VAT (Value Added Tax) Explain A to Z
VAT stands for Value Added Tax and is a type of sales tax that is applied in both the UK and also in the EU. Below I’ll be showing how VAT impacts your profit margins whether you’re VAT registered or not The easiest way to understand VAT is that there are two types
a) Input VAT (Purchases) and
b) Output VAT (Sales).
Input Vat –
a) Paid on purchases of products and services from VAT registered businesses
b) Paid on all non-EU imports (supplier unit cost + shipping + customs) As most of us are importing from Alibaba (China) so we’ll be paying VAT once our goods enter the EU.
c) Reclaimable if VAT registered, not reclaimable otherwise
Output Vat –
a) Charged on Sales/Revenue
b) Not applicable if we’re not VAT registered
All Amazon Fees are Subject to VAT!
1. Amazon FBA Calculator does not show VAT
1. Refrell Fee (8-15%) varies from category to category
2. Fulfillment Fee (Based on weight and dimensions)
EXAMPLE OF VAT ON AMZ FEE
Suppose we are calculating FBA Fee using Amazon FBA Calc.
Its showing Selling on Amazon Fee as = 1.5 £ and Fulfillment Fee as = 2 £
Sum = 3.5 £
You’ll be okay that your Amz Fee is 3.5 £, but that’s, not the case if you are not VAT registered Amazon will be charging VAT on this as well, So your total Amz Fee will be 4.08 £, An additional 0.58£ that could impact our profit margins, so we need to be aware of this.
2. Monthly Fee
3. Storage Fee
4. PPC Costs – Yes VAT applies to PPC spending as well
EXAMPLE OF VAT ON PPC SPENDING
Suppose if we spent 500£ on PPC so 20% of that will be 100£, In total Amazon will be charging you 600£ for an Ad Spent of 500£, So we have to pay 20% on PPC too unless we are VAT Registered
How to Calculate VAT
- Current VAT rate: 20% – Some products carry a reduced rate or are exempt
- Calculate 20% VAT by multiplying by 0.2 (or multiply by 1.2 for VAT inc. Total):
£10 x 0.2 = £2.00 VAT£10 x 1.2 = £12.00 inc. VAT
- Reverse calculate 20% VAT by dividing by 6 (minus from total for VAT exc. Total):
£12 / 6 = £2.00 VAT£12.00 – £2.00 = £10.00 exc. VAT
Non-VAT Registered vs VAT Registered Profit Margin Comparison
Non-VAT Registered Profit –
(Your Price £20.00 – Total Unit Cost £14.04) = £5.96 Per Unit
VAT Registered Profit –
(Your Price £16.67 – Total Unit Cost £14.04 + Total Input VAT £2.34) = £4.97 Per Unit
So despite charging £3.33 less for the product when VAT registered, in this example, you only lose £0.99 of profit as you are able to reclaim £2.34 for Input VAT.
When to become VAT registered
- If you are a UK resident when turnover reachers £85,000 per annum
- If you non UK resident as soon as you start selling in the UK
- If you are using PAN-European you must become VAT registered in every country your stock is held
- You do not need to be VAT registered if using EFN and under the respective countries VAT threshold
General Vat Notes:
- Reclaiming VAT – You don’t really claim VAT back (unless you have previously overpaid VAT to the HMRC), instead your Input VAT is deducted from your Ouput VAT and you pay the difference to HMRC.
- The standard UK VAT rate is 20%, these are certain products that carry a lower rate e.g. Baby Clothes are 5% and Cycle Helmets 0%.
- If your supplier is offering DDP (Delivery Duty Paid) shipping method you will need to ask them to provide an invoice in order to reclaim VAT.
- If you use a freight forwarder they be able to supply the relevant VAT invoice.