Firstly, if you are an online trader and its not just a hobby, makesure you register and pay tax.
The criteria used to assess if an activity is a hobby or a business are:
- The size and commerciality of the activity.
- The frequency of the activity and transactions
- The application of business principles.
- Whether there is a genuine profit motive.
- The amount of time devoted to the activities.
- The existence of arm’s-length customers (as opposed to just selling your wares to family and friends).
You must register for VAT with HM Revenue and Customs (HMRC) if your business’ VAT taxable turnover is more than £83,000.
So once you are VAT registered and trading online with Ebay, Amazon or other platforms how do you work out how much VAT you should account for on sales?
Let’s take an example:
Sales are £5,000
Postage £500
Online Platform Commission £500
Is your VAT able income:
a) £5,000 (Goods)
b) £5,500 (Goods plus Postage)
c) £4,500 (Goods net of Commission)
The answer is b) Goods plus Postage = Total Sales Value
Assuming its a UK customer and goods are standard rated the VAT would be £5,500/6 = £916.67 because when you sell to consumers the price is inclusive of VAT.
If your platform provider is based outside the UK but in the EU their fees will subject to ‘Reverse Charge‘ VAT.
When you buy services from suppliers in other countries, you may have to account for the VAT yourself – depending on the circumstances. This is called the ‘reverse charge’, and is also known as ‘tax shift’. Where it applies, you act as if you are both the supplier and the customer – you charge yourself the VAT and then, assuming that the service relates to VAT taxable supplies that you make, you also claim it back. So there’s no net cost to you – the two taxes cancel each other out. [HMRC]
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