While it differs for each country, in the UK it takes around 5-10 minutes to apply.
To get your EORI number, you’ll need to:
- Visit the customs website of the country where you are applying for an EORI number.
- Navigate to the part of the website where you can apply for an EORI number (or alternatively find the right page by searching ‘apply for EORI number + [the country where you want to apply] into Google).
- Gather the information that you need to apply. These requirements will be on your customs authority’s website. In the UK, for example, you’ll need some or all of these documents: VAT number and effective date of registration, national insurance number (if you’re an individual or sole trader), unique taxpayer reference (UTR), business start date and standard industrial classification (SIC) code, and your government gateway user ID and password.
- Start the application process and provide the information required.
- Wait for your EORI number to come through. This normally happens within 48 hours, but it can sometimes take up to a week if the government needs to find out more information.
Registering for VAT and filing returns
Now that we have a clearer idea of what VAT actually is, let’s look at what it takes to register for VAT and become compliant.
The pros and cons of registering for VAT
If you’re currently considering whether to register for VAT, then you might be wondering what life is like when you’re fully set up.
There are a few things that change in your business (such as charging VAT to customers and filing regular returns), but otherwise, it’s simply business as usual.
Here are some of the pros and cons of being VAT registered.
- For smaller businesses, being VAT registered can give you the presence of being larger and more established, helping you to be taken seriously by larger companies.
- Once you are registered for VAT in a jurisdiction, you don’t need to worry about going over the registration threshold. Instead, you can focus on growing your business instead of minimizing tax.
- You can claim back the VAT paid on tax-deductible expenses.
- If structured correctly, VAT can help your cash flow (you hold onto VAT collected for a few months before paying it to the government).
- Once you are registered for VAT, you need to file returns on a regular basis.
- You might decide to use apps like Quaderno, or an accountant to help manage your VAT filings. This becomes an ongoing expense for your business.
- If you try to do it yourself and get it wrong (or pay your bill late) there are penalty fees and interest.
- Being VAT compliant does make your business more complex, and is another responsibility to manage.
Can you sell on Amazon without registering for VAT in the EU or UK?
Yes, you can sell on Amazon without registering for VAT, but whether or not you should depends on where you’re based.
If you’re based in an EU country or the UK and sell all your products within that country, you can wait until you’ve crossed your resident VAT threshold before registering there. You can also voluntarily register for VAT before reaching the threshold.
For example, if you’re based in the UK and selling within the UK, you can have a turnover of up to £85,000 before registering for VAT, but you could also voluntarily register before this.
If you’re based internationally but have stock stored in the EU/UK and are selling in that country, you must register for VAT before sending your first shipment of products to that EU country or the UK. Don’t be fooled by VAT thresholds—they are only for businesses based in the country they’re operating from.
For example, if you’re incorporated in the United States and decide to expand and fulfill products from the UK, you must register for VAT before sending your first shipment of products to the UK.
Where should I register for VAT first?
Deciding where (and when) to register for VAT should be part of your overall market entry strategy. Once you hold stock in a country, you need to be VAT compliant—so make sure to plan out your registrations accordingly.
In general, we recommend beginning by registering in one of the following countries first:
- Your home country: if you live in a particular EU country (and speak the language), start there. This will allow you to begin trading at home without needing to learn about a new country’s tax systems.
- United Kingdom: if you’re entering the European region from another part of the world, the UK is usually the best option for English-speaking sellers. This is because VAT registrations and returns are based in the local language, and you can file VAT returns every three months in the UK.
What information do I need to provide to register for VAT?
To register for VAT in the UK, you’ll need to have access to these documents and information:
- Your national insurance number or ’tax identifier’—your unique taxpayer reference.
- Incorporation details from your certificate of incorporation.
- Details of all associated businesses within the last two years.
- Business bank account details.
- If you have acquired this business, you’ll need details of the business that has been transferred.
You’ll also need to have a login for HMRC’s online services to register in the UK. Different countries can often have slightly different variations to the UK rules.
For more details about what information is required to register, head to your country’s tax department website (which you can find in the table above) or ask your accountant.
Lead times on VAT applications
Depending on which country you are registering for VAT in, and the method that you use to apply (manual or online), your application may take anywhere from a few working days to a couple of months. In the UK, HMRC aims to process applications within 10 working days. However, it often takes longer than this.
So what do you do during the time between registering and when your VAT number is issued?
While you cannot charge VAT until you have received your number, it’s important to keep all of your invoices, as the VAT on these bills can be claimed back at a later date.
Instead of adding VAT to your invoices, it is recommended that businesses should increase the amount they charge by the necessary VAT rate (e.g., 20%) and explain to clients and customers that you’ll reissue the invoices with the VAT-able amount after receiving your VAT number.
For Amazon sellers, this is not necessarily relevant, so you’ll be better off trading as you were before registering for VAT, but simply claiming it back on expenses.
During this interim period, you should actually pay less tax because you’re able to claim back VAT on expenses, but don’t need to charge VAT on income.
Ways to file VAT returns
You have a few options when it comes to the method of filing your VAT. Amazon may actually handle this for you, so in the cases where it doesn’t, you can self-file, outsource it or opt for Amazon’s internal VAT services.
Let’s explore these.
Is Amazon responsible for your VAT collection?
As part of the 2021 Ecommerce VAT package, new marketplace facilitator obligations were put in place.
Now, the platforms themselves may be responsible for collecting and remitting VAT on your behalf.
In these instances, you don’t need to do anything. Buyers will see the VAT added at checkout, and Amazon will collect and manage it for you.
There are no set rules that say you need to work with an accountant to file VAT returns. If you have the time available, it is relatively easy to look after your VAT returns in-house if you’re just selling in one marketplace.
This can be done by visiting the online portal of your country’s tax department, using the new OSS or IOSS systems, submitting a manual form or sending the information directly from your cloud accounting system.
OSS and IOSS
The 2021 Ecommerce VAT package introduced new ways to file your VAT.
The One-Stop Shop (OSS) and Import One-Stop Shop (IOSS) systems are designed for sellers that have nexus with more than one EU country to be able to file and remit their VAT in one place.
OSS is for selling within the EU, and IOSS is for selling into the EU.
Sellers file one return, and the systems handle the rest.
There are some restrictions as to consignment values for IOSS, as well as which countries can use it, so read up on the countries you have nexus with and their unique circumstances.
Registering and filing with each member state
If you don’t use the systems above, then you’ll need to register and file with each EU member state individually.
This can of course, be done, but may prove more time-consuming and potentially error-prone.
Benefits of self-filing VAT returns:
- It’s free: you save the cost of paying an accountant or bookkeeping agency to do it for you.
- Easy to automate: with software like Quaderno and HelloTax, you can cut down the amount of time it takes to file VAT returns and make it much simpler to manage.
- Gives you more information to work with: by doing VAT returns yourself, you will have a deeper understanding of the financials and cashflows within your business.
Drawbacks of self-filing VAT returns:
- Can be time-consuming - looking after tax returns yourself takes your focus away from other areas of the business that could generate more income.
- Potential for errors - tax laws are always changing, and the rules vary for each country. By working with a professional service provider, you can rest easy knowing that you’re much more likely to be on the right side of the law.
- You might pay more tax - companies that look after VAT returns on a regular basis tend to have a deep understanding of ways to pay less tax, and can help you to stay on top of payments and obligations.
Working with professionals
Tax agencies can manage the VAT compliance side of your business for you. Many Amazon sellers opt for working with the experts because it simplifies their job and gives them the space to focus on growth rather than management.
Benefits of working with VAT experts
- Saves you time: seriously, who really enjoys filing VAT returns? By outsourcing your tax burdens to a professional, you can spend more time focusing on other areas of your business.
- Ensures accuracy: as we mentioned before, tax laws are in a constant state of flux and each country has its own set of regulations. By working with the experts, you can feel confident that your returns are being done in accordance with the latest rules.
- No issues with language barriers: VAT returns generally need to be done in the local language of the country. As you expand into new EU territories, there will eventually be a need for filing tax returns in a different language. Many tax agencies have offices or partners in each country, which means that they can look after all of your VAT requirements with just one relationship.
Drawbacks of working with VAT experts
- It costs money: as with any professional service, there is a cost to getting your work done, and accountants are one of the more expensive groups of consultants.
Using VAT Services on Amazon
If most of your business is done through the Amazon platform, why not take advantage of VAT Services on Amazon to look after registration, calculation and filing on your behalf?
VAT Service on Amazon lets sellers manage UK and EU VAT registration and filing obligations, with the help of tax service providers. It can be used to ensure VAT compliance in:
- The UK
- Czech Republic
What does VAT Services on Amazon cost?
Amazon’s offering lets you register for VAT in each country for a one-time €50 fee that includes:
- VAT Registration
- EORI in UK
- EORI in one EU4 country
- Sworn Translation service
Your recurring fees start at €33.30 per month for one country for VAT filings. The monthly fees rise as you add filing countries, topping out at €142 per month for seven countries. This fees includes:
- VAT returns as required by subscribed country
- Intrastat reporting
- EC Sales List reporting
- Locally required reporting, such as Spesometro in Italy
- UK and European EORI number request
- Manage your VAT from Seller Central through Amazon technology
- Dedicated customer support
If you require fiscal representation, you’ll pay an additional €21 per month for each country needed.
Benefits of using Amazon’s VAT service
- Keep it all in one place: by using VAT Services on Amazon, you can look after your taxes without consulting with accounting firms.
- It’s scalable: as you grow, you’ll want to enter new marketplaces and this means more VAT compliance. With Amazon’s solution, it doesn’t take much more work to file a larger amount of transactions in the same return.
Drawbacks of using Amazon’s VAT service
- It costs money: to use VAT Services on Amazon for one year it costs at least €399, plus additional costs if you use the VAT registration option, require fiscal representation, or file in more than one country.
- Sharing confidential information: some sellers are sceptical about handing their sales data from other channels over to Amazon. After all, it’s not uncommon for Amazon to use their mountains of information to decide which products to sell and who to compete with.
How often do I need to file VAT returns?
Each country has different rules around how often you need to file VAT returns. However, it is generally:
- Either monthly, quarterly, bi-annually or annually, and
- Based on your turnover.
In the UK, for example, the standard filing frequency is quarterly. However, if your VAT liability exceeds £2.3 million, you’ll need to submit returns monthly. Conversely, if you have a taxable turnover of less than £1.35 million, you can request to file returns annually.
For more information on VAT rules in the UK, check out this guide.
Other Things to Know About VAT Registration and Filing
Once I’ve submitted my VAT return, how long do I have to pay the bill?
As with most areas of VAT law, the rules are different for each UK or EU country. Therefore, it’s important to check your due dates on a case-by-case basis.
In the United Kingdom, payment for monthly and quarterly returns is required within one calendar month and seven days from the end of the VAT period.
Late fees for delayed payment
Each country sets their own rules on the consequences of filing or paying your VAT returns late. The best way to avoid late fees is to simply submit your returns and pay your taxes on time.
In the United Kingdom, HMRC records your payment as a ‘default’ if full payment of your VAT return hasn’t reached their account by the deadline.
If you default on a payment, you will enter a 12 month ‘surcharge period’. During this time, there are penalties for not complying with the rules, and the costs get larger every time you miss a payment.
In addition to late payment penalties, there are also added costs for submitting inaccurate returns as a result of carelessness or tax avoidance, receiving inaccurate information from HMRC and not correcting them, or submitting a paper tax return without prior approval.
For more information around penalties in the UK, head to this page.
Making Tax Digital (MTD)
Making Tax Digital (MTD) is a major change to the administration of the UK tax system. that Her Majesty’s Revenue and Customers (HMRC) launched in April 2019. MTD is another step taken by HMRC to integrate and digitalise tax submissions.
This scheme is designed to make the process of submitting VAT returns more efficient and effective, and to reduce the amount of mispayment errors due to people accidentally submitting inaccurate tax returns.
The vast majority of VAT-registered businesses with a taxable turnover above the VAT threshold (£85,000) are now required to follow the Making Tax Digital rules by keeping digital records and using software to submit their VAT returns.
To become compliant with the MTD regulations, you need to:
- Check if and when you have to follow the rules.
- Get the right software (Xero and QuickBooks Online are both compatible).
- Sign up for Making Tax Digital for VAT.
- Authorize your software.
One of the main questions that Amazon (and Shopify) sellers often ask is whether they need to report transactions on a daily basis, as is stipulated in the rules. HMRC acknowledges the difficulties involved in trying to clarify daily sales where a third party provides information in settlement periods. Amazon and Shopify both provide their daily sales data in settlement periods.
Therefore, our understanding is that it’s okay to report sales on a settlement basis in your VAT returns. However, if you are unsure on how this applies to you, it’s worth asking your accountant.
Amazon fulfillment options for selling in the UK and Europe
There are a range of ways to store, manage and send your inventory to customers when selling on Amazon. These options include:
Fulfillment by Merchant (FBM)
This involves using either your home, your company’s warehouse or a non-Amazon third-party logistics service for fulfillment.
FBM is generally best suited to individuals that are just trying out Amazon and ‘dipping their toes in the water’ by fulfilling orders from home and companies that already have established warehouses and infrastructure which can be used instead of Amazon’s FBA facilities.
Some sellers opt to keep their best selling products in FBA warehouses, and fulfill the slower moving items (and bulky items) from another source.
The benefits of using FBM are that it’s usually cheaper than Amazon’s service, you have more control over how your stock is managed, and it can be more efficient for brands that sell through multiple channels.
However, if you don’t use Amazon’s warehouses, you are less likely to win the buy box or appear at the top of organic search results, and Amazon imposes a range of other seller performance metrics that you need to maintain.
The other options that we take a look at below are all based on using Amazon’s logistics network for your warehousing and fulfillment.
European Fulfillment Network (EFN)
The European Fulfilment Network (EFN) lets sellers with an Amazon Europe Marketplaces account, and who are also registered for Fulfilment by Amazon, store their inventory in their local fulfillment center, and fulfill orders coming from other European marketplaces from the same local inventory pool. This maximizes the control and flexibility that sellers have over their inventory.
By using the European Fulfilment Network, you can list your products on local marketplaces throughout Europe and send orders from your country (rather than needing to hold stock in every country where you list products for sale).
Unlike FBA export, when you use the EFN, your product offerings will show up in local marketplace searches.
The key benefit of using the EFN is that you can sell your products in all of the main Amazon marketplaces without needing to immediately register for VAT in each country or hold extra stock to cover a larger number of warehouses. It’s great for smaller sellers and those who are just getting started.
However, when you use the EFN, you are less likely to win the buy box as a seller with local inventory. This is because Amazon tends to show the offers that are closest to customers and will take the shortest amount of time to be delivered.
Fulfilling orders from one country also exposes you to VAT distance selling thresholds. In the early stages of your business, this will probably not be an issue. However, it’s important to keep an eye on your sales in each territory so that you know when to register.
Using EFN to export your goods across borders in Europe also exposes you to extra fulfilment fees, which aren’t incurred if you use Pan-EU FBA.
More information on the fee structure can be found here.
Multi-Country Inventory (MCI)
As the name suggests, MCI involves holding your stock in multiple countries. For growing Amazon sellers, this is often a suitable intermediate stage between storing items throughout Europe with Pan EU FBA and fulfilling from one country with EFN.
By using MCI, you can enjoy the following benefits:
- Customers receive faster, local delivery when your products are located in fulfillment centers close to where they live.
- Your listings qualify for speedy shipping options such as Amazon Price 1-day delivery, free delivery and next-day delivery, where available.
- You save money on transportation costs when you send inventory in bulk to local fulfillment centers rather than dispatching individual orders across borders.
You can also combine the use of MCI and EFN to get the best of both worlds - fulfilling orders from local inventory until you run out, then using the EFN warehouse for any shipments until your stock is replenished.
The downsides of using MCI are that you’ll need to hold more stock overall (in order to have enough inventory in every country), and you’ll need to be VAT compliant in every country where you have a physical presence.
Another variation of MCI is the Central European Programme (CEP). This involves storing your inventory in Germany, Poland and the Czech Republic. By strategically holding stock in these three countries, your deliveries can reach customers throughout Europe in a timely manner.
For more information about multi-country inventory, check out this article.
Pan European FBA
Once your business reaches a stage where it makes sense to expand your physical presence throughout Europe, you’ll probably be considering whether to use Pan EU FBA.
This programme is perfect if you have already passed the distance selling in your main markets and have established a customer base throughout Europe.
With Pan EU FBA, you simply send your goods to one Amazon warehouse, and then they use predictive technology to place your inventory in the warehouses where they forecast future sales are most likely to come from.
The benefits of using Pan EU FBA are that you can enjoy:
- Lower fulfillment costs.
- Less time spent managing the amount of inventory that you need to hold in each location.
- Eligibility for Prime throughout all of Amazon’s European marketplaces.
- Faster delivery due to stock being in local warehouses24/7 Amazon customer support in each marketplace, in the local language so that you don’t need to worry about it.
However, using Pan EU FBA means you need to have VAT registrations in every country where your stock is held, and file regular returns.
This adds complexity and costs to your business, but it also means that your operations are ready for ongoing growth without needing to add further VAT registrations or be concerned with distance selling thresholds.
Deciding which option is best for your business
The following questions will help you to get a better idea of which fulfilment option will be best for your business (right now):
- Where are you currently VAT registered? If you’re already paying to be compliant in a country, you might as well store inventory there as well.
- How close are you to exceeding the distance selling thresholds in countries where you are not registered? By forecasting your upcoming sales revenue, you can get a better idea of when you’ll need to register for VAT in the near future, and therefore, when it makes sense to store inventory there.
- Have you translated and localized your product listings for European marketplaces that use different languages? If not, then you’ll want to do this before even listing your products for sale on another country’s marketplace.
- Do you already have a physical presence in the UK or Europe, or are you entering the region from another part of the world? If you live in the UK or an EU country, you can start selling up to a certain threshold in your home country before even needing to register for VAT.
- Which languages do you speak? If your native language is English, you’ll probably be better off starting in the UK.
- What are your growth aspirations? Do you just want to sell enough products to earn a passive income, or are you planning to go big? If you’re in the latter category, then it’s worth creating a market entry (and VAT registration) plan to map out your international expansion journey from the outset.
- How much money can you afford to invest in this business? If you’re planning to grow it into a sizeable enterprise, and you have money to spend, it might make sense for you to enter Pan EU FBA sooner rather than later. However, if you’re bootstrapping on a tight budget, a more conservative approach may be better suited to your situation.
The fulfillment solution that’s best for your business is influenced by a range of factors. Therefore, it’s important to create a VAT strategy and connect this with your plan for when to hold inventory in each marketplace.
Further below, we take a closer look at what this means for you, and how to create a VAT strategy.
Calculating VAT and customs duties when importing from China
If you’re based outside of the EU or UK and planning to import products to sell in the EU or UK, when those products are imported you will need to pay both VAT and import duties on the products. So how much will you need to pay? Here’s a breakdown on what these payments are and how to calculate them.
Customs duties: This is a tax charged on all products being brought into the EU or UK. Its purpose is to bring the cost of imported goods up to the same cost of goods produced within the EU and UK, to keep competition fair. Customs duties are calculated as a percentage of the cost, insurance, and freight (CIF) value.
First, you need to find the trade tariff for the specific product/s you’re importing. Ask your manufacturer for the commodities code to make this process easier. For example, we want to import 600 T-shirts to the UK. Using the government Trade Tariff website we discover the trade tariff for clothing is 12%.
To calculate your CIF value, you need to add the value of your goods + shipping + insurance = CIF value. This should be done in pounds, not USD, so if you have paid dollars make sure you work out what that comes to in GBP using the HMRC exchange rate. Here’s how you would calculate the CIF value using our T-shirt example: £3000 (value of goods) + £900 (shipping) + £300 (insurance) = £4200.
Finally, your duties payable = CIF value x duties rate. In our example, this is 4200 x 0.12 = 504, so we owe £504 induties.
VAT: As we know, this is a sales tax charged on all products bought in the EU or UK. VAT is calculated at different percentage rates depending on the country you’re importing to. In our example, we’re importing our T-shirts to the UK, so VAT is calculated at 20% of the total value (total value = value of goods + shipping + insurance + duties).
The total value of our T-shirts is £3000 + £900 + £300 + £504 = £4704. VAT is 20% of the total value, so £4704 x 0.20 = £940.80.
Finally, to calculate our total duties and VAT payable, the two figures must be added. The total duties and VAT payable on our imported T-shirts is £504 + £940.80 = £1444.80.
Using this figure + the original CIF value, you can also figure out your total landed costs of goods. In our example, this would be £4200 + £1444.80 = £5644.80 or £9.41 per T-shirt.
Creating a VAT strategy
It can be tempting to simply start selling on Amazon without giving much consideration to your mid- and long-term plans and how you will handle taxes as you grow.
Although there are many uncertainties in business and things can change often, if we don’t have a strategy or plan, then it’s hard to know which direction to take and to know whether we are succeeding or failing.
Creating a VAT strategy is a relatively simple activity, but it does involve thinking ahead and understanding the measures that will need to be taken in the short, medium and long term future to establish your enterprise.
Why you need to create a VAT strategy
When it comes to VAT, getting it wrong can be quite costly. If you pass a distance selling threshold or store inventory in a country but forget to register for VAT, you may need to pay penalty fees.
However, creating a VAT strategy is much more than just avoiding fines. It’s about developing a roadmap that gives you clarity over what needs to take place to move your business to the next level.
Things to keep in mind when planning out your approach to managing VAT
A sound VAT strategy provides context around:
- When to start holding inventory in each country.
- When to register for VAT in each country (or via the OSS/IOSS systems).
- Whether you’re going to use Amazon’s filing service, work with a professional or do it yourself.
- Who you are going to work with to make it happen.
- Apps and tools that are being used to make your life easier.
- When you plan to review your sales in each country and determine whether you’re about to meet a distance selling threshold.
While it can be difficult to put a date or time on when you’re going to meet a distance selling threshold or start using a tool, you can connect your plan to future revenue values.
For example: You might say ‘when we sell €10,000 in France, we will officially enter that market by registering for VAT, working with a French-speaking tax professional and using the local FBA warehouses to store our stock’, or ‘when we are 10% below a distance selling threshold, we will initiate our VAT strategy in that market.’
By connecting your VAT strategy to revenue or profit levels in each region, you can make it part of your sales forecast to ensure that it is tied to your overall business plan.
In addition to this, here are a few other things to keep in mind when formulating your VAT strategy:
- Check if Amazon is collecting VAT on your behalf and make sure that your tax rates are set up accordingly.
- When you register for VAT in a country, it’s usually worth also using the local FBA warehouses to get your products to customers faster and enjoy the other benefits that Amazon offers.
- Consider the benefits versus costs of entering each country, and how this fits into your market plan.
- It’s best to register for VAT in the largest (and strictest) countries first. For example, if you are selling €10,000/month in Germany and €500/month in Spain, it makes sense to register in Germany first.
- Unless you want to spend lots of time filing VAT returns, plan to hire professional help from the outset. By working with local accountants, you can relax knowing that they speak the language, understand the country’s tax laws in detail, can ensure that you receive the most tax benefits, and can grow with your business.
- When you register for VAT in a country, it’s a good idea to make a note of the filing deadlines in your calendar to ensure that you don’t miss any payments or returns.
- Make sure you get it right the first time around—don’t let your virtual assistants do tax returns. The potential consequences of messing it up are just too expensive.
5 VAT mistakes for sellers in the UK and Europe to avoid
You’re off to a great start if you’ve registered for VAT and have a solid VAT strategy. But, as you’ll know by now, VAT is a complex topic. To make sure you’re not making avoidable mistakes, here are six of the most common VAT mistakes sellers in the UK and Europe need to know:
1. Not registering for VAT when and if you need to
We’ve already covered this extensively, but it cannot be said enough: Make sure you understand when you need to register for VAT and do not ignore this obligation.
Companies based in the EU or the UK are not obliged to register for VAT until they hit a certain monetary threshold, although they are free to register before they hit that threshold if they want. However, for companies incorporated outside the EU and the UK, these thresholds do not apply, and they must register for VAT immediately.
If you fail to register before you make a shipment to an EU or UK fulfillment center it can be costly as you may not be able to claim back import VAT as you would if you were registered. The good news is that once you’ve applied for a VAT number, you don’t need to wait until your number is issued to sell. You can begin selling as soon as you’ve made your registration—but make sure you price your products to allow for VAT collection.
2. Buying an existing company and not checking if you need to collect VAT
If you are preparing to buy an existing company, you must do your due diligence and check whether the company is already registered for and collecting VAT. Remember, if your business is incorporated outside the EU or UK, you have no thresholds, and you must be VAT registered. For example, if a US-based company buys another US-based company and that company also sells in the EU, the buyer should ensure the company they’re purchasing is VAT registered.
3. Not educating yourself on VAT obligations
As a business owner, you’re pulled in many directions, and it can be tempting to leave anything to do with VAT to an advisor. However, if you, or other decision-makers in the business, are making choices about when and where to sell in the EU and UK, having a good base level of education on your VAT responsibilities can help you make informed decisions.
4. Not having good banking practices for timely VAT payments
It can be tempting to let Amazon pay your settlements into the bank account of your home country. However, if you have VAT obligations in the EU or UK, making these payments on time is crucial to avoid costly penalties. Setting up a currency or bank account in Europe will allow you to make those payments much faster than a traditional wire transfer, so you don’t exceed payment deadlines. An additional benefit is that being paid into a currency account and then transferring back to your home account will likely yield a better currency exchange rate than using Amazon.
5. Not registering for VAT in other countries as you reach distance-selling thresholds
It doesn’t matter where in the EU or UK you’re fulfilling orders from, if you’re selling to other EU countries, you need to be prepared to register for VAT if you go above the €10,000 distance selling threshold. So, if you’re fulfilling orders from the UK but you make sales totalling more than €10,000 to Italy, you must also register for VAT in Italy—even though you’re not fulfilling from Italy.
Make VAT easier by using the right apps and automation
As an Amazon seller, there are a wide range of tools at your disposal to help grow, simplify and optimize your business.
These apps are handy for helping you to look after VAT
- Quaderno - this app makes VAT easy. Among some of the many features they offer, Quaderno tracks your sales vs. distance selling thresholds and lets you know when you need to start charging tax in a country ahead of time.
- HelloTax - by providing VAT registrations and returns for eCommerce sellers across a range of different channels, HelloTax provides a solution to calculate, collect and file your VAT returns with ease. They also offer a free plan.
- Avalara - their motto is ‘tax compliance done right’. Yes, Avalara’s platform can look after your EU VAT, but they also provide the tools you need look after sales taxes in the other Amazon marketplaces.
- A2X Accounting - reporting VAT is one thing, but accurately accounting for your Amazon and Shopify data is another matter altogether. A2X fills this gap by taking your transactions and entering them into your accounting system in a way that’s easy to reconcile when settlement payments arrive. A2X integrates with sales tax apps to ensure that your returns are not only accurate, but that you can rely on all of your financials to be done right.
How to set up A2X to help with your VAT
One of the ways you can save money and streamline your bookkeeping and accounting for VAT is to use automation.
A2X securely pulls all of the data on your sales, shipping revenues, returns, seller fees, FBA fees and reserved balances and sends it through to your accounting software, ready to reconcile with the total that hits your bank and submit your UK VAT return.
A2X works with a direct connection to either Xero and QuickBooks Online. It can also be used with other accounting software via a manual connection.
What information do I need to set up A2X for Amazon?
To prepare for setting up A2X for your Amazon Seller Central account, we recommend the following:
- Check your VAT registrations: Which ones are live, which ones are in process? Check that all of the current registrations have been added into Amazon Seller Central.
- Check that Amazon’s VAT Calculation Service is switched on: This will give you the most detailed information on your transactions.
- Check your product types: Are all the products you sell standard rated (20% VAT)? Do you have any special product types that have a different rate of VAT? (Note: A number of items are charged at a lower or zero rate of VAT. These can include items such as car seats, books or some hygiene products). Check that your product listings in Amazon have the correct VAT rate applied for the product.
- Check the VAT rates that have been applied to your Amazon fee invoices: The best place to look for these is in the Tax Document Library in Amazon Seller Central. This can be found at Amazon Seller Central -> Reports -> Tax Document Library. The invoices normally fall into three categories: Amazon FBA Fees, Amazon Merchant Seller Fees and Product Ads.
Initial A2X setup for all UK sellers
- Step 1: Set Up Google Login.
- Step 2: Connect to an Amazon Marketplace.
- Step 3: Connect to your Accounting System.
- Step 4: Enter your VAT information:
The first place for any seller to start with their A2X account once all the login credentials and connections are established is to go to A2X -> Settings -> VAT.
Here you can switch on the VAT Jurisdiction Tracking and add the names of all the countries in which you are currently registered for VAT.
If you are not registered in any countries for VAT, you can skip this step for now.
Step 5: Set Up Accounts and Taxes
Go to the Accounts and Taxes tab.
Step 6: Create Default Accounts
Scroll down the Accounts and Taxes page and hit Save Mappings. A2X will ask you if you want to create the default set of accounts in Xero. Agree!
VAT setup configurations for each stage of the UK Amazon seller
Setup 1: Seller with no VAT registration
This is the easiest one to setup. You have no VAT registrations. Both your expenses and sales will be set up as NO VAT when you push them through from A2X to Xero.
Ensure you are meeting your obligations by not registering— the rules as of January 2021 may require you to.
Work through the following settings, with the main tax rate as NO VAT.
NB: Remember every section can be expanded using the orange cross on the right hand side of the category in the Accounts and Taxes page.
Work down the Accounts and Taxes mapping page, expanding every section with the orange cross to see the sub-transactions. There are three categories which combine two types of transactions, both expenses and income. These are Shipping, Other and Promotions.
Accounts should be mapped as shown below for a seller with no VAT registrations.
Setup 2: Seller with one UK VAT registration
This is the second easiest setup. You have only one UK VAT registration and are selling all of your products from the UK.
NB: Remember every section can be expanded using the orange cross on the right-hand side of the category.
Work down the Accounts and Taxes mapping page, expanding every section with the orange cross to see the sub-transactions. There are three categories which combine two types of transactions, both expenses and income. These are Shipping, Other and Promotions.
Accounts should be mapped as shown below for a seller with one UK VAT registration.
Setup 3: Seller with a UK VAT registration plus one or more EU VAT registrations
In this scenario, you have a UK VAT registration and in addition, one or more EU VAT registrations. In this example we will look at the mapping on the Accounts and Taxes page for a seller with a UK and a DE (German) registration that is live in Amazon Seller Central.
With this setup, you will need to create two extra accounts on the Chart of Accounts in Xero before we begin the mapping page.
The accounts you will create will be:
- DE Sales: this will be account type REVENUE and tax rate NO VAT in Xero.
- DE VAT Liability: this will be account type CURRENT LIABILITY and tax rate NO VAT in Xero.
If you are not familiar with setting up new accounts on the Xero Chart of Accounts then please check out this helpful article.
The next step is to pull these new accounts through to A2X. You can do this by going to A2X -> Settings -> Connections -> Xero -> Refresh Cache. This will bring those new accounts through to the mapping page.
Now you are ready to begin the mapping on the Accounts and Taxes page.
NB: Remember that every section can be expanded using the orange cross on the right-hand side of the category.
Work down the Accounts and Taxes mapping page, expanding every section with the orange cross to see the sub-transactions. There are three categories that combine two types of transactions, both expenses and income. These are Shipping, Other and Promotions.
Accounts should be mapped as shown below for a seller with one UK VAT registration and a DE VAT registration. Where a transaction line appears with the information Jurisdiction DE, that line should be separated out to either the new DE Sales account or the DE VAT Liability account.
We will use a NO VAT tax code for these DE transactions. This will allow you to track them on your books for third party submission in Germany, without putting them through the UK VAT return.
Setup 4: Seller who is part of the Amazon PAN EU program with multiple EU VAT registrations
For this setup, the seller will follow the exact same procedure as Setup 3 (above), however, they will set up an individual sales account and VAT liability account in Xero for every live VAT jurisdiction registered in Amazon Seller Central.
For example, for a seller registered in the seven main countries, the new accounts would look something like this:
The Accounts and Mapping page will be mapped as follows:
Next steps: refresh and send to Xero
The next step for all types of sellers once they are happy with their Accounts and Taxes setup is to refresh a settlement on the Settlements page and send it to Xero. Refreshing the settlement before sending will apply all your new tax settings to the period.
Special VAT schemes: what should I do?
Some UK Amazon sellers are for various reasons registered on a different type of VAT scheme with special requirements.
For example: Some sellers are part of a Flat Rate Scheme where they do not claim relief on any of their purchases or expenses but they get to pay a reduced flat rate of VAT on all their sales.
If you are in a scheme like this, you can still use A2X. However, we recommend reviewing the setup with your accountant to make sure that it satisfies all of the requirements for your particular scheme.
Recent changes to VAT in the UK and EU
The 2021 Ecommerce VAT Package
In July 2021, a new set of rules and systems went live. As part of the 2021 Ecommerce VAT Package, five key changes for sellers took place:
- There is now one pan-EU distance-selling threshold of €10,000.
- Sellers can centralize their VAT returns with the OSS system.
- Sellers can ensure a quicker, smoother customs experience with the IOSS system.
- The Low-Value Consignment Relief (LVCR) has ended.
- There are new marketplace facilitator obligations, leaving much of the VAT collection responsibility with the platforms themselves.
The best way to ensure you are meeting your tax obligations at home and overseas is to work with a specialist ecommerce accountant. Find one now via our trusted directory.
Are you ready for effortless Amazon accounting?
The competitive world of Amazon’s marketplaces provides both enormous opportunity, and a wide range of potential pitfalls.
One of the most common areas where Amazon sellers get stuck is ensuring that their accounts are done right, without spending untold amounts of time manually entering data or fixing mistakes.
If you are planning to scale your Amazon business, then you’ll want to make sure that your tech stack can grow with you—without a proportional increase in your workload.
For Amazon accounting, A2X is the gold standard to automate away the headaches of data entry. To find out more, setup a free trial now.
Frequently Asked Questions About VAT
Will VAT reduce my profit margin?
If you have set up your VAT correctly in Seller Central, then it will not reduce your profit margin, as the costs are passed on to customers.
Here are a couple of scenarios to consider:
- Your business is based in the UK (or another EU country), and registered for VAT. In this instance, you will charge VAT on products sold and pay VAT on all purchases. The total amount of VAT that you pay is the difference between your income and expenses.
- Your business is based in the UK (or another EU country), but you haven’t passed the VAT registration threshold (so you aren’t registered for VAT yet). If you are in this position, you’ll need to pay VAT on your expenses, but will not be able to charge VAT on your sales.
Either way, your profit margin should remain the same if VAT is factored into your income and expenses.
For example: You sell a product for £10, and it cost you £5 to purchase.
- If you’re not registered for VAT, your income is £10 and your cost of goods sold is £5. Therefore, your profit margin is 50% (£5/£10).
- If you are registered for VAT, you’ll need to pay £1.67 (£10 - £10/1.2) in VAT, which makes your net income £8.33. However, you are also able to claim £0.83 (£5 - £5/1.2) VAT from the cost of your purchase, making your cost of goods sold £4.17. Therefore, your profit margin is 50% (£4.17/£8.33).
Does Amazon charge VAT on seller fees?
Yes, Amazon does charge VAT on seller fees. For your referral fees and monthly professional account charges, there will be an amount of VAT paid, which corresponds to the percentage rate in your country.
However, if you have provided Amazon with a VAT number (and they have verified it), you will not be charged VAT. Instead, you’ll be required to declare the expenses on your tax returns through the reverse charge mechanism.
What is the reverse charge mechanism?
The reverse charge mechanism is a way to handle VAT in business to business transactions that helps to prevent fraud, and simplifies the process of paying VAT tax.
When the buyer is a business, and also the consumer (i.e: they aren’t on-selling the product or service being transacted), any VAT charged will eventually be refunded as a claimable expense.
So instead of paying the VAT, then claiming it back at tax time, the reverse charge mechanism removes the need to pay the VAT in the first place. In the majority of transactions, suppliers act as a tax middleman where they collect tax from the buyer and passing it onto the government. The reverse-charge mechanism is designed to cut out this step.
With the reverse charge mechanism, the responsibility for paying VAT shifts from the seller to the buyer.
In practice, it looks something like this:
- When the transaction takes place, the buyer provides the seller with their VAT number.
- The seller verifies that the VAT number is valid and that they are a legitimate trading entity.
- Once verified, the transaction takes place as normal but there is no VAT charged or paid.
- In the buyer’s VAT return, they declare their purchase (input VAT) and the supplier’s sale (output VAT), which essentially cancels out each other from a cash payments point of view.
For more information about the reverse charge mechanism, and how to use it in your business, check out this guide.
How long do I need to keep VAT records for?
For most online sellers, you’ll need to keep your VAT records for 6 years. However, there are some circumstances where you need to hold onto records for a longer time period.
If you have signed up to the MOSS (mini one-stop shop) system, you’ll need to hold onto VAT records for 10 years. If your business also owns land and buildings, you might need to keep VAT records for 20 years.
However, the general rule is that holding onto VAT records for 6 years is suitable. Unless they suspect fraud, the HMRC can only go back four years to issue assessments, penalties and interest.
While such a period of time might seem like forever, there is an easier way to stay on top of your books—use automation and apps to keep your records accurate and tidy as you go.
A2X is an accounting app that connects your Amazon Seller Central account with Xero or QuickBooks Online (cloud accounting software) and ensures that your income, selling fees and cost of goods sold are accurately recorded for future reference.
What is the VAT flat rate scheme?
For UK businesses with a turnover of less than £150,000 per year, there is another way to look after your VAT returns.
In essence, you pay a flat rate of VAT on your sales (which is lower than the standard rate), but you aren’t able to claim back VAT on purchases.
Visit this page for more information about the VAT flat rate scheme.
What is the main difference between sales tax and VAT?
As Thomson Reuters explains: Sales tax is collected by the retailer when the final sale in the supply chain is reached via a sale to the end consumer. End consumers pay the sales tax on their purchases. Businesses issue resale certificates to their sellers when buying business supplies/inputs that will be resold since sales tax is not due. Tax jurisdictions do not receive the tax revenue until the sale is made to the final consumer.
By contrast, VAT is charged at every stage along the supply chain, and the amount of VAT that any one company pays to the government is the difference between their VAT received on income and VAT paid on purchases.
In this manner, tax jurisdictions receive tax revenue at every stage of the supply chain rather than being required to wait until the final sale to the end consumer.
While sales tax reporting requirements in the United States are triggered by nexus, the need to register for VAT is triggered by similar circumstances (but they aren’t commonly called nexus in Europe). More specifically, these circumstances are:
- Having a permanent establishment or inventory stored in a jurisdiction.
- Passing the distance selling threshold for the destination country.
For more information about the differences between sales tax and VAT, see this guide by Thomson Reuters.
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