Selling online gives businesses in St Albans, Luton and London access to customers throughout the UK and overseas. However, e-commerce VAT can quickly become complicated when sales pass through several websites, marketplaces, payment providers and fulfilment locations.
An online seller may need to consider UK VAT registration, marketplace VAT reports, import VAT, exports, customer refunds, overseas warehouses and Making Tax Digital. The correct treatment can change depending on where the goods are located, where the customer is based and whether a marketplace is responsible for collecting the VAT.
Recording only the amount transferred into your bank account is not enough. Marketplace settlements may already have had commissions, fulfilment charges, advertising costs, refunds and other deductions removed.
This guide explains the main VAT responsibilities affecting UK e-commerce businesses and the practical steps online sellers can take to maintain accurate records and avoid preventable problems.
Carter Bookkeeping Services supports online retailers across St Albans, Luton, London and Hertfordshire with e-commerce bookkeeping, VAT returns, accounting software and financial record reviews.
What Is VAT?
Value Added Tax is a tax applied to most goods and services supplied in the UK.
A VAT-registered business normally:
- Charges VAT on taxable sales, known as output VAT.
- Reclaims eligible VAT paid on business purchases, known as input VAT.
- Maintains appropriate VAT records.
- Submits VAT returns to HMRC.
- Pays the difference where output VAT exceeds recoverable input VAT.
- Claims a repayment where recoverable input VAT exceeds output VAT.
Not every sale carries the standard VAT rate. Products and services can be standard-rated, reduced-rated, zero-rated, exempt or outside the scope of UK VAT.
These categories are not interchangeable. For example, zero-rated sales remain taxable supplies and normally count towards the VAT registration threshold, while exempt sales are generally excluded.
When Must an Online Seller Register for VAT?
A UK business must normally register for VAT when its total VAT-taxable turnover for the previous rolling 12 months exceeds £90,000.
This is not measured only at the end of the tax year or company financial year. Online sellers should calculate their taxable turnover at the end of every month by looking back over the preceding 12 months.
Taxable turnover generally includes sales that are:
- Standard-rated.
- Reduced-rated.
- Zero-rated.
- Subject to particular reverse-charge rules that count towards registration.
Marketplace commission, payment-processing charges, advertising costs and customer refunds should be recorded properly, but ordinary business expenses do not reduce turnover when testing whether the registration threshold has been exceeded.
Looking Back Over the Previous 12 Months
If taxable turnover exceeds £90,000 during a rolling 12-month period, the business must normally register within 30 days of the end of the month in which it exceeded the threshold.
The normal effective registration date is the first day of the second month after the threshold was exceeded.
Expected Turnover During the Next 30 Days
A separate test applies when the business expects taxable turnover to exceed £90,000 during the next 30 days alone.
This may be relevant where an online seller receives an unusually large order, launches a successful product or enters a major retail agreement.
Under this test, registration is generally effective from the date the business first realised it would exceed the threshold.
Use Gross Sales When Monitoring the Threshold
Online marketplaces and payment providers normally transfer net settlements rather than the full value of customer sales.
For example, a marketplace statement might contain:
| Settlement Activity | Amount |
|---|---|
| Gross customer sales | £18,000 |
| Customer refunds | −£1,000 |
| Marketplace commission | −£1,800 |
| Fulfilment and storage fees | −£1,100 |
| Advertising charges | −£900 |
| Bank settlement | £13,200 |
Recording only the £13,200 bank settlement as sales would omit substantial revenue and expenditure. It could also cause the business to monitor the VAT registration threshold using the wrong figures.
The bookkeeping should separately record:
- Gross sales.
- VAT collected.
- Customer refunds.
- Marketplace commission.
- Fulfilment and storage charges.
- Advertising costs.
- Chargebacks.
- Amounts still held in reserve.
VAT on Sales Through Your Own Website
Where a UK business sells directly through Shopify, WooCommerce or another website, it is normally responsible for determining the VAT treatment of the transaction.
The business may need to establish:
- Whether the product is subject to UK VAT.
- The correct VAT rate.
- Whether the sale is domestic or an export.
- Whether the customer is a business or consumer.
- Where the goods are located when sold.
- Whether overseas registration or import arrangements apply.
The website and accounting software should use consistent VAT codes. A product configured incorrectly in an online shop can apply the same mistake to hundreds of customer orders.
VAT on Marketplace Sales
Selling through Amazon, Etsy, eBay or another marketplace does not automatically transfer every VAT responsibility to the platform.
In many ordinary UK sales made by a UK-established seller using UK-held stock, the seller remains responsible for accounting for VAT.
However, an online marketplace can be treated as the supplier for VAT purposes in defined circumstances.
Imported Consignments Worth £135 or Less
Where qualifying goods are outside the UK when sold, imported in a consignment worth no more than £135 and sold to a UK consumer through an online marketplace, the marketplace will generally collect and account for the UK VAT.
The £135 limit applies to the total value of the consignment rather than each separate product inside it.
Goods Held in the UK by an Overseas Seller
A marketplace may also be responsible for VAT where goods of any value are already located in the UK and are sold through the marketplace by an overseas business to a UK customer.
These deemed-supplier rules are highly fact-specific. A marketplace VAT report should therefore be reviewed rather than assuming every platform sale has been handled in the same way.
Even where the marketplace accounts for the VAT, the seller may still need to:
- Record the transaction in its bookkeeping system.
- Retain marketplace VAT and settlement reports.
- Reconcile the amount collected and paid out.
- Account for related fees and expenses.
- Consider whether it has other VAT registration obligations.
Selling Goods From Great Britain to Overseas Customers
Goods exported from England, Scotland or Wales to a destination outside the UK can generally be zero-rated for UK VAT when the relevant conditions are met.
Zero rating does not mean the transaction is ignored for VAT. It remains a taxable sale at a 0% rate and must be supported by appropriate evidence.
The business should normally retain documents showing:
- What was sold.
- The customer and delivery destination.
- When the goods left the UK.
- How the goods were transported.
- Customs or courier information.
- Evidence that the goods reached an overseas destination.
For most exports, the goods must leave the UK and the required evidence must normally be obtained within three months of the time of supply, although exceptions can apply.
If the conditions are not satisfied, the seller may need to account for UK VAT.
Selling Goods to EU Consumers
A seller dispatching goods from Great Britain to an EU consumer is normally making an export from the UK and an import into the destination country.
Although the UK sale may qualify for zero rating, import VAT and potentially customs charges can arise when the goods enter the EU.
The commercial arrangement should clearly establish whether:
- The customer pays import VAT and customs charges on delivery.
- The seller acts as importer and pays the destination charges.
- A marketplace collects the destination VAT.
- The Import One Stop Shop can be used for eligible low-value consignments.
Unexpected import charges can result in refused deliveries and customer complaints, so the tax and delivery terms should be established before international sales begin.
Import One Stop Shop
The Import One Stop Shop may be available for eligible goods imported in consignments worth no more than £135 and sold to consumers in the EU, Northern Ireland or both.
Under IOSS, the seller charges the destination VAT at the point of sale, submits monthly IOSS returns and pays the VAT through the scheme.
The conditions should be reviewed carefully before using IOSS. It does not apply to every product, sale or shipment.
One Stop Shop
The Union One Stop Shop can be relevant to distance sales of goods from Northern Ireland to consumers in EU member states.
A seller dispatching goods from Great Britain should not assume it can use the UK Union OSS arrangement. Its destination-country VAT position may require separate registration or a different arrangement.
Selling Digital Services Internationally
Digital services can follow different VAT rules from physical products.
These may include automated or electronically supplied services such as:
- Downloadable software.
- Online games.
- Automated online courses.
- Digital media subscriptions.
- Website hosting.
- Downloadable images, music or publications.
The VAT treatment can depend on whether the customer is a business or consumer and where that customer is located.
A UK business selling qualifying digital services to EU consumers may need to register for the non-Union OSS in an EU member state or register separately where the customers are located.
Businesses selling both physical products and digital services should keep these transactions separate because the rules may differ.
Importing Stock Into the UK
E-commerce businesses importing stock into the UK may incur several separate costs.
- The overseas supplier’s invoice.
- International freight and insurance.
- Customs duty.
- Import VAT.
- Customs clearance and agent fees.
- Domestic delivery charges.
These amounts should not automatically be recorded as one expense.
Customs duty usually forms part of the cost of bringing the stock into the business and is not reclaimed through the VAT return.
Import VAT may be recoverable by a VAT-registered business where the normal conditions are satisfied and the business holds appropriate evidence.
Postponed VAT Accounting
A VAT-registered importer may be able to use postponed VAT accounting rather than paying import VAT immediately at the border.
The business accounts for the import VAT on its VAT return and may reclaim it on the same return, subject to the normal input VAT recovery rules.
Monthly postponed import VAT statements should be downloaded, retained and reconciled to the relevant imports. Courier invoices or customs-agent statements may not always provide the complete information required.
Making Tax Digital for E-Commerce VAT
All VAT-registered businesses must generally keep specified VAT records digitally and submit VAT returns using compatible software unless HMRC has granted an exemption.
This applies whether the business registered because it exceeded the threshold or chose to register voluntarily.
Compatible software must be capable of:
- Maintaining the required digital VAT records.
- Preparing the VAT return from those records.
- Communicating digitally with HMRC.
A spreadsheet can still form part of a compliant system if it is connected to HMRC through compatible bridging software.
Where several systems are used, required VAT information should normally pass between them through digital links rather than being manually copied and re-entered.
Choosing Accounting Software for E-Commerce VAT
Popular accounting platforms include Xero, QuickBooks, FreeAgent and Sage. However, the most suitable software depends on the structure and complexity of the business.
Before selecting a platform, check whether it supports:
- Making Tax Digital for VAT.
- The VAT scheme used by the business.
- Marketplace and website integrations.
- Stripe, PayPal and other payment providers.
- Foreign-currency transactions.
- Inventory or stock integrations.
- Import VAT and reverse-charge entries.
- Channel or product reporting.
- The expected number of monthly transactions.
Carter Bookkeeping Services can help businesses choose and configure appropriate accounting software.
Software integrations can reduce manual processing, but they still require review. An incorrectly configured integration can duplicate revenue, omit refunds or apply the wrong VAT code to large numbers of transactions.
How to Register for VAT
Most businesses register online through HMRC.
The application may require:
- Business registration and contact information.
- Details of business activities.
- Taxable turnover figures.
- Bank account information.
- Details of associated businesses where relevant.
- The reason for registration.
Once registration is accepted, HMRC confirms the VAT registration number, effective registration date and return periods.
Charging VAT While Waiting for the Registration Number
A business cannot show VAT as a separate amount on its invoices until it receives its VAT registration number.
It may increase its prices to allow for the VAT that will become payable from the effective registration date. Once the registration number is received, the business can issue the appropriate VAT invoices or replacement documents.
The business should not delay accounting for VAT simply because HMRC has not yet issued the number.
Preparing an E-Commerce VAT Return
Most VAT-registered businesses submit returns every three months, although monthly and annual arrangements may be available.
A properly prepared e-commerce VAT return should be based on reconciled records rather than only bank transactions.
The preparation process may include:
- Recording sales from every website and marketplace.
- Separating gross sales, VAT, fees and refunds.
- Reconciling marketplace settlement reports.
- Reconciling Stripe, PayPal and other payment processors.
- Reconciling bank and credit card accounts.
- Recording eligible purchase invoices and expenses.
- Reviewing UK, export and marketplace VAT treatments.
- Recording import VAT and postponed VAT accounting amounts.
- Processing refunds and credit notes.
- Reviewing overseas-service reverse charges.
- Reconciling the VAT control account.
- Reviewing the final return before submission.
VAT Return and Payment Deadlines
For most standard quarterly and monthly VAT returns, the submission and payment deadline is one calendar month and seven days after the end of the accounting period.
The payment must reach HMRC by the deadline, so sufficient processing time should be allowed.
Different arrangements can apply to businesses using annual accounting or payments on account. The deadline shown in the business’s VAT account should always be checked.
Late VAT Return Penalties
Late VAT returns are dealt with through a points-based penalty system.
A business normally receives one penalty point for each late submission, including nil and repayment returns.
| Return Frequency | Penalty-Point Threshold |
|---|---|
| Annual | 2 points |
| Quarterly | 4 points |
| Monthly | 5 points |
Once the relevant threshold is reached, HMRC can issue a £200 penalty. Further £200 penalties can apply for subsequent late submissions while the business remains at the threshold.
Late VAT Payment Penalties and Interest
Late payment is dealt with separately from late submission.
Late-payment interest begins from the first day the VAT is overdue and continues until the outstanding amount is paid.
Where VAT remains unpaid:
- A first penalty can be calculated at 3% of the VAT outstanding at day 15.
- If the balance remains outstanding at day 30, a further 3% can apply to the amount still unpaid.
- From day 31, an additional penalty can accrue daily at an annual rate of 10% on the outstanding balance.
A business that cannot pay should still submit its VAT return and contact HMRC promptly. Agreeing a Time to Pay arrangement before the relevant penalty date may reduce or prevent some late-payment penalties.
VAT Invoices for Online Sales
Only VAT-registered businesses can issue VAT invoices.
A VAT-registered business must normally issue a VAT invoice when it supplies standard-rated or reduced-rated goods or services to another VAT-registered business.
A full VAT invoice normally includes:
- A unique invoice number.
- The date of issue and tax point where different.
- The seller’s name, address and VAT registration number.
- The customer’s name and address.
- A description and quantity of the goods or services.
- The net value excluding VAT.
- The applicable VAT rate.
- The VAT amount.
- The total amount payable.
Simplified VAT invoices can be used for certain lower-value retail transactions. The correct document depends on the transaction value and customer.
Online sellers should also retain copies of cancelled or incorrect invoices, credit notes and marketplace-generated VAT documents.
Customer Returns and VAT Credit Notes
Returns and refunds are a normal part of e-commerce, but they need to be reflected accurately in both the sales records and VAT return.
Where a sale is cancelled or the price is reduced, the seller will normally issue an appropriate credit note and adjust the VAT in the relevant accounting period.
The bookkeeping should account separately for:
- The reduction in sales.
- The output VAT adjustment.
- The amount returned to the customer.
- Any payment-provider refund fee.
- Marketplace commission refunded or retained.
- The product returned to inventory.
- Damaged stock that cannot be resold.
Refunds should be reconciled against the marketplace, payment processor and bank records.
How Long Must E-Commerce VAT Records Be Kept?
VAT records generally need to be retained for at least six years.
Businesses using the VAT One Stop Shop or the former Mini One Stop Shop normally need to retain relevant records for ten years.
Useful e-commerce VAT records include:
- Sales invoices and credit notes.
- Purchase invoices and receipts.
- Marketplace transaction reports.
- Marketplace settlement statements.
- Payment-processor reports.
- Bank and credit card statements.
- Import VAT and customs documents.
- Postponed import VAT statements.
- Export and delivery evidence.
- VAT returns and supporting calculations.
- Refund and chargeback records.
- Foreign-currency calculations.
- Digital records maintained within the accounting software.
Is Voluntary VAT Registration Worthwhile?
An online seller below the compulsory threshold can choose to register voluntarily.
Potential advantages include:
- Recovering eligible VAT on stock and other business costs.
- Recovering eligible import VAT.
- Preparing in advance for expected growth.
- Avoiding a rushed registration when the threshold is exceeded.
- Reducing the apparent VAT impact where most customers are VAT-registered businesses.
Potential disadvantages include:
- Charging VAT on taxable UK sales.
- Reducing margins if VAT is absorbed within existing consumer prices.
- Maintaining digital VAT records.
- Submitting returns and making payments.
- Managing more complicated domestic and international transactions.
Voluntary registration should be assessed using the business’s actual pricing, customer base, expenses and growth plans. Registering only to appear larger or more established is not sufficient commercial justification on its own.
Common E-Commerce VAT Mistakes
- Monitoring net deposits rather than gross sales: Marketplace deductions do not normally reduce taxable turnover.
- Checking turnover only at year-end: The compulsory VAT threshold uses a rolling 12-month test.
- Assuming the marketplace handles every VAT obligation: Deemed-supplier rules apply only in defined situations.
- Using the wrong product VAT rates: Product categories can have different VAT treatments.
- Failing to retain export evidence: A sale cannot simply be zero-rated because the delivery address is overseas.
- Ignoring stock held overseas: Storing goods in another country can create a local VAT registration obligation.
- Missing import VAT statements: Input VAT claims need appropriate evidence.
- Recording refunds incorrectly: Customer refunds, credit notes and VAT adjustments must agree.
- Duplicating sales through integrations: Website orders and payment transactions can both be imported as revenue.
- Leaving marketplace balances unreconciled: Old reserves and settlement differences can make the accounts unreliable.
- Using manual transfers between software systems: This can break required MTD digital links.
- Registering voluntarily without reviewing prices: Consumer-facing businesses may need to absorb VAT or increase prices.
Monthly VAT Checklist for Online Sellers
- Calculate VAT-taxable turnover for the previous rolling 12 months.
- Reconcile every sales channel.
- Reconcile Stripe, PayPal and other payment providers.
- Separate gross sales from marketplace deductions.
- Review refunds, credit notes and chargebacks.
- Check product VAT codes.
- Review UK and overseas sales separately.
- Collect export and delivery evidence.
- Download import VAT and postponed accounting statements.
- Capture all eligible supplier invoices.
- Check foreign-currency transactions.
- Investigate failed software integrations.
- Review the expected VAT liability and reserve sufficient cash.
How Carter Bookkeeping Services Can Help
Carter Bookkeeping Services supports online sellers across St Albans, Luton, London and Hertfordshire with practical e-commerce bookkeeping and VAT support.
Our services can include:
- Monitoring the VAT registration threshold.
- VAT registration support.
- Setting up MTD-compatible accounting software.
- Connecting online stores and marketplaces.
- Reconciling marketplace settlements.
- Reconciling Stripe, PayPal and other payment processors.
- Recording gross sales, fees, refunds and chargebacks.
- Reviewing domestic and overseas VAT transactions.
- Recording import VAT and postponed VAT accounting.
- Preparing and submitting VAT returns.
- Reviewing existing bookkeeping through a holistic bookkeeping review.
- Identifying transactions requiring specialist cross-border tax advice.
International VAT can become highly fact-specific. Where overseas registrations, customs classifications or complex cross-border structures are involved, specialist tax or customs advice may also be required.
Frequently Asked Questions
When Must an E-Commerce Business Register for VAT?
A UK business must normally register when its VAT-taxable turnover for the previous rolling 12 months exceeds £90,000.
Registration may also be required if the business expects taxable turnover to exceed £90,000 during the next 30 days alone.
Do Amazon and Etsy Collect VAT for Sellers?
Sometimes. A marketplace can be responsible for collecting VAT under defined deemed-supplier rules, particularly for certain sales involving overseas sellers or low-value imported goods.
A UK seller should not assume that the marketplace accounts for VAT on every transaction.
Do Marketplace Fees Reduce My VAT Registration Turnover?
No. Ordinary marketplace commission, advertising and processing costs do not reduce the value of taxable sales when assessing the registration threshold.
Do I Charge UK VAT When Selling to EU Customers?
Goods exported from Great Britain can normally be zero-rated for UK VAT when the relevant conditions and evidence requirements are met.
Import VAT, destination-country VAT or overseas registration requirements can still arise when the goods enter the EU.
Can a Great Britain Seller Use OSS?
The UK Union OSS arrangement primarily applies to qualifying distance sales from Northern Ireland to EU consumers.
A seller dispatching goods from Great Britain may need destination-country registration or another arrangement. IOSS may be available for eligible low-value imported consignments.
Does Making Tax Digital Apply Below £90,000?
Yes, if the business is VAT registered. MTD for VAT generally applies to voluntarily registered businesses as well as businesses above the compulsory threshold.
How Often Are VAT Returns Submitted?
Most businesses submit VAT returns quarterly. Some use monthly returns, while eligible businesses within annual accounting normally submit one return each year.
How Long Must Online Sellers Keep VAT Records?
VAT records generally need to be retained for at least six years. Relevant OSS records normally need to be retained for ten years.
Can I Reclaim VAT on Stock and Marketplace Costs?
A VAT-registered business can generally reclaim VAT on eligible purchases used for its taxable business activities, provided it holds appropriate evidence and no restriction applies.
Some overseas suppliers may not charge UK VAT, and their services may instead require a reverse-charge entry.
Can a Bookkeeper Manage My E-Commerce VAT Returns?
Yes. An authorised bookkeeper or agent can maintain the records and prepare and submit VAT returns on behalf of the business.
The business remains legally responsible for providing complete information and ensuring its returns are accurate.
Get Help With E-Commerce VAT
E-commerce VAT becomes easier to manage when sales channels, payment providers, imports and refunds are reconciled regularly.
Waiting until the VAT deadline to investigate several months of marketplace transactions increases the risk of missing records, incorrect VAT codes and unexpected liabilities.
Contact Carter Bookkeeping Services to discuss VAT and bookkeeping support for your online business in St Albans, Luton or London.