The Ultimate VAT Guide for Amazon Sellers in the UK and Europe

The Ultimate VAT Guide for Amazon Sellers in the UK and Europe

Otherwise known as ‘value-added tax’, VAT is a type of consumption tax that is paid by end users on products and services.

In different regions, VAT is referred to by different names. For American sellers, it is called ‘sales tax’. In Australia and New Zealand, we call it ‘goods and services tax (GST)’.

While the rules around how VAT is managed are different for each economy, there are a wide range of things that they all have in common. In this guide, we take a deep dive into the world of VAT for Amazon sellers in the UK and Europe.

Online businesses that sell across state and country borders, and hold inventory in multiple places have a special range of tax requirements that they need to meet because of a concept called nexus.

In the context of taxes, nexus refers to a physical or economic presence that a business has in a state or country which means they are required to become tax compliant in those areas. If you’re planning to enter the Amazon UK or European marketplaces, or you already have a presence here, then this VAT guide is made for you.


By reading the chapters that follow, you will learn about:

  1. What VAT is, and how it works.
  2. Distance selling thresholds and what this means for Amazon sellers.
  3. VAT rates by country and special rates for non-standard products.
  4. EORI numbers and why you need one.
  5. What it’s like being VAT registered.
  6. How to register for VAT and file returns.
  7. The various fulfilment options that are available for Amazon sellers and how they impact your VAT obligations.
  8. How to create a VAT strategy.
  9. The best apps for managing your Amazon bookkeeping.
  10. How to set up VAT in A2X.
  11. Upcoming changes that will impact the way we manage VAT.

An introduction to VAT

Piggy bank

VAT tax is paid by consumers. However, the companies that supply end users are responsible for making sure that VAT is paid. In this section, we define what VAT actually is, and how it affects your business operations.

What is VAT?

“VAT (Value Added Tax) gets charged whenever “value” is added in the supply chain. When a supplier of raw materials sells goods to a manufacturer, for example, VAT is added to the sale. VAT is added again on the sale from the manufacturer to the wholesaler, and from the wholesaler to the retailer, and from the retailer to the consumer.”[Resource]

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). Unlike income tax, which is taken off a person’s income, VAT is added to the final price that we pay for goods and services.

How does VAT work?

To administer VAT, businesses are responsible for charging VAT on sales, paying VAT on purchases and reporting this information to their tax collections agency:

For example;

  • When a company buys goods or services, they generally pay VAT to their supplier as part of the purchase price.
  • When a company sells goods or services, they generally charge VAT to their customer as part of the selling price.
  • At regular intervals throughout the year (usually monthly or quarterly), businesses calculate the net amount of VAT that they have collected or paid in each country where they are registered.
  • This information is passed onto the local tax agency (e.g: in the UK, that is HMRC), and the amount of VAT owing is either paid or refunded.

For example, if a company in the UK charges $2000 of VAT on products sold, and pays $1000 of VAT on purchases made, then they would owe HMRC $1000 in VAT.

While this is a relatively simple calculation for companies that trade in only one market, it can get quite complicated for businesses that sell to customers throughout Europe - such as Amazon sellers.

This is because each jurisdiction has its own set of rules, VAT rates, filing frequencies and distance selling thresholds.

What is distance selling?

“Distance selling occurs whenever goods or services are sold without any face-to-face contact between the supplier and the buyer.”[Resource]

In other words, when you sell your products on Amazon, you are distance selling to your customers - whether that’s in your market or to customers in other European countries.

But why does this matter?

eCommerce has changed the way that we buy and sell. As a result, it’s easier than ever before 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.
  • However, 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 EU country, you are required to register locally for VAT and start filing returns.

For example: Germany’s annual distance selling threshold is €100,000. Therefore, if you are located in another EU country and selling to customers in Germany:

  • You are required to pay VAT to your local tax authority until you sell €100,000 to customers in Germany within a tax year.
  • When your sales exceed €100,000 to customers in Germany, or when you expect your sales to exceed €100,000 in the next 30 days, you 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 (e.g: 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.

Distance selling thresholds by country

Here’s a list of the distance selling thresholds (current as of May 2020) for each EU country.

If you are selling into these territories from another EU location (and don’t hold any stock in the country), you can sell up to the following amounts before needing to register for VAT:

Country Distance selling threshold
Austria €35,000
Belgium €35,000
Bulgaria BGN 70,000
Croatia HRK 270,000
Cyprus €35,000
Czech Republic CZK 1,140,000
Denmark DKK 280,000
Estonia €35,000
Finland €35,000
France €35,000
Germany €100,000
Greece €35,000
Hungary HUF 8,800,000
Ireland €35,000
Italy €35,000
Latvia €35,000
Lithuania €35,000
Luxembourg €100,000
Malta €35,000
Netherlands €100,000
Poland PLN 160,000
Portugal €35,000
Romania RON 118,000
Slovakia €35,000
Slovenia €35,000
Spain €35,000
Sweden SEK 320,000
United Kingdom £70,000

VAT registration thresholds

When you’re just getting started, you might decide to see how your sales are performing before applying for a VAT registration.

If your business is located in the country where you are registering for VAT (i.e: the United Kingdom), then you may be able to sell products without needing to register for VAT until you reach a certain level of turnover.

For example, in the UK, the threshold is £85,000. This means that registering for VAT is optional until you reach £85,000 within a 12 month period, if you are based in the UK.

For more information about VAT registration thresholds in each country, check out this table provided by the European Commission.

How does VAT work when you’re selling to customers in other countries?

This depends upon your business situation, and the type of products or services you are selling.

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 USA account to a customer in France, the VAT would be charged on arrival.

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 to ask your accountant for professional advice based on your specific circumstances.

VAT rates by country

Member states of the EU (and the United Kingdom) are governed by a broad set of VAT rules. They are required to set a minimum VAT rate (the standard rate must be at least 15%) and up to a maximum of two reduced rates (with the lowest rate being a minimum of 5%).

Some countries also have a third reduced rate, which they had in place prior to joining the EU. In addition to this, member EU countries also have a 0% VAT rate on some amenities such as intra-community and international transport.

Member countries are allowed to set their own rules on VAT rates (within these parameters), and they are allowed to decide which products and services can be sold at a reduced rate.

The following table provides a brief overview of the VAT rates by country:

Country Standard VAT rate Reduced VAT rates
Austria 20% 13%/10%/0%
Belgium 21% 12%/6%/0%
Bulgaria 20% 9%/0%
Croatia 25% 13%/5%/0%
Cyprus 19% 9%/5%/0%
Czech Republic 21% 15%/10%/0%
Denmark 25% 0%
Estonia 20% 9%/0%
Finland 24% 14%/10%/0%
France 20% 10%/5.5%/2.1%/0%
Germany 19% 7%/0%
Greece 24% 13%/6%/0%
Hungary 27% 18%/5%/0%
Ireland 23% 13.5%/9%/4.8%/0%
Italy 22% 10%/5%/4%/0%
Latvia 21% 12%/5%/0%
Lithuania 21% 9%/5%/0%
Luxembourg 17% 14%/8%/3%/0%
Malta 18% 7%/5%/0%
Netherlands 21% 9%/0%
Poland 23% 8%/5%/0%
Portugal 23% 13%/6%/0%
Romania 19% 9%/5%/0%
Slovakia 20% 10%/0%
Slovenia 22% 9.5%/5%/0%
Spain 21% 10%/4%/0%
Sweden 25% 12%/6%/0%
United Kingdom 20% 5%/0%

For most products sold on Amazon, you will need to pay the standard VAT rate. However, you might be eligible for a reduced rate if you are selling items that fit into a special category (such as children’s car seats or diapers in the UK), so it is worth conducting further research into the VAT status of your products for each marketplace that you sell in.

This comprehensive guide by Avalara provides an up to date list of the products that are eligible for reduced rates in each European country.

What is an EORI number?

“An Economic Operators Registration and Identification number (EORI number) is a European Union registration and identification number for businesses which undertake the import or export of goods into or out of the EU.”[Resource]

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.

During the year of 2020, you won’t need to have an EORI number to move goods between the UK and EU. However, from 2021 onwards, an EORI number will be required for this purpose.

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:
  1. Visit the customs website of the country where you are applying for an EORI number (this list provides links to all of the EU customs websites).
  2. 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).
  3. 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.
  4. Start the application process and provide the information required.
  5. 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.

Frequently asked questions about VAT

Will VAT reduce my profit margin?

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 most transactions, suppliers act as a tax middleman, collecting tax from the buyer and passing it onto the government. The reverse-charge mechanism is designed to cut out this step.”[Resource]

With the reverse charge mechanism, the responsibility for paying VAT shifts from the seller to the buyer. In practise, it looks something like this:

  1. When the transaction takes place, the buyer provides the seller with their VAT number.
  2. The seller verifies that the VAT number is valid and that they are a legitimate trading entity.
  3. Once verified, the transaction takes place as normal but there is no VAT charged or paid.
  4. 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 fraud is suspected, 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?

“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.”[Resource]

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, check out this guide by Thomson Reuters.


Registering for VAT and filing returns

Calculator and pen

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.

What is it like being VAT registered?

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…

Pros:
  • 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 cashflow (you hold onto VAT collected for a few months before paying it to the government).
Cons:
  • 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.

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 3 months in the UK (compared to some countries where you need to file monthly).

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 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 when you registered 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 prevailing VAT rate (20%), explaining to clients and customers that you will reissue the invoices with the VAT-able amount once you receive 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

There are three main methods for Amazon sellers to file VAT returns - doing it yourself (self filing), outsourcing the work to an agency or letting Amazon do it for you.

Self filing

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, submitting a manual form or sending the information directly from your cloud accounting system.

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. 

Let Amazon do it for you with their VAT Calculation Service (VCS)

If most of your business is done through the Amazon platform, why not take advantage of their VAT services to look after registration, calculation and filing on your behalf?

The Amazon VAT Calculation Service performs VAT calculations for the 28 European Union (EU) Member States on products sold on Amazon's European/EU marketplaces. The VAT calculations are performed based on Seller-determined tax settings and any other related Seller information set up during configuration. Amazon's VAT Calculation Services do not perform VAT calculations in countries located outside the EU. [Source]

The VCS (Vat Calculation Service) can provide you with extra information that is helpful for your accounting and tax reporting. This includes:

  • B2B and export sales transactions.
  • Tax jurisdiction by transaction.
  • Separating out zero-rated products from standard-rated products.

With Amazon's offering, you can register for VAT in each country for free, and then file regular returns with just a few clicks. It costs €400 per year to file returns for your Amazon transactions, and another €100 per year if you have sales from other sources to include in the returns.

How does Amazon calculate the tax jurisdiction?

Once you have more than one EU VAT registration, you will need to determine the tax jurisdiction on all the sales you make. This is so you know in which country this VAT is due for payment and account for it correctly in your books.

The Vertex jurisdiction selection logic uses information from four transaction-related details to determine whether it is a B2B or B2C transaction as well as the VAT jurisdiction and tax type (i.e. VAT). The four transaction-related details are:

  • Seller VAT registration number(s);
  • Customer VAT registrations number(s) (if applicable);
  • Deliver-from location (departure country);
  • Deliver-to location (arrival/destination country).”
[Source]

In other words, Amazon takes the information from each transaction and combines it with the information that you’ve already provided in Seller Central (such as VAT numbers) to calculate the tax jurisdiction.

Benefits of using Amazon’s VAT service
  • Keep it all in one place - by using Amazon’s VAT services, 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 Amazon’s services, you’ll need to spend at least €400 per year for each marketplace that you sell in.
  • Sharing confidential information - some sellers are skeptical 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. 
  • The VCS depends on you, the seller, entering information correctly when you set up your VAT settings and also when you make a new listing. 

When using the VCS, you must ensure that all your live VAT registrations in EU countries are entered into the system and keep these up to date. You also need to make sure that any non-standard rated products (for example products with a 5% or 0% tax rate) are set up correctly in your Seller Central account.

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 registering for VAT and filing returns

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. Her Majesty's Revenue and Customers (HMRC) launched MTD in April 2019... MTD is another step taken by HMRC to integrate and digitalise tax submissions.”Source

This new 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.”Source

To become compliant with the MTD regulations, you need to:

  1. Check if and when you have to follow the rules.
  2. Get the right software (Xero and QuickBooks Online are both compatible).
  3. Sign up for Making Tax Digital for VAT.
  4. 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.Source

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 fulfilment options for selling in the UK and Europe

Amazon warehouse

There are a range of ways to store, manage and send your inventory to customers when selling on Amazon. These options include:

Fulfilment by Merchant (FBM)

This involves using either your home, your company’s warehouse or a non-Amazon third party logistics service for fulfilment. 

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 fulfil the slower moving items (and bulky items) from another source.

The benefits of using FBM are that it’s usually cheaper that 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 fulfilment.

European Fulfilment Network (EFN)

“The European Fulfilment Network (EFN) allows sellers with an Amazon Europe Marketplaces account who are also registered for Fulfilment by Amazon to store their inventory in their local fulfilment centre, and fulfil orders coming from other European marketplaces from the same local inventory pool, maximising the control and flexibility that sellers have over their inventory.”[Source]

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 fulfilment centres 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 fulfilment centres 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.

Europe map of Amazon warehouses

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 fulfilment costs.
  • Less time spent managing the amount of inventory that you need to hold in each location.
  • You are eligible for Prime throughout all of Amazon’s European marketplaces.
  • Because the stock is located in local warehouses, deliveries are faster.
  • Amazon provides 24/7 customer support in each marketplace, in the local language so that you don’t need to worry about it.

However, using Pan EU FBA does mean that 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 fulfilment 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.

In the next section, we take a closer look at what this means for you, and how to create a VAT strategy.


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

Europe map of Amazon warehouses

A sound VAT strategy provides context around around:

  • When to start holding inventory in each country.
  • When to register for VAT in each country.
  • 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 € 33,000 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 €15,000/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 VA’s do tax returns. The potential consequences of messing it up are just too expensive.

Example: four stages of the UK Amazon seller

UK sellers tend to fall into one four categories, depending on their stage in business:

  • Seller with no VAT registration.
  • Seller with a UK VAT registration.
  • Seller with a UK VAT registration and one or more EU VAT registrations.
  • Seller who is part of the Amazon Pan EU programme.

If you’re planning to start in the UK and grow to a point where you’re selling throughout Europe, this is likely to somewhat resemble your VAT strategy. Let’s take a closer look…

Stage 1: seller with no VAT registration

If your business is located in the UK and you’re just starting out, you may decide to begin with no VAT registration. In doing so, you can still use FBA and take advantage of the European Fulfilment Network.

However, you may decide to start by selling on the Amazon UK marketplace and gradually get your listings onto the main European marketplaces.

Stage 2: seller with a UK VAT registration

As you start selling more products, you’ll eventually need to register for VAT in the United Kingdom. While the threshold is £85,000, you may decide to register earlier so that you can claim back VAT on purchases, or to appear more established in your dealings with suppliers.

It is at this point that you’ll need to decide whether to outsource your VAT returns or manage it yourself.

Keep a close eye on your sales volumes in European marketplaces, and set a regular time (e.g: monthly) to review your exposure to distance selling thresholds.

Stage 3: seller with a UK VAT registration and one or more EU VAT registrations

When you start entering European marketplaces, it makes sense to consider whether to continue using the EFN for fulfilment of all orders, or to place stock in European distribution centres.

During this transition period, it is possible to use a combination of EFN and Multi Country Inventory - fulfilling orders from the closest warehouse, and when you run out of stock in the nearest storage location, to default back to the EFN model.

At this point, you’ll want to pay particular attention to the amount of stock held in each facility, and regularly move items around to ensure that inventory is always available for sale where it’s needed most.

By reducing the number of individual orders that get shipped across borders, you can save money on fulfilment fees.

You may also wish to consider working with a larger accounting firm that provides VAT services throughout Europe, so that you can manage all of your filings with one relationship.

Germany is the largest Amazon marketplace in the EU, so it’s quite common for UK based sellers at this stage to enter the German market and use the Central European Fulfilment programme to reach most customers with short delivery times.

Stage 4: seller who is part of the Amazon Pan EU programme

As you expand beyond the main European markets, you’ll eventually reach a point where it makes sense to hold inventory throughout Amazon’s FBA network. Whilst this does mean more VAT returns, it also means that you get the most competitive offering from Amazon:

  • It’s easier to win the buy box.
  • Your products are eligible for Prime.
  • Delivery fees are lower.
  • Your products are dynamically moved around Europe to reduce delivery times to customers - resulting in a better service experience.

Overall, this results in more growth opportunities, less operational involvement on your part, and easy access to customers throughout Europe.

For many UK sellers, taking advantage of Pan EU fulfilment might seem unrealistic due to the high costs of tax compliance. However, once you have passed the distance selling thresholds for your main markets, you have a robust supply chain, accounting partners and good cashflows, this makes sense as the next logical step.

Review and adapt as you grow

By this stage, you should have a clear understanding of what European VAT means for you, and the next logical steps to take. When you’re creating a VAT strategy, it’s important to ensure that your plans are flexible to changes in the marketplace. After all, we don’t know what the future holds.

The best things to keep in mind at the outset are to:

  • Unless you’re prepared to learn the rules in detail for each country, you should hire an expert.
  • You need to have a plan before launching, but it doesn’t need to be complex - make it understandable, and adaptable.
  • Set aside regular times each week, month or quarter to review your performance and plans, and tweak them as necessary.

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.

Screenshot guide 1

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!

Screenshot guide 2

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.

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.

Screenshot guide 3

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.

Screenshot guide

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.

Screenshot guide

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.

Screenshot guide

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 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:

Sales VAT
Sales DE DE VAT Liability
Sales ES ES VAT Liability
Sales FR FR VAT Liability
Sales CZ CZ VAT Liability
Sales PL PL VAT Liability
Sales IT IT VAT Liability

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.

Screenshot guide

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.


Upcoming changes to VAT in the UK and EU

There may be big changes ahead for UK and EU online eCommerce sellers and VAT. The EU has proposed a new VAT One Stop Shop (OSS) for online sellers. This is designed to simplify the VAT submission process by allowing eCommerce sellers to submit one VAT return for all of their EU sales.

Whether these will be delayed and how Brexit will affect the requirements for UK sellers is still not clear. That being said, here are a few thoughts on the potential implications of Brexit and COVID19...

Brexit

When the UK opted to leave the EU, that put a ‘spanner in the works’ for a wide range of issues related to import, export and taxation.

At the time of writing (May 2020), we are in a transitional period, which will last until the end of the year. This phase is in place for the governments of the UK and EU counterparts to iron out the finer details of the new arrangement.

With this in mind, it is too early to have a clear picture of what Amazon VAT for UK and EU sellers is going to look like.

However, here are a few things to keep in mind that are likely to happen:

  • Goods moved between the UK and EU will probably be treated as imports and exports. Under this structure, the exporter would not charge VAT, but when items reach the destination country, the local tax authority may charge VAT.
  • Distance selling into the EU may become a thing of the past for UK sellers. Rather than keeping an eye on thresholds, sellers will probably have a choice between registering in an EU country or simply exporting Amazon sales to customers in the EU.
  • If that happens, it is likely that many UK based Amazon sellers will need to get an EU EORI number. It is also likely that holding stock in a European FBA warehouse is going to make more sense for smaller UK-based sellers (compared to EFN with distance selling from the UK).
  • If parcels sent between the UK and EU are treated as export and import events, then the reverse charge mechanism will no longer be valid in these instances. Rather, the importing business would need to pay VAT on arrival and claim it back in their return.

For a more detailed discussion on the potential impacts of Brexit on VAT, check out this article and this article.

COVID19

Due to the widespread impacts of COVID19, many governments around the world have provided tax relief by reducing the VAT rate on certain goods and services, and allowing for delayed payment without penalties.

If you are based in the UK, you may have 9-12 months extra to pay your VAT.

“Because of coronavirus (COVID-19), you can delay (defer) any VAT payments due between 20 March 2020 and 30 June 2020. If you choose to defer a VAT payment, you will have until 31 March 2021 to pay it.”[Source]
To determine whether you might be eligible for tax relief, use this calculator.

Are you ready to experience 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, and schedule in a free trial, head to www.a2xaccounting.com.