The Biggest Tax Mistake An eBay Seller Can Make!

March 4, 2013 by Andrew Minalto - 291 Comments
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…is to register for VAT (Value Added Tax). Yes, registering as a VAT payer when you don’t have to is the single biggest VAT related mistake you can make as an eBay seller. Why? Because by doing that, you become less competitive on eBay’s marketplace where the majority of sellers are not VAT registered.

I know this may initially all sound too complicated and confusing so let’s cover the VAT registration process in detail, and both the advantages and disadvantages of becoming VAT registered.

The whole VAT system is quite complicated, with many exceptions and special rules. I won’t go into minute detail on every aspect of VAT now but if you want, you can read all the information about it on the HMRC website.

I’ll keep this blog post simple and straight to the point – so that you, as an eBay seller, get a clear idea on what VAT is and when you should apply for it.

VAT Rate Explained

The current standard VAT rate in the UK is 20% (as of 4th January 2011). There’s also a reduced rate of 5% applied to some specific goods and services (eg children’s car seats) and zero rated goods & services, such as children’s clothes. We’ll go into more detail on these exceptions in a minute.

The VAT rate is not fixed across all European Union countries so if your business is based outside of the UK, you will want to check your local authority’s website to find out the VAT rate in your country. For example in Ireland, the standard VAT rate is currently 23%, while in Luxemburg it’s just 15%.

When Should You Register for VAT?

You should register for VAT ONLY when you reach the “VAT threshold” and registration becomes mandatory, which currently stands at £77 000. The VAT threshold simply indicates the maximum turnover a business can have had over the last 12 months and still remain / work VAT free.

So for example:

If your turnover over the last 12 months is £50k, you don’t have to register for VAT.
If your turnover over the last 12 months is £80k, you do have to register for VAT.

IMPORTANT!!! If you go over this threshold only temporarily (due to a large, one-off sale, a Christmas promotion etc.) you can apply for exemption from registration. You’ll find more details and information about this on the HMRC website.

To put it simply, you must register when your 12 month turnover exceeds the VAT threshold which is £77k as of today (March, 2013). This figure change almost every year (it’s announced in the annual Budget), so make sure you keep up to date with the current rate.

Also this turnover INCLUDES goods that are ZERO VAT rated – so if you deal with zero rated goods, you HAVE to register for VAT when you go over that threshold. It’s mostly services that are zero rated but there are also a few products, here are some examples:

  • Equipment for disabled people
  • Books
  • Maps
  • Magazines
  • Baby wear
  • Children’s clothes and footwear
  • Cycling Helmets
  • And others…

You’ll find a full list here: http://www.hmrc.gov.uk/vat/forms-rates/rates/goods-services.htm.

So if you’re dealing with these products, even partially, you will have to INCLUDE sales of these products in your total turnover.

You can of course register for VAT voluntarily at any time but you should really think twice before doing anything like this…

You Should Avoid Registering for VAT for as Long as Possible…

Because when you do, you’ll have to pay more tax, as simple as that. You’ll either have to raise your prices to make up the difference which will make you less competitive OR you’ll have to lower your profit margin to keep the same pricing as before. And it doesn’t matter how you look at this – when you register for VAT, you pay more tax, PERIOD!

That’s why it’s so crucial to stay away from VAT registration for as long as possible. Applying for VAT voluntarily may be the biggest mistake you ever make; it can simply kill your eBay business as in just one day you’ll become uncompetitive.

That’s not even considering additional accounting expenses, as when you become VAT registered; accounting becomes even more complicated than before… VAT returns quarterly or monthly based on your return + each transaction booked now comes with an additional, VAT, field.

I personally started outsourcing accounting completely from the day I become VAT registered as I simply don’t think it’s worth the hassle and time doing this for yourself.

So yes, being VAT registered you’ll also face more expense with accounting. Even online accounting software programs usually have Basic and VAT versions, where the latter is more expensive of course.

THE ONLY exception would be IF you’re selling ZERO VAT rated goods. In this case you’ll be able to get MORE in VAT you’re paying in your expenses than what you take in on sales (ZERO).

So if you’re selling ZERO RATED goods, you would benefit from VAT registration from day one when you start your business.

But Andrew, how about reclaiming VAT on purchases?

Yes, that’s true, when you become VAT registered, you’ll be able to claim VAT back on all business purchases you make. This will include VAT on items you purchase for re-sale, packaging supplies, eBay fees and other related expenses.

But here’s the thing most eBay sellers don’t realise – the amount of VAT you claim back on purchases will be LESS than you take in sales meaning at the end of the day you’ll pay the government EXTRA tax.

For example:

* You buy £1000 + VAT worth of goods in one month (£1200 in total). VAT paid – £200.
* Your other VAT reclaimable expenses for that month (packaging materials, fees etc.) are £240, so VAT part – £40.

So your total VAT for purchases for that month was £240.

Now let’s have a look at your sales:

* You sold all those items for £3000, VAT included.

* This means you took in from sales £500 in VAT.

In your VAT return it would look something like this:

VAT from sales (£500) MINUS VAT from purchases (£240) = £260

This means you would have to pay the government £260 pounds in tax for the last month of trading.

Does that sound like a good deal to you?

Of course not!

As if you were not VAT registered, you would NOT have to pay any of this.

What’s the solution?

Keep trading VAT free for as long as possible. If you temporarily go over the threshold, apply for an exception.

If you see that you are going over the threshold but only by a minimal amount (say £1k or £2k), it may actually be a good idea to reduce sales a bit, to stay just below the threshold. But do this ONLY if you know that you can’t make bigger progress and reach say £100k in sales next year.

In all other cases, you have no choice but to register for VAT when the time comes. At that stage (£77k turnover over the last 12 months) you should have built a solid business, selling profitable items with good margins, and have your own online presence. Then you can be more flexible with pricing and profit margins.

However it’s very difficult to survive when you’re VAT registered and sell ONLY on eBay, unless your margins are very good (like with unbranded products). You’ll essentially be competing with all the people who are not VAT registered and therefore at a competitive advantage to you.

I’m not saying it’s not possible, it definitely is (take me for example or any other large eBay sellers – they’re all VAT registered) – if you buy in true wholesale quantities  directly from manufacturers in China then you can still make profit on eBay even when VAT registered, it’s just more difficult.

To sum it up – stay away from VAT for as long as possible! As registering voluntarily really may be the biggest mistake you can make for your business!

Thanks,
Andrew 


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291 Comments
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  1. Martin Dimitrov

    Hi Andrew.
    I had that big mistake.
    UK company VAT registered from day 1. Everything was fine when worked with big companies. Flat rate pay 11%. But now on ebay goings terribly. So, do you know any options for deregistation. I’m with turnover around £36 000 annually.
    Many thanks

    1. Andrew Minalto

      HI Martin,

      If your turnover is below the threshold, you can easily deregister from VAT.

      Just contact HMRC and ask them for the form you need to complete for this.

      Thanks,
      Andrew

  2. Hi Andrew
    Thanks for the post.

    If I exceed the Vat threshold (currently £85k), as a B2C business I will not be able to raise the price and thus will have to absorb the cost of VAT myself.

    As a result, this will mean that my vatable revenue will immediately reduce to £71k, thus below the threshold, which in theory should allow me to immediately deregister for VAT.

    Therefore do I need to register for VAT at all?

    Many thanks

    1. Andrew Minalto

      Hi There,

      I’m afraid it doesn’t work that way, no.

      Yes, you have to register for VAT if you exceed the threshold and then you can de-register in future if you go below the threshold.

      Andrew

  3. Colin Mayhew

    Hi Andrew,
    interesting article. Definitely food for thought.

    Here’s my question. I have a web design business, just myself, no employees, and I’m also looking at starting an eBay based business, and running the two together. When deciding whether I have to register for VAT, will I have to add the turnover of both businesses together to arrive at the threshold figure or is each one business treated as a completely separate entity for VAT reg purposes?

    Colin

    1. Andrew Minalto

      Hi Colin,

      If it’s the same company (same legal entity), you have to sum up turnover from both “divisions”.

      But of they’re two separate companies, you don’t have to sum turnover, no.

      Thanks,
      Andrew

  4. Hi Andrew

    Thank you for providing such a clear and helpful article on this subject. I’m not sure if you are still responding to questions but thought I would ask.

    I’m not above the VAT threshold of 85k and keep below this for all the reasons you have specified. I have an eBay business. There are occasions where buyers will return an item for a full refund. My question is whether refunds are also counted in the total turnover. I would assume that they weren’t but I’m not certain. If they were counted in the turnover it wouldn’t make sense as I will still sell the item, perhaps the following week and if they are counted then it would mean paying VAT twice on the same item if registered. Hope this makes sense.

    Kind Regards

    Andrew

    1. Andrew Minalto

      Hi Andrew,

      Thanks for your comment. Yes, of course, I’m still doing it! 🙂

      The answer to that question is complex and based on the accounting rules/system you run your business under. I’m afraid I can’t give you an answer here as there are too many variables. You should consult your accountant about this.

      Thanks,
      Andrew

  5. If I do become VAT registered to I have to pay vat even if I dont go over 85k? I was considering it as a supplier will not deal with me without a VAT number.

    1. Andrew Minalto

      Hi Andrew,

      Yes, once you become VAT registered, you have to charge/pay VAT on all sales – no matter what is your turnover.

      Thanks,
      Andrew

      1. Aaron Reese

        Not quite true…
        If both companies share a ‘significant’ controlling interest (i.e. same shareholders and/or directors) then HMRC can lift the ‘veil of incorporation’ and treat them as a single entity if they think that separate incorporations have been made to avoid VAT. The short answer is talk to your accountant.

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