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Online selling and ecommerce tax, the complete guide
This is part of our full guide to online selling and ecommerce tax. Start with undefined, or read on:
This case study is based on genuine client work carried out by our practice. Names, figures and identifying details have been changed to protect confidentiality, and the numbers shown are representative of the situation rather than the exact amounts. Your own position will differ.
The scenario
An online seller has grown quickly. Sales are running at about £8,000 a month and climbing. Almost all customers are consumers buying through a marketplace.
They check turnover once a year, at their accounting year end, because that is when they think about the business finances. That habit is about to cost them.
Why the annual check is the mistake
The VAT threshold is £90,000, tested on a rolling 12 month basis. Not your accounting year. At the end of every month you look back at the previous 12.
At £8,000 a month the rolling total crosses £90,000 partway through month twelve. If the year end is four months later, they will discover it four months late, and by then registration should already have happened.
The consequence is not a fine. HMRC backdates the registration, and the seller owes VAT on everything sold since the date they should have registered. On four months at £8,000, that is £32,000 of sales carrying roughly £5,300 of VAT that was never charged to anyone. The customers are long gone. It comes out of the margin.
The consumer problem
This is where selling to consumers is genuinely harder than selling to businesses.
A business customer reclaims the VAT you charge, so adding 20% costs them nothing and your price is effectively unchanged. A consumer cannot reclaim anything. You either raise your price by 20% and become less competitive overnight, or you absorb it and lose a fifth of your revenue.
That is the real cliff edge, and it is why the threshold distorts behaviour so much at the margin. A seller at £89,000 can genuinely be better off than the same seller at £95,000, because the VAT applies to everything, not just the amount above the threshold.
What is worth doing
Track the rolling total monthly. One spreadsheet column that sums the last 12 months. This is the single most valuable habit a growing seller can build, and it takes minutes.
Look at the schemes before you register, not after. The Flat Rate Scheme suits some low cost businesses. Cash accounting helps if you are paid slowly. These are choices, and they are easier to make deliberately at registration.
Understand your marketplace position. For some online sales the marketplace is treated as the supplier for VAT purposes, which changes who accounts for what. It depends on where you and the goods are, and it is worth getting right rather than assuming.
Do not split the business to stay under. HMRC has specific rules on artificial separation. If the two businesses share customers, stock, staff or bank accounts, it will not survive scrutiny.
The point of this example
Crossing the VAT threshold is not the problem. Crossing it without noticing is. The cost of finding out late lands entirely on you, because you cannot go back and invoice customers who bought months ago.
If you are growing and getting close, get in touch before you cross it, not after.
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