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.
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.
“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.
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;
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.
“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.
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:
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:
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 |
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.
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.
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.
“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.
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:Here are a couple of scenarios to consider:
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.
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.
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:
For more information about the reverse charge mechanism, and how to use it in your business, check out this guide.
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, QuickBooks Online (cloud accounting software) or Sage and ensures that your income, selling fees and cost of goods sold are accurately recorded for future reference.
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.
“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:
For more information about the differences between sales tax and VAT, check out this guide by Thomson Reuters.
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.
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: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:
To register for VAT in the UK, you’ll need to have access to these documents and information:
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.
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.
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.
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 returnsTax 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 expertsIf 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:
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.
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:
[Source]
- Seller VAT registration number(s);
- Customer VAT registrations number(s) (if applicable);
- Deliver-from location (departure country);
- Deliver-to location (arrival/destination country).”
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 serviceWhen 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.
Each country has different rules around how often you need to file VAT returns. However, it is generally:
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.
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.
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) 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:
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.
There are a range of ways to store, manage and send your inventory to customers when selling on Amazon. These options include:
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.
“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.
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:
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.
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:
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.
The following questions will help you to get a better idea of which fulfilment option will be best for your business (right now):
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.
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.
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.
A sound VAT strategy provides context around around:
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:
UK sellers tend to fall into one four categories, depending on their stage in business:
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…
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.
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.
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.
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:
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.
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:
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:
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.
To prepare for setting up A2X for your Amazon Seller Central account, we recommend the following:
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.
Go to the Accounts and Taxes tab.
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!
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.
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.
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.
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:
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 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.
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:
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.
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.
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...
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:
For a more detailed discussion on the potential impacts of Brexit on VAT, check out this article and this article.
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.
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.