Before your e-commerce business is even off the ground there are a plethora of choices to be made that may affect your bottom line. If you have just started trading, how do you know if Value Added Tax (VAT) registration is the right choice for you?
Business owners often associate VAT registration with endless paperwork and yet another bill to take care of, but VAT needn’t be the enemy. Let’s look at when you need to register, and when it is prudent to register voluntarily.
The basics of mandatory VAT registration
If your e-commerce business has a taxable turnover of more than £85,000 (2019/20 figures) then it is mandatory for you to register for VAT. This removes any grey area, and if that’s you, you will now need to decide which VAT scheme is best suited to your business. The threshold is not based on a calendar year. It is a 12-month rolling calendar, so don’t get caught out!
You will also need to register if you based outside of the UK but are selling goods located in the UK or selling to UK customers. There is no threshold related to these specifics so VAT registration will be mandatory straight out of the gate.
Once you have completed VAT registration you must charge VAT on applicable sales and are liable to HMRC for your VAT liability. If you don’t, or if you don’t register when required to, HMRC can impose penalties on you, and contact any online marketplaces you trade through. This will likely lead to your removal from those platforms, and as a result, the quick demise of your e-commerce business.
If you do opt for VAT registration and plan on shipping goods outside of the UK either independently or through an e-commerce platform such as Amazon Marketplace, make sure you also apply for your EORI number at the same time to avoid needless delays. An EORI number, or Economic Operator Registration and Identification number, is used to identify you and collect duty on your goods within the UK and the EU. It is mandatory if you are shipping to and from the EU; with more and more e-commerce businesses going international it is very likely you will need one.
Benefits of voluntary VAT registration
There are several benefits that may sway you to register your e-commerce business before compulsory registration kicks in.
VAT is not a one-way street. If you are about to make sizeable purchases, being able to claim back VAT can be a smart way to soften the financial blow that is often associated with business growth. If you are just starting up, or about to undertake a serious expansion, then reclaiming the VAT on your purchases may be the right move.
The illusion of size
Nothing gives the illusion of being more established, and more profitable than VAT registration. If you want your customers to assume your e-commerce business is thriving and well past the start-up phase, then voluntary VAT registration will often give this impression. By displaying your VAT number on invoices and your website, customers and potential investors may believe your business is larger and more profitable than it really is.
Growth as a mindset
Your e-commerce business may be new or in a steady growth stage now, but if you are planning for rapid growth then completing your VAT registration before the fact means you don’t have to be on the constant lookout for the threshold. Beginning with VAT registration and the accounting procedures that go with it will allow you to concentrate on growth without splitting your focus.
Disadvantages of voluntary VAT registration
If your customers are primarily non-business owners, then adding VAT to your prices could make you wholly uncompetitive. You will need to absorb the costs of VAT into your pricing structure in order to keep prices in line with non-VAT registered businesses, and this could seriously hamper your profit margins.
Additionally, if your products are mainly created in-house or are digital goods then you could end up paying a large bill on your income with little to reclaim.
VAT registration also inevitably leads to the need to regularly submit VAT returns. Under the Making Tax Digital initiative, this needs to be dealt with electronically.
The MTD shift should make completing your returns much simpler and less time-consuming, but only if you have the right systems in place. If your e-commerce business is brand new you may not be running your figures through accounting software yet, although we recommend everyone future-proofs their business by implementing the right systems from day one.
Backdating is an option
If you believe you missed the boat with voluntary VAT registration but have been stringently keeping records, you may be able to backdate your registration by up to four years. A single return will be required for the period.
Help with your decision
If you are still unsure whether VAT registration is for you or need help to set up systems for your e-commerce business, we are happy to help. Unicorn Accounting specialises in e-commerce so let us help you scale your business and have all the legalities in place. Get in touch today.
The best time to start is now.