An introduction to online distance selling

The VAT rules for online sales of goods in the UK are determined by the place of supply for VAT purposes. This determines the country in which VAT is payable when goods are being sold online.

In the discussion below we consider a UK branch of a non-UK company (the Overseas Company”) which has no presence in the UK (so a Non-EU business) and a UK limited liability company, which would be a UK business.

The initial matter to be determined are

• where the business providing the goods is located
• the location of the goods being sold at the point of sale
• the location of the customer
• whether the customer is registered for VAT in the UK or in the EU member state in which the goods are being supplied

Broadly speaking, the online businesses that are selling goods in the UK fall into three categories.

• UK businesses that sell goods which are in the UK at the point of sale
• EU businesses that sell goods to UK customers
• Non-EU businesses that sell goods to UK customers

UK businesses that sell goods which are in the UK at point of sale

This will apply where the Overseas Company incorporates a UK limited liability company and where it has a permanent establishment in the UK.

The simplest scenario is where goods are in the UK and are sold to UK customers. In this case it is only once the UK VAT registration limit[1] is exceeded that VAT registration is required and VAT charged on any subsequent sales to UK customers.

As we discussed, it will be advantageous for any online business the Overseas Company establishes for sales in the UK to be registered for VAT at the earliest date so as to recover VAT on the importation of goods to the UK and to assist with import customs and duties.

If the UK business is VAT registered and sell goods to EU customers the VAT treatment will depend on whether or not your customers are registered for VAT in the EU.

Any non-VAT registered EU customers should be charged UK VAT unless the sales by the business in the EU territory of the customer have exceeded the Distance Selling Threshold. If sales to an EU territory exceed the Distance selling threshold the business is required to register for EU VAT in that EU member state and charge VAT at the rate applicable in the member state rather than UK VAT.

As shown in Schedule 1, the Distance Selling Thresholds vary between EU member states and it is necessary to keep a record of the sales in each member state to ensure appropriate registrations are made. As for the UK, Test-Rite US may decide to register in the main EU member state markets, such as Germany, to avoid potentially registering late.

[1] Schedule 1 shows the Registration Threshold, Distance Selling Threshold and Standard VAT rates for EU Countries

For VAT registered EU customers the sales can be subject to a UK VAT zero rate (0%) and the customer will then be responsible for accounting for VAT in their country. For the zero rate to apply there are regulatory requirements which need to be met.

Sales of goods to non-EU customers where the goods are physically leaving the UK are subject to zero-rate for VAT purposes and again there are regulatory requirements which need to be met.

EU businesses that sell goods to UK customers

If the Test-Rite US business is located elsewhere in the EU and does not have a permanent establishment in the UK, the VAT treatment will be determined by whether or not your customers are registered for UK VAT.

For non–VAT registered customers where the goods are already based in the UK at the point of sale the EU business will automatically be required to register for VAT from day one – there is no threshold.

If the goods are in the EU country at the time of sale then they will be regarded as UK distance sale. The EU business will be required to register for UK VAT and charge UK VAT once the UK Distance Selling Threshold (currently £70,000 as shown in Schedule 1) is exceeded.

For VAT registered customers, the position is the same where the goods are already based in the UK at the point of sale – EU business will automatically be required to register for VAT.

If the goods are in the EU country at the time of sale then they will be subject to EU member state VAT, however it may be possible to zero rate the sale if your customer provides you with a valid UK VAT registration number.

Non-EU businesses that sell goods to UK customers

This will be the position of a branch of the Overseas Company provided it does not have a permanent establishment in the UK.

If the goods are already based in the UK then automatic VAT registration will be required. As noted above for a UK company, Test-Rite US will wish to register for VAT in the UK at the earliest date so as to recover VAT on the importation of goods to the UK and to assist with import customs and duties.

If the goods are outside the EU at the point of sale and the Test-Rite US branch is responsible for importing the goods to the UK, then VAT registration is automatically required.

However if the buyer is responsible for importing the goods to the UK, the supply is deemed to take place outside the UK and there are no potential UK VAT obligations for the Test-Rite US branch.

Online Market Places

It is worth noting that online market places (e.g. Amazon) can be held jointly and severally liable by the UK tax authority, HM Revenue & Customs, for an online seller’s VAT liability. The online market places will request details of the VAT registration if they consider the online business should be registered for VAT. They can also potentially block sales of goods on their marketplace if the business fails to provide a VAT registration number where they believe one is necessary.

CHARGING VAT WHEN SELLING ONLINE

The example below assumes the business is registered for VAT and making sales to a UK non-VAT registered customer.

Assuming the online sale is for £1,000 plus £100 postage and packing and the online market provider deducts 12.5% commission (£125) and the costs of postage and packing from the net remittance to the business of £875.

VAT is chargeable on the total sales amount of £1,100 as VAT is applied to the postage and packing costs at the same rate as is applicable to the goods being sold. The VAT due will therefore be:

VAT will have been incurred on the purchase or importation of the goods to the UK. Assuming the net of VAT price is say £500, VAT will have been incurred of £100.

VAT may also be incurred on the charges from the online marketing platform however most online marketing platforms are based outside of the UK and some outside the EU.  Those based within the EU will not charge VAT if they have the VAT registration number of the business (there are some complications regarding reverse charge procedures) and those outside the EU will not include VAT. The example below assumes no VAT has been incurred from the online marketing platform.

The VAT and net of VAT position will therefore be: