Do I need to pay VAT when selling online?
Do I need to pay VAT when selling online?
The short answer is: It depends on how much you sell! There's a specific threshold for when you need to register for VAT and start charging VAT on your sales.
The important VAT threshold
You only need to register for VAT and charge VAT if your sales exceed a certain threshold within a 12-month period. This is a rolling threshold, which means you need to keep an eye on your sales over the last 12 months, not just a calendar year.
Before you hit the VAT threshold (under threshold in sales)
If your expected or current sales are under the threshold within 12 months, you're generally VAT-exempt. This means:
- You don't need to charge VAT: Your customers therefore don't pay VAT on the goods or services you sell.
- You don't need to report VAT: You don't need to submit VAT returns to the tax authorities.
- You can't deduct VAT: You also can't deduct the VAT you pay yourself when you buy goods or services for your business (e.g., purchase of materials or shipping).
- Important: Remember to keep accounts! Even though you don't need to pay VAT, you still need to keep simple accounts of your income and expenses. This is important for your tax return and if the tax authorities should ask.
When you hit the VAT threshold (over threshold in sales)
As soon as you expect, or have realized, sales over the threshold within a 12-month period, you're required to register your business for VAT. This must happen no later than a certain number of days after you've hit the threshold.
When you're VAT-registered:
- You must charge VAT: You need to add VAT (typically 20-25% depending on country) on top of your selling prices. The VAT you charge from customers doesn't belong to you but must be settled with the tax authorities.
- You can deduct VAT: In return, you can now deduct the VAT on the expenses you have in your business (e.g., purchase of goods for resale, marketing, or packaging).
- You must report VAT: You need to regularly report and settle your VAT with the tax authorities (typically quarterly or semi-annually, depending on your revenue).
How does VAT work in practice?
When you sell a product for, e.g., $100 (excl. VAT), you need to add VAT on top. The product then costs $120-125 for the customer (depending on VAT rate). The VAT amount is VAT that you must pay to the tax authorities.
If you've also bought materials for $50 (excl. VAT) and paid VAT for them, you can deduct this VAT. Then you only need to pay the difference to the tax authorities.
Here's a simple overview:
| Situation | Do you need to charge VAT? | Can you deduct VAT? | Most important requirements |
|---|---|---|---|
| Your sales are under threshold within 12 months | No | No | Keep simple accounts of income and expenses |
| Your sales hit or exceed threshold within 12 months | Yes (typically 20-25%) | Yes (on business expenses) | VAT registration, reporting of VAT (VAT return) |
GoShup.com makes it easy to keep track of sales
With a user-friendly platform like GoShup.com, it's easy to keep an eye on your total sales. All your orders and revenue are in one place, so you can always quickly see how close you are to the VAT threshold. This gives you peace of mind and makes it easier to act in good time when you're approaching the threshold.
Always remember to keep track of your accounts
Regardless of whether you need to pay VAT or not, it's crucial to have your accounts in order. Save all receipts, invoices, and documentation for your income and expenses. If you're unsure about VAT rules, it's always a good idea to contact the tax authorities directly or an accountant. They can give you precise guidance based on your specific situation.