VAT. It’s the subject of many questions that I receive and something that all new sellers (and even many experienced ones!) seem to struggle with. And it’s something I’ve covered multiple times on my blog over the years.
But if you don’t want to go back and read over those posts then let me sum up the conclusion for you, and it’s pretty simple really – don’t register for VAT unless you have to!
Why should Amazon FBA sellers wait to register VAT?
Well, registering for VAT will nearly always cost you and your business money as the VAT you charge on sales (which you have to give to the government) will be higher than the VAT you reclaim on business expenses.
And we can see this clearly with a very basic, simplified calculation.
Say I’m a business selling a product on Amazon for £20. Amazon’s referral fee is £3.60 and their FBA fee is £4.20, leaving me with £12.20 per sale.
I source this product from China for £2.92 FOB, which gives me the following as a final landed cost:
|Product Cost||Shipping||Import Duty (5%)||VAT (20%)||LANDED COST|
So with my £20 selling price I’m making a net profit of £6 per item. At 1,000 sales a month that works out at £6,000 profit per month.
How does VAT affect FBA profits?
Now with every £20 sale, £3.33 (20%) is the amount of VAT I’ve charged my customer. But that doesn’t mean I have to give all of that to HMRC and lose half my profit! As a VAT registered business I can also claim back the VAT I’ve paid.
In this case that would be the Import VAT, which is £1.03 per item. And also VAT on my Amazon Fees, which works out at £1.30 per item.
So in total that’s £1 per item sold that I owe in VAT (£3.33 – £1.03 – £1.30). Times a thousand sales a month and my profit is down from £6,000 to £5,000 – a 17% decrease.
In reality it would be slightly less than this as there are other business expenses that you could reclaim VAT on but for the average seller that’s roughly what it would look like and all important point is that registering for VAT costs you money! That’s not even considering the additional accounting costs and paperwork that needs to be done.
Exceptions to waiting to register VAT
An exception to this is if you’re selling certain goods which are reduced or zero rated.
This includes products like children’s clothing and shoes, protective and safety equipment such as children’s car seats, protective boots, helmets etc. For a full list of reduced and zero rated products and services take a look at this page.
If you’re selling one of these products then it would actually make sense to register for VAT as soon as possible, because the amount of VAT you reclaim will be higher than what you have to pay, so you’ll increase your net profit.
For the vast majority of products though this won’t be the case and that’s why I always say put off registering for VAT for as long as possible.
Unfortunately we can only keep that going for so long though as there are a number of thresholds and triggers that mean you have to register for VAT. Which of these apply to you will depend on your specific business but the most common reasons are below.
When do Amazon FBA sellers pass the threshold?
If you’re selling in a European country to customers within that country then you must register for VAT when your sales reach the domestic selling threshold. In the UK this is currently £85,000 and is calculated over a rolling 12 month period, so not year by year!
Here’s a full list of domestic selling thresholds for Amazon’s European marketplaces:
|Country||Domestic Selling Threshold|
|Czech Republic||CZK 1,000,000|
How storing goods in other European countries affects Amazon FBA Sellers
Previously as long as you were under the distance selling threshold (more on that in a minute) for other European countries you could store and ship goods there without having to register for VAT. But after Brexit that’s no longer the case and now if you store goods within a European country you have to register for VAT in that country.
And this includes storing goods in Amazon’s fulfilment centres or using the PAN-European FBA programme.
Distance selling thresholds for FBA Sellers
If you decide to only store and ship orders from the UK to European customers, rather than storing goods within Germany or France for example, to avoid having to register for VAT – you still have to register if your sales reach the distance selling threshold for that country.
|Country||Domestic Selling Threshold|
|Czech Republic||CZK 1,140,000|
There are other triggers and VAT requirements, but these three are by far the most common reasons for when VAT registration becomes obligatory.
Amazon actually offer a useful VAT registration test which will tell you if you need to be registered for VAT or not.
Here’s the link if you’d like to take a look yourself.
So what these thresholds mean is that if your business does well and your sales grow, then sooner or later you will have to register for VAT. But as we saw earlier this can mean less profit!
Should FBA sellers purposefully stay under the threshold?
Well that’s a great question and exactly what an Amazon Sharks member recently asked me.
As you can see he’s already created a successful side income from selling on Amazon to supplement his full time job, which he wants to expand further, BUT he isn’t sure if that’s the right thing to do when taking into account VAT. And as he’s right at the £85,000 sales threshold he has to decide to either artificially restrict sales or to continue expanding and suffer the loss in margin.
But I know what you may be thinking – how can you even stop sales in the first place!?
How FBA sellers can postpone hitting the VAT threshold
One would be to reduce your ad spend so a higher percentage of your sales come from organic searches. This would also increase your overall margins.
Another way would be by increasing your prices.
Let’s use our product from earlier for another example. Say you sell 350 units a month at £20 each, giving you sales of £7,000 a month (or £84,000 in 12 months, so right at the threshold). At £6 profit per unit, that’s £2,100 per month. So instead of letting your sales pass the £85,000 threshold, which would reduce your profit to roughly £1,750 when taking into account VAT, you instead increase your price to £24.
That 20% price increase might reduce your sales by 30%, meaning you now only sell 245 units / £5,880 a month.
But it also increases your profit per sale from £6 to £9.28, so your monthly net profit is actually £2,274, so higher!
The important part is that it gives you a bigger profit safety net when you reach the VAT threshold.
Of course while this sounds great in theory in reality it isn’t always possible and it’s not a permanent solution – we can’t simply keep raising our prices.
And in answer to the question I received – at what point it’s worth passing the threshold and registering – it really depends on your own specific business and margins.
To help you make that decision let’s do one final example using our made up product / business as the 30% net margin that I’ve used is fairly typical for an Amazon FBA product.
Again, just to recap – at 350 units a month at £20 each, we get yearly sales of £84,000 and profit of £25,200.
Being VAT registered brings this profit down to £21,000.
So at what level of sales can we make the same profit? As that’s really the all important question and what we want to know. As he put it, does he need to reach £120,000 and above or is it less?
Well in this made up business, the magic number is £100,800!
At that level you’re making 420 sales a month and ending up with the same monthly profit of £2,100.
So £85,000 in sales while not VAT registered works out at the same level of profit as £100,800 in sales if you are registered.
I hope you can see why I always say put it off for as long as possible! That’s nearly a 20% growth in sales that doesn’t add to your monthly profit, all because of VAT.
And speaking of putting it off for as long as possible – it’s time to end today’s post with a big tip on how to (legally) avoid VAT!
As we’ve already covered, you have to register for VAT when you reach £85,000 in sales over the last 12 months and this applies whether you’re a sole trader or a Ltd company.
BUT this 12 month period can actually be reset…
How can FBA Sellers reset their counter?
If you’re a sole trader who changes to a Ltd company your previous sales are disregarded when it comes to VAT.
I hope I don’t have to go over how huge this is and how if used correctly it can save you thousands and thousands of pounds. In my opinion it’s something that every sole trader should take advantage of and I’m shocked it’s not talked about more online.
And on that note we’ll end today’s post.
As always if you have any questions or comments post them below or email me at email@example.com and I’ll personally get back to you.
Otherwise, until next time.
All the best,
Disclaimer – everything in this article is purely my own opinion. You should always consult a professional accountant if you need advice specific to your own business.