Updated on May 15, 2022
Amazon FBA vendor Luke Filer contributes to this post.
In the interest of full disclosure, I am not a tax advisor or accountant. All I’m saying here is what I’ve learned from completing my first two VAT returns and registering for VAT. Because VAT is such a complicated subject, I strongly suggest that you consult with a Tax Advisor.
Before starting my Online Arbitrage business full-time, I earned a Bachelor of Science in Accounting and Finance and worked for a few months at a small accounting firm. I felt I could handle the bookkeeping for my Amazon firm with this background and a little willpower…
I had no idea how incorrect I had been!
I wasted a lot of time and energy because of this blunder. It was a complete waste of time!
My first and second VAT returns were both submitted at the same time. Because there is no penalty for a late initial return, I was unable to complete my first one on time due to my shoddy bookkeeping. If any of my next four VAT returns are late, HMRC will impose a penalty on me.
It is highly recommended that you outsource this aspect of your business unless you are an expert Amazon bookkeeper. It’s clear that I should have outsourced this task from the beginning.
Bookkeeping for Amazon is Very Complicated
Some examples will be given to show you what I mean.
To make matters worse, if you use a credit or debit card to pay through Paypal checkout, you’ll see that only a portion of the transaction will reflect on your card account. Additionally, you must be careful not to confirm the transaction twice, once in Paypal and once in the bank account associated with the credit card.
In addition to these concerns, I came across a number of other issues.
If you want to succeed as an entrepreneur, you can’t do everything. I strongly recommend outsourcing this task. To properly file your VAT return, you must have accurate bookkeeping.
Your Amazon business should have its own bank account, separate from your personal one.
Even if you use your personal bank account to conduct business activities, make sure to keep them distinct from your business operations.
Another example of not keeping professional and personal matters separate would be to purchase a combination of the two. This is not the first time I’ve placed an order that included both personal and commercial things from a single retailer. This is a bad idea; it adds unnecessary complexity to your life.
Make sure you keep your business and personal lives distinct.. Let your bookkeeper know if they overlap, such as a phone bill, so they can adapt for this.
Introduction to VAT
Taxes on the sale of goods and services are referred to as VAT. The vast majority of goods and services in the UK are subject to sales tax. A lot of information about how VAT works is available online, so I won’t go into great depth here.
Most goods and services in the UK are subject to a VAT of 20% at the moment. However, some commodities are subject to a 5% or 0% VAT charge.
A company must register for VAT if it earns more than £85,000 in a rolling 12-month period. The company must then charge VAT on all things sold, but it can also claim VAT on all products acquired. Because only VAT-registered firms can be reimbursed for the VAT paid on their items, this is critical information to know.
You must file a VAT return every three months if you are VAT-registered. This tax return examines the amount of VAT that you paid and the amount of VAT that you collected (from sales). First, make a subtraction from the second, and then pay the difference to the government if the result is positive (as it usually is) (HMRC).
How I Registered For VAT
Due to the VAT registration requirement of £85,000, I sold up to roughly £82/83k as a Sole Trader (self-employed) and then registered a Limited Company in May of this year.
The VAT threshold “resets” since the Limited Company is a separate legal entity from the Sole Trader. Since I’ll be registering for VAT on October 1, 2019, I’ll be able to sell an additional £82/83k worth of items before then.
The clear advantage of this is that an additional £85k in VAT-free sales is generated. Having to register for VAT cuts profits, thus this is a good thing.
I performed some research to see if VAT registration was something I wanted to pursue before coming up with this strategy. Here are some of the factors that influenced my decision.
1. Effect on Profitability
I’ll use a very simple example to illustrate this. A VAT-registered seller and a seller who has not yet registered for VAT will both be taken into account in this circumstance.
A straightforward scenario: we purchase a product for £50 and resell it for £100. For the sake of simplicity, we’ll assume no further costs and apply a 20% VAT to the final product.
In this scenario, the seller who is VAT registered earns £40, while the seller who isn’t makes £50.
What’s going on?
For the simple reason that they can claim back a whopping 20% of their purchase price (or £10). A 20 percent (£20) remittance is required, though. This translates to a profit of £40: £80-£40.
If the service provider is VAT registered, you can recoup the VAT you paid on these expenses. To demonstrate this, we’ll use the same example as before.
Let’s say the following are our outgoings: (we will assume all providers are VAT registered).
a total of £8 in charges from Amazon
The cost of a single service at a prep centre was equal to the cost of that service elsewhere (all software costs apportioned)
There is a net profit of £40 for the non-VAT registered vendor as a result of this.
To make a profit of £32 (£40 minus £8), the seller who is registered for VAT can reclaim £2 in VAT on these £10 in expenditures.
Because of this, claiming VAT on expenses minimises the impact on VAT registration. Let’s take a look at a few other aspects that can help you make a more informed decision.
2. Extra Admin Costs
Bookkeeping and VAT returns should be outsourced to a reputable accountant. Not doing this will cost you a lot of time and money — both in fines and in not maximising what you may claim — so it’s worth the money to do it.
As a result, you should be aware of the additional costs that come with VAT registration. As a result, you may find yourself spending more time and money on invoice collection and basic record keeping.
3. 0% Goods
It’s critical to consider the impact of zero-percent VAT-rate goods after discussing the impact on profitability. These appear to be the same as non-VAT registered sellers at first, but they are actually superior because you may still claim back VAT on expenses, whereas a non-VAT registered seller cannot do this.
It would make a profit of £42 if we assume that the product in question is exempt from VAT, as in the prior scenario. A non-VAT registered seller’s profit (£50) would be identical to yours (£42) before costs, but you are entitled to a VAT refund of £2, making your profit £42 instead of £42 (£2 greater).
VAT registration will have a smaller impact on your business if you can find a large number of 0% goods.
The problem is that 0% products are difficult to come by. You’ll have to do your own investigation on these. GOV.UK is an excellent place to begin your study.
Should You Register for VAT?
As much as I’m aware of the bad aspects of doing this seriously, this is an unavoidable step.
However, you must assess the pros and drawbacks of taking this step against your unique circumstances before making a final decision. In many cases, working part-time and making roughly £80,000 a year in sales works out well for the firm. For some, like me, VAT registration was a foregone conclusion when I decided to make this my full-time job after carefully evaluating the implications for my firm.
I’d advise you to figure out your profit margin right now and to think about how it might change if you go through the VAT registration process. Is it possible to continue selling some of the products you already offer if you become VAT registered?
Check to see if you have the resources to expand your business’s revenue. Your profit margin will be reduced even if you take steps to minimise the impact of VAT registration.
Is it preferable to sell £150k of goods at a 9 percent profit margin than £80k at a 12 percent profit margin? Suppose you could make £200k at an interest rate of 8 or 9 percent? Consider the additional time and resources required to achieve these goals.
I’d recommend contacting a merchant who is VAT-registered and asking them questions about their products. Don’t make a decision too quickly! A large question with no clear right or incorrect answer because it is based on your unique situation.
Registering will require you to perform the following:
Stay on Top of Invoice Collection
There are some shops who provide invoices for all orders they have in their database, but there are others who just provide invoices for current orders, and other unexpected events may occur. It’s critical to keep an eye on the collecting of invoices. Mothercare is a prime example of a company that has gone into administration and from which you can no longer obtain invoices.
I’d advise you to check to see if you have any unpaid invoices that are more than 30 days old. Make a plan and follow through with it. As a business owner, you and your bookkeeper should work together to develop a system that works for both parties.
Claiming VAT – Suppliers
The Reverse Charge Mechanism
Because I’m VAT-registered, I’ve run into trouble figuring out what a product’s VAT rate is before I buy it. The VAT rate charged by the supplier can be seen on an invoice, and this is often what you will charge for the product you sell after receiving the invoice.
However, knowing the VAT rate before making a purchase is essential because it might make a product better or worse.
I’ve helped complete two VAT returns, and I’ve gotten a decent sense of the VAT rates for various things. It’s possible to find out what the VAT rate is for a product by searching for it on Google or the HMRC website. VAs (Virtual Assistance) are a great way to save time and money, but they don’t have the capacity to learn about all the VAT rates for every goods.
Unless they are in the grocery sector, in which case they must analyse at both 0% and 20%, I have had VAs assume a 20% VAT rate on all commodities (and you may have a better solution). This is due to the fact that a large number of grocery items are rated as “0 percent”. To help with future purchases, I’ve also created an inventory database of every zero-percent things I’ve purchased.
There are a few things to keep in mind when it comes to using deal analysing tools like BuyBotPro and others. They make the mistake of assuming the category-based VAT rate is valid, which is obviously incorrect. Check this out before you buy! To customise the VAT rates on the things you analyse, I suggest using Seller Amp.
VAT Rates in Amazon
Your products’ VAT rates need to be established. When you list your products for sale on Amazon, you’re doing this. Without this, Amazon will assume that a product sold is subject to 20% VAT.
Checking VAT rate
An Amazon business buying account might help you determine a product’s VAT rate if you’re unclear. You may easily find the goods by logging into your Amazon account and searching for it. Go to Amazon’s business account and search for items.. See if VAT is included or excluded from the pricing.
I searched for “Playmobil” in the example above since all Playmobil toys are billed at 20% VAT. It’s easy to tell from these findings, which show costs both before and after VAT because there is a 20% tax.
Searched for “Coffee” since Coffee is taxed at 0% VAT, which is what I was looking for. Clearly, this method isn’t flawless; however, it may be useful for products about which you aren’t certain. As you can see, there was just one result with a VAT component. I presume the seller supplied an inaccurate VAT number.
We sincerely hope that you have benefited from reading this blog. As a last piece of advice for VAT-registered firms, you should set aside money each month to pay your VAT bill. This is because, over the course of three months, you will accrue an obligation in the form of VAT payable to HMRC.
In the United States? See our Amazon tax guide for more information.
Do you want to learn more about how to make money selling on Amazon? Visit the iGen Entrepreneurs Facebook page to see what they’re up to.