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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. James Ashford

    Thanks for that great blog post Andrew- Very helpful! I have 2 questions:

    1) Would it help incorporating your company in HK/China no in the EU? (We are distributing out of UK)

    2) Can you split your company into server (e.g. 5) separate company’s so you can have a seperate 77k threshold for each company?

    1. Andrew Minalto

      Hi James,

      Thanks for your question.

      I’m not an accountant (I’m outsourcing it 100%) so I can’t give you any legal advice. Anyway:

      1) I’m not sure really? How would it help? As you would still need to register for UK VAT if your sales in UK reach 77k a year. I’m not that informed about HKs tax system etc. so can’t comment on benefits. Mainland China I would probably leave out straight away.

      2) Yes and No. By the letter of law, you can’t do it technically – by just splitting one company in 2 or 3 parts but if you’re creative, you can make this work by really separating your business into divisions. At least that’s what I’m doing and it’s perfectly legal. At the end of the day HMRC will make the call, so you may well want to (anonymously) ask whatever your set-up would be ok for them?

      Here’s more info on this from HMRC directly:

      http://www.hmrc.gov.uk/vat/start/register/when-to-register.htm#7

      You’ll obviously need to form separate Ltd. for each division, ideally get a separate address and so on.

      This is totally grey area and your success with getting this done will depend on your accountant’s creativity. I’m not recommending anything illegal here by the way – not at all! But if you really can create separate businesses and use this as tax advantage, you should probably do it.

      Hope this helps James!

      Thanks,
      Andrew

  2. Awsome post Andrew, really great stuff – you really make things cristal clear! Thank you very much. I have another question related to a slightly different situation:

    Background
    I have a Hong Kong registered company and will start to sell on Amazon FBA in Germany. The goods are produced in mainland China and shipped from mainland China, then they will be store in the amazon warehouses in Germany, and sold through amazon.de to German customers. I have a German bank account and the money from sales will go into that.

    Questions
    1. Do i have to pay VAT in Germany or Hong Kong (lets assume that i go above the VAT threshold in Germany to keep it simple)? In HK VAT = 0% so if i have to pay in HK, that would be fantastic. At the border when goods are declared, i assume that the German customs will charge customs tax AND VAT on the incoming goods, which then later i guess i could claim back.

    2. Where do i have to pay income and profit tax? I guess Hong Kong as this is where my company is, but then my bank account is in Germany, so dont know if the German authorities will sit by allowing me to earn money in Germany off German people without paying tax (other than VAT) on it.

    3. Do I have to have a company in Germany at some point or can you operate like this from abroad with no problems?

    I know many questions, and maybe the setup is not anything like you have done, but any help would be really appreciated!!

    Best!
    Ivar

    1. Little advice- Don’t put your stock in amazon warehouse,because when amazon decide to suspend your account for no reason whatsoever and keep your stock locked in their warehouse,u’ll be screwed mate!! And believe me it happens more than you think!! Never ever trust amazon with your stock,they are total crooks my friend. I know of 3 people who had 95%,99% and100% positive feedback ratings and were shut shut down overnight with a bullsh-t excuse,all their stock was locked in so they couldn’t create a removal order for their products. Also amazon do not take wisely to Chinese receipts:-)) you have been warned!!

      1. Andrew Minalto

        Hi Mark,

        Thanks for sharing your experience with us..

        It’s hard to believe though that Amazon does keep stock if your account is banned, unless it’s fake goods involved?

    2. Hi Ivar,

      I have a question for you, as i am in a very similar position may i get your email address?

      That would be fantastic

      Many thanks

      Sam

      1. Hi Ivar and Sam,

        I’m currently trying to fix the same problem with FBA Europe.

        Did you do it?

        May we share some information?

        Thank you

    3. Andrew Minalto

      Hi Ivar,

      Thanks for your questions.

      I’m not an accountant (I’m outsourcing it 100%) so I can’t give you any legal advice. Anyway:

      1) Yes, you’ll have to pay VAT in Germany if you go over the German VAT threshold. That’s how it works in all European Union countries.

      2) You’ll have to pay taxes in Germany probably (see nr.3).

      3) Yes, at least this is how it works in UK now – if you store & dispatch goods from UK, you have to register as a business here and of course pay taxes as a result. Alternative would probably be to set-up a company in Germany that only does goods distribution process and your HK company pays this company for the service provided? This would keep German’s company’s profit to minimum.

      But as I said – I’m not really an expert on such complex tax/accounting questions, especially I’m not familiar with German or HK laws and regulations so your best bet would be to get a legal advice from a professional.

      Hope this helps!

      Thanks,
      Andrew

      1. Hello Andrew,

        Thanks a lot for you help – very helpful indeed, and again for your article which was well written and very clear!

        Cheers,
        Ivar

      2. Andrew Minalto

        Glad I can help Ivar! 🙂

        Good Luck with the business & Thanks for stopping by.

        Andrew

  3. Ebay charge 15% VAT which you have to pay however you cant claim back any Tax back on business purchases? So are you really better of?

    1. Andrew Minalto

      Yes, you’re because that VAT charge on your eBay fees will never offset the extra you have to charge your customers. If eBay fees are roughly 10% and VAT makes less than 1/5th of that so that’s only less than 2% difference on FEES.

  4. […] The Biggest Tax Mistake an eBay Seller Can Make. Yes, being VAT registered when you don’t have to be! This only proves once again how important quality accounting advice can be so if you’re un-sure about VAT registration or any other tax related information, seek professional advice or at the very least call HMRC! If you don’t and make mistakes (like registering for VAT unnecessarily), it can literally cost you your business. […]

    1. harry richardson

      Hi,
      sort of similar to one of your other posters. i live in China and have a Hong Kong limited company that sends good to Amazon in Europe and another fulfillment company in the UK. Do I have to pay UK or European VAT as my turnover for all sales is nearing £79,000. the current VAT level.
      I have looked everywhere on the interenet and cant find an answer
      Thank You in Advance

      1. Andrew Minalto

        Hi James,

        You won’t be paying 20% as you’ll be taking off any VAT you pay suppliers and other expenses.

        But yes, on eBay it is a problem as many sellers are not VAT registered and it will be harder for you to compete when you are.

        The only solution to this is to deal with products that have decent margins. No way around this.

        Thanks,
        Andrew

      2. James Rayfield

        Hi Andrew,
        Thank you for the reply. It means that you have to swallow the pill and find high margin products. There is no other way. 🙁

        Regards,
        James.

      3. Andrew Minalto

        Exactly, that’s right James.

        Thanks,
        Andrew

      4. Andrew Minalto

        Hi Harry,

        Thanks for stopping by.

        Yes, I’m afraid you have to register for VAT in case goods are stored and sent from a UK/EU based warehouse.

        Just to be 100% sure (as I’m not an accountant or tax advisor), get in touch with HMRC and ask them directly:

        http://search2.hmrc.gov.uk/kb5/hmrc/contactus/view.page?record=dMVkEC6liWE

        Thanks,
        Andrew

  5. Hi Andy,

    Thanks for the info about the VAT, i understand you have many ecommerce/ebay business brands you trade under, to help you stay within the threshold did you register each brand as a separate ltd company? therefore making them totally unique legal entities with their own individual VAT turnover limits?

    Would be interesting to hear as i also have a few different ebay stores under different brands

    1. Andrew Minalto

      Hi John,

      Yes, I usually create a new Ltd. when starting new business. This not only makes them VAT free in the beginning but allows me to legally open new PayPal accounts (more on multiple PayPal & eBay accounts in next Monday’s blog post).

      Thanks,
      Andrew

      1. Mickael

        Hello Andrew,

        Do you need to pay an extra fee to the account for each new company? Ie, we are paying over £1000 per year for a single company, would we need to pay the same for each new one?

        And if you don’t mind me asking, which accountants are you using and how much is usually per company?

        Cheers!!

      2. Hristiyan

        Hi Andrew,

        Recently Ebay started to send messages to overseas sellers that they should register for VAT, but their turnover is not over £ 70,000 (according GOV.com)
        Should they register for VAT or not ?

        And if sellers not register for VAT can eBay ban them ?

        Thank you.
        Hristiyan

      3. Andrew Minalto

        I don’t know really what is going on on eBay as I don’t sell there anymore.

        So I don’t know how/if/when eBay will ban sellers who are not complying with VAT regs and law.

        But yes, if your business is based outside the UK, you have to register for VAT from day one IF you store goods in the UK OR from the moment you reach distance selling threshold IF you don’t store goods in the UK but send them to customers directly from abroad.

        Thanks,
        Andrew

      4. Andrew Minalto

        Yes, of course – there are additional accounting fees for each company.

        I’m using a local, small accounting company that gives me good discounts on additional accounts. They do local businesses only.

        Thanks,
        Andrew

      5. Joseph Pinto

        Hi Andrew,

        Thank you for such detailed information on VAT.

        My question is basic and simple:

        Turnover on ebay = Net sales (Actual sales minus all costs (ebay fees + Royalmail postage charges + PayPal fees)

        Or is trun over the actual sales for the VAT threshold of 85,000 in 2018.

        Kind regards,
        Joseph

      6. Andrew Minalto

        Hi Joseph,

        Turnover is your sales number, as simple as that.

        You don’t take anything off that number.

        Thanks,
        Andrew

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