Is VAT Mandatory for Ecommerce Websites?

Ecommerce can be a challenge for tax administrating and there has been plenty of confusion over how it should be taxed. As the technological revolution deepens and more companies are doing business directly online, the regulations are also becoming more detailed. Here is a quick guide to ecommerce website taxation in the UK when it comes to VAT.

The Legislation

There are a few main pieces of legislation when it comes to ecommerce taxation. These are the Electronic Commerce (EC Directive) Regulations 2002, which help implement the EU’s Electronic Commerce Directive 2000 into UK law. The Directive helps to simplify ecommerce taxation within the member countries and avoid double taxation from occurring.

VAT and Ecommerce

VAT is essentially a tax placed on any of the goods or services your business sells, no matter whether they are sold through a physical location or an ecommerce website. It is advisable to register for VAT through HMRC’s website as soon as you start a business.

Despite the many benefits registering for VAT can bring to your business, it isn’t necessary until your business turnover per year exceeds a specific limit. The limit changes yearly, and in 2013 it was £77,000.

According to the Out Law website, since the UK is a member of the EU, the country where the business is required to pay VAT can vary. A UK business selling goods or services through an ecommerce website doesn’t necessarily pay VAT in the UK. The necessity to pay VAT tax is determined by analysing the context of three types of transactions. These are

  • Supplies of physical goods to business or private consumers
  • Supplies of intangible goods or services to private consumers
  • Supplies of intangible goods or services to business

Therefore, it depends on the type of goods or services one is selling, whether to pay VAT in the UK or elsewhere. On top of this, the location of the business, as well as the location of the consumer or business, determines where the VAT is paid.

Physical Goods and VAT

If your business sells physical goods through an ecommerce website, then the VAT is generally paid in the UK, as this is the original location for dispatching the goods.

In some instances, your business may be required to register to pay VAT to another EU member state. This is when you exceed that country’s distance selling threshold.

Eservices and VAT

When it comes to VAT regarding eservices the situation gets a bit more complicated. Furthermore, the legislation changed only recently and you can read more about the changes from the Enterprise Europe SW website. The new rules will come into effect at the start of next year.

In short, in the majority of instances, supply of digital goods is treated as a service and therefore the VAT is often paid in the country where the buyer is a resident. In these cases, your business pays VAT according to the rules of the EU member state you sell to.

All in all, whether you need to register for VAT with your ecommerce websites depends on the kind of revenue your business receives. In many instances, registering is beneficial since it gives you the ability to claim back taxes. You can contact our professionals to find out more about business taxation.