Do I Need to Register My Etsy UK Shop for VAT?

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Register Etsy UK Shop for VAT

The need to register an Etsy UK Shop for VAT comes down to business turnover.  HMRC sets out rules which all businesses must follow that decides whether or not they must be registered for VAT.  That being said there are circumstances where a business can choose to voluntarily register for VAT. Regardless of motivation however register your Etsy UK shop for VAT brings administration and paperwork.

What is VAT?

VAT is a tax on consumers who buy goods and services in the UK.  Businesses do not pay VAT but it is their responsibility to collect VAT on behalf of HMRC.

All goods and services a consumer buys are either standard rated (20%), reduced rated (5%), zero rated (0%) or exempt.  The rate applied depends on how the goods and services are classified but generally speaking:

  • Standard Rate applies to most goods & services often referred to as ‘luxury items’;
  • Reduced rate applies to some goods & services such as gas and electricity;
  • Zero rated applies to essential goods & services to make it cheaper for people to buy such as essential foods and children’s clothing;
  • Exempt goods and services are outside of the VAT rules such as education and insurance.

Why do Businesses Need to Register for VAT

Businesses including limited companies, partnership and sole traders are responsible for collected VAT from consumers on behalf of HMRC.

Business collect VAT from consumers by adding the applicable rate of VAT to their sales price.  The business then needs to pay that amount over to HMRC periodically.

Since businesses are unaffected by VAT they can deduct any VAT they have collected from the final amount they pay over to HMRC.

Since being registered for VAT carries administrative and reporting responsibilities HMRC only require businesses to register for VAT once their turnover reaches a certain amount. This is currently £85,000 for 2018/2019 but changes every year so if you run an Etsy UK shop then you should keep an eye on the rules.

How to Calculate Turnover of Your Etsy UK Shop for VAT

Your turnover for VAT is your entire business turnover so you need to add the amount you sell from all channels.

To find out whether the turnover of your Etsy UK shop for VAT you need to check your gross sales.  Thats the sales your Etsy shop makes before deducted any Etsy fees plus any other income you make in your business such as cash sales.

To check your gross sales in your Etsy UK Shop head over to:

Shop Manager > Settings > Options > Download Data

You must monitor your turnover if you feel you are approaching the threshold because the threshold of £85,000 is based on your previous 12 month period on a rolling basis.

You must also register for VAT if you are going to exceed the £85,000 threshold in the next 30 days, for example if you win a large contract and you know this will push your turnover over the VAT registration threshold.

What is a Voluntary VAT Registration

Some businesses choose to voluntarily register for VAT even through their business turnover is below the registration threshold.

A voluntary VAT registration does bring benefits to businesses but it also has legal requirements. Depending on the industry a business operates in a VAT registration, voluntary or not, can bring disadvantages.

Should You Voluntarily Register Your Etsy UK Shop for VAT

In many cases, Etsy shops sell directly to consumers so a VAT registration can have a serious impact on Etsy UK sellers.  Here are the pros and cons of registering an Etsy UK Shop for VAT whether you register voluntarily or otherwise:

Pros

  • It will give the impression that your business has a turnover of more than £85,000 making you appear larger;
  • You can claim back VAT on your purchases, regardless of your sales, helping to reduce costs while you get your business off the ground (generating tax refunds).

Cons

  • HMRC can ask for information before releasing any tax refunds;
  • As an Etsy UK Seller your customers are likely to be individuals who cannot claim back VAT.  A voluntary VAT registration will mean you need to increase your prices by 20% more which may make you uncompetitive.  Or if you are unable to raise your price you will need to pay VAT from what you sell which will impact your profit margin;
  • You will need to keep detailed books and submit VAT returns so you may not feel ready to deal with this level of administration.

VAT If Your Sell Physical Products to Customers in the EU

If you are sending physical product to EU Countries then you may be affected by VAT regulations known as Distance Selling Thresholds.

Distance Selling is where a UK business needs to register for VAT in the country that they sell products to.  This is only needed once the business starts to sell over a certain threshold, set by that EU country.

LEARN MORE: Distance Selling Thresholds Explained

VAT If Your Sell Digital Products to Customers in the EU

VAT MOSS affects Etsy UK Shops who sell digital products to individuals in EU countries.  It means that the business is responsible for charging VAT on the sale at the VAT rate that the buyer lives in. This has caused considerable problems for Etsy UK sellers but there may be ways to avoid being affected.

LEARN MORE: VAT on Digital Products Sold On Etsy

VAT is confusing and mistakes can result in fines. If you are unsure always seek the advice of a professional.