It is a new month of August and with Q4 around the corner, the subject of VAT has increasingly become a source of worry and concern to new small businesses especially Amazon Business Owners. In this post, we shall aim to cover the basics of VAT, why it is charged, as well as how you can work out VAT paid and to be reclaimed by your business.
What is VAT?
VAT, or Value Added Tax, is levied on the sale of goods and services in the UK. It is a type of ‘consumption tax’ because it is charged on items that people buy and is also an ‘indirect tax’ because it is collected by businesses on behalf of the Government. Simply put, VAT is a tax added to the price of goods and services depending upon their value.
What are the current VAT rates in the UK?
- The standard rate of VAT in the UK is currently 20% and this is the rate charged on most purchases. However, there are other VAT rates which you need to be aware of as an Amazon seller and a business owner in general.
- Reduced rate VAT is charged on sanitary products, energy saving measures and children’s car seats and is charged at 5%.
- The zero rate – as the name suggests, charged at 0% – is applied to most food, books, newspapers and children’s clothes. Although no VAT is charged, the sale of zero rate goods and services still has to be recorded and reported on your VAT return.
- On top of that, some items are ‘exempt’. These include postage stamps and financial and property transactions. As with zero rate items, no VAT is charged on these goods and services. However, these do not need to be counted in your taxable turnover.
- EU law dictates that the standard rate of VAT in EU states should not be lower than 15%.
Who pays VAT?
Businesses with a turnover of more than £85,000 must register to pay and charge VAT on the products and services they buy and sell. Other businesses can choose to register for VAT voluntarily.
Businesses charge their customers VAT, but must then pay this to HMRC when they file their VAT return.
How you work out VAT:
- As a VAT registered business, you should charge VAT on every sale you make to other businesses or customers – in other words, you have to add it to the sell price. There are ways to include this in the seller central section of your Amazon seller account. Or you can do this manually by multiplying the originally intended sale price of the item by the VAT rate percentage, then adding that to the cost of the item or service or just simply multiply your intended price by 1.2 (if the VAT rate is 20%) or 1.05 (if the VAT rate is 5%)
- To calculate input VAT i.e. VAT you have paid as a business to acquire goods and services, ensure that you separate out VAT on invoices. This will leave you with the net cost of the goods (before VAT), add these up and you would have arrive at your total input VAT. You can do this manually by dividing the total amount paid by 1.2 (for 20% VAT rated items) and then subtract the gross amount (total including VAT) from the net amount (cost before VAT) and you will be left the VAT amount paid.
- Always remember to ask your suppliers for VAT invoices.
- Ensure you keep records of all VAT transactions. That’s the VAT you’ve charged on sales and the VAT you’ve been charged on purchases.
For more information and advice do contact your tax adviser or accountant
Would you like to take away the stress of prepping your goods as an Amazon seller, get in touch with us today. Contact us today