How to choose the right VAT scheme for e-commerce

Knowing about Value Added Tax (VAT) is important for any business and choosing the right VAT scheme can be one of the most important financial decisions an e-commerce business makes, but it doesn’t have to be overwhelming. Let’s look at what options are available and their main benefits.

The right VAT scheme should work for your business. By making the right choice you will save both time and money, both of which can be in short supply when you are just starting out.

What is VAT?

When you select a VAT scheme you are choosing which reporting method you will use to inform HMRC about how much VAT you have charged on your sales, and how much you have paid on your purchases. There are exceptions, such as sales outside of the UK, so e-commerce business owners will need to be well informed of these or seek appropriate guidance.

Should your e-commerce business register?

Mandatory VAT registration is required when your e-commerce business reaches an earnings threshold. This year’s threshold is £85,000 but it changes year on year. Once you exceed the threshold you must register within 30 days or be penalised.

If you don’t qualify for mandatory VAT registration you may still wish to opt in. This may seem counterintuitive as it will increase your administrative paperwork and likely mean a price increase, but there can be good reasons for doing so. If you are about to purchase a large amount of business stock and assets reclaiming the VAT can be substantially advantageous for your cash flow. It can also add a degree of professionalism to other businesses. There is no requirement to reveal that you have opted in, which can make competitors and consumers assume an inflated bottom line and a more established company than in reality.

In either case, should you wish to register your business, you can do so here. Under the new Making Tax Digital initiative, you will need to ensure your business has an accurate online reporting system. Using Xero, or another MTD ready accounting software, will help reduce the time spent.

What if I don’t register my business?

If you are above the threshold and don’t register your business or don’t accurately report your VAT, you can receive some hefty fines. Late payment and misinformation can also result in penalties. By utilising accounting software and/or outside help, ensure you stay on top of matters to avoid unnecessary additional costs. As previously mentioned, the Making Tax Digital initiative means HMRC now expects a digital accounting system that meets its criteria to be used, so this is a crucial tool to rely on.

Choosing a VAT scheme for your e-commerce business
Manny Pantoja

Standard VAT Scheme

The Standard VAT Scheme involves keeping a detailed log of all purchases and sales and the VAT related to them. If you are using Xero or similar software this can be set up to process automatically. VAT returns will need to be submitted on a quarterly basis.

Annual Accounting VAT Scheme

As you might expect, the key difference between the Annual Accounting VAT scheme and the standard VAT scheme is the frequency of the VAT returns. The key advantage here lies in setting your VAT return date to coincide with your Corporation Tax and year-end accounts. This ensures all accounting work is prepared at the same time to minimise the workload.

While the return is sent annually, you can continue to make quarterly payments for the estimated VAT total. This allows you to avoid a large bill, making it easier to budget. This will likely result in an underpayment or overpayment so the balance will need to be settled at the time of VAT return submission.

If your e-commerce business has an annual turnover in excess of £1.35 million you will not be permitted to use this scheme.

Flat Rate VAT Scheme

Best for those with very limited time resources, the Flat Rate VAT Scheme allows you to pay a set percentage of your annual turnover. The exact percentage will vary dependent on your business are, but retail businesses vary from 4-8%. While you must still charge VAT to your customers there is no need for a lengthy paper trail.

If you register under this scheme when you initially register for VAT, you will get a 1% reduction in your first year, making it perfect for fledgling businesses.

If your e-commerce business has an annual turnover in excess of £150,000 you will not be permitted to use this scheme.

Cash Accounting VAT Scheme

Cash accounting may be familiar to you as a concept, and it is no different as a VAT scheme. The key difference is that you only account for transactions in which cash has changed hands, not outstanding invoices. This is usually not beneficial to e-commerce businesses as most customers pay upfront. If you do use a sales platform that allows for delayed payment, this method can avoid you paying VAT on an unpaid invoice.

If your e-commerce business has an annual turnover in excess of £1.35 million you will not be permitted to use this scheme.

Help with your decision

It may be that one of these VAT schemes leapt out as the right path for your e-commerce business but if you are unsure then it is best to talk things through. At Unicorn Accounting we specialise in helping e-commerce businesses, so we are well-placed to discuss the pros and cons of each option. Call us today to discuss which VAT scheme we believe would be right for you.

The best time is now.