How does VAT apply to online sellers and ecommerce?

VAT is one of the biggest sources of confusion for online sellers and ecommerce businesses, and I completely understand why. Selling online blurs traditional boundaries, customers can be anywhere, platforms sit in the middle, and goods move across borders quickly. Many sellers assume VAT works the same way online as it does for a local shop, but in reality ecommerce VAT has its own set of rules, traps, and obligations.

In this article I will explain clearly how VAT applies to online sellers and ecommerce businesses in the UK, how it differs from traditional trading, and where sellers most often go wrong. I will cover UK sales, overseas sales, digital products, marketplaces like Amazon and eBay, and what HMRC actually expects in practice. Everything here reflects current UK VAT treatment as applied by HM Revenue & Customs and guidance published on GOV.UK, combined with real world experience advising online businesses.

The starting point, when VAT applies to online sellers

The first thing to understand is that selling online does not change the fundamentals of VAT.

VAT applies based on:

Whether you are VAT registered

What you sell

Where your customer is

Where the goods or services are supplied

An online business is not treated differently simply because it trades through a website or platform.

However, ecommerce models introduce complexity around location, distance selling, and intermediaries, which is where problems often arise.

VAT registration for ecommerce businesses

An online seller must register for VAT if their VAT taxable turnover exceeds the UK VAT registration threshold.

VAT taxable turnover includes:

Standard rated sales

Reduced rate sales

Zero rated sales

Online sales to UK customers

Online sales to overseas customers where UK VAT applies

It does not include VAT exempt income.

Many ecommerce sellers accidentally exceed the threshold because they focus only on UK customers and forget that zero rated or export sales still count towards the threshold.

Voluntary VAT registration and ecommerce

Some online sellers choose to register voluntarily before reaching the threshold.

This can make sense where:

Customers are mainly VAT registered businesses

Significant VAT is paid on stock or advertising

Selling on marketplaces that expect VAT registration

Import VAT recovery is important

However, voluntary registration also means charging VAT where required, and complying with all VAT rules. It should always be a considered decision.

VAT on UK ecommerce sales

For UK based online sellers selling to UK customers, the VAT position is usually straightforward.

In most cases:

Standard rated goods are charged VAT at 20 percent

Zero rated goods are charged VAT at 0 percent

Prices shown to consumers normally include VAT

VAT must be declared on VAT returns

The complexity does not usually come from the sale itself, but from correct pricing, invoicing, and record keeping.

VAT and pricing on websites

Online sellers must be very careful with pricing displays.

For UK consumer sales:

Prices must usually be shown including VAT

VAT should not be added at checkout unexpectedly

Any VAT inclusive pricing must be clear

Incorrect pricing displays can cause consumer complaints as well as VAT compliance issues.

VAT on digital products and downloads

Digital products are treated differently from physical goods.

Digital services include:

Software downloads

Online courses

Membership access

Streaming content

E books and digital publications

VAT treatment depends heavily on where the customer is based.

For UK customers, UK VAT usually applies.

For overseas customers, different rules apply, particularly for EU customers, and VAT may need to be charged at the customer’s local rate.

This is an area where many small online sellers make mistakes.

Selling physical goods online within the UK

For physical goods sold and delivered within the UK:

VAT is charged based on the product type

Delivery charges usually follow the VAT treatment of the goods

Returns and refunds must adjust VAT correctly

Online sellers must ensure that VAT is calculated correctly on both the goods and any delivery fees.

VAT on delivery and shipping charges

Delivery charges are often overlooked.

In most cases:

Delivery takes the VAT rate of the goods supplied

If goods are standard rated, delivery is standard rated

If goods are zero rated, delivery is usually zero rated

If multiple goods with different VAT rates are supplied together, apportionment may be required.

Ecommerce and overseas customers

This is where VAT becomes more complex very quickly.

The VAT treatment depends on:

Whether goods or services are supplied

Where the goods are located at the point of sale

Where the customer is located

Who is responsible for import VAT and duties

Many online sellers assume overseas sales are automatically VAT free, which is not always correct.

Selling goods outside the UK

Goods sold from the UK and exported outside the UK are usually zero rated for UK VAT, provided strict conditions are met.

Key requirements include:

Goods must physically leave the UK

Export must take place within required time limits

Evidence of export must be retained

Sales must be correctly invoiced

If evidence is missing, HMRC can assess UK VAT on the sale.

Selling goods to EU customers after Brexit

Brexit fundamentally changed ecommerce VAT for EU sales.

For UK sellers:

Sales to EU customers are now exports

UK VAT is usually zero rated

Import VAT is due in the EU

Customers may pay VAT on delivery

Marketplaces may collect VAT instead

This has significantly affected pricing and customer experience for EU sales.

Distance selling and EU VAT

For sellers who hold stock in the EU, such as through fulfilment centres, VAT obligations can arise in multiple countries.

This may require:

EU VAT registrations

Charging local VAT

Filing EU VAT returns

Using EU VAT OSS or IOSS schemes

This area is complex and often requires professional advice.

Marketplaces and platforms, Amazon, eBay, Etsy, and others

Online marketplaces have changed VAT responsibilities significantly.

In many cases, marketplaces are now treated as the deemed supplier for VAT purposes.

This means:

The platform may collect VAT on the sale

The platform may remit VAT to tax authorities

The seller’s VAT reporting changes

Different rules apply depending on seller location and stock location

Many sellers assume the platform handles all VAT, but this is not always true.

VAT responsibilities when selling on marketplaces

As a seller, you must understand:

Whether the platform is collecting VAT

Whether you still need to report the sale

Whether VAT registration is required

How fees and commissions are treated for VAT

Marketplace fees are usually standard rated and include VAT, which can often be reclaimed if you are VAT registered.

VAT on platform fees and advertising

Most ecommerce sellers incur significant costs through platforms.

Common VAT charged expenses include:

Marketplace commissions

Advertising fees

Fulfilment services

Storage fees

Subscription fees

VAT on these costs is often reclaimable, but only if VAT invoices are correctly issued and retained.

Holding stock in multiple countries

Holding stock overseas is one of the biggest VAT risk areas for ecommerce sellers.

If you hold stock outside the UK:

VAT registration may be required in that country

Local VAT rules apply

Transfers of stock may trigger VAT events

Import VAT and duties must be managed

Many sellers unknowingly create overseas VAT obligations by using fulfilment services.

VAT on returns and refunds in ecommerce

Returns are common in ecommerce, and VAT must be adjusted correctly.

When a customer returns goods:

VAT on the original sale must be adjusted

Credit notes should be issued

VAT returns must reflect the refund

Failing to adjust VAT correctly on returns is a common HMRC query point.

VAT and dropshipping models

Dropshipping adds another layer of complexity.

VAT treatment depends on:

Where the supplier is located

Where the customer is located

Where goods are shipped from

Who is treated as the supplier

In some cases, UK VAT applies. In others, import VAT or overseas VAT applies instead.

Dropshipping is an area where incorrect VAT treatment is extremely common.

VAT and payment processors

Payment processors such as Stripe or PayPal do not change VAT treatment.

Key points to understand:

VAT is based on the sale, not the payment method

Fees charged by processors may include VAT

Processor reports do not replace VAT records

Relying solely on payment reports without VAT analysis is risky.

Record keeping requirements for ecommerce VAT

HMRC expects ecommerce businesses to keep detailed records.

These include:

Sales data by VAT rate

Customer location evidence

Invoices and receipts

Import and export documents

Platform statements

Returns and refunds records

Digital records are essential, particularly under Making Tax Digital.

Making Tax Digital and online sellers

Most VAT registered ecommerce businesses must comply with Making Tax Digital.

This requires:

Digital record keeping

Digital links between systems

Compatible VAT software

Accurate data transfers

Manual adjustments and spreadsheets are increasingly scrutinised.

Common VAT mistakes I see with ecommerce sellers

These issues appear repeatedly in practice:

Charging UK VAT on exports incorrectly

Missing VAT registrations overseas

Assuming marketplaces handle all VAT

Failing to keep export evidence

Reclaiming VAT incorrectly on platform fees

Incorrect VAT treatment of digital products

Poor handling of refunds and returns

Most of these errors arise from misunderstanding rather than intent.

How HMRC reviews ecommerce VAT

HMRC increasingly focuses on ecommerce sellers.

They may:

Review marketplace data

Compare sales volumes to VAT returns

Request export evidence

Check platform fee VAT

Review overseas activity

Investigate inconsistencies across periods

Ecommerce businesses leave large digital footprints, which makes errors easier to spot.

When ecommerce sellers should seek VAT advice

Professional VAT advice is particularly important if you:

Sell to overseas customers

Use fulfilment centres

Sell digital products

Operate on multiple platforms

Are approaching the VAT threshold

Have received HMRC correspondence

VAT errors in ecommerce scale very quickly as sales grow.

Final thoughts on VAT and ecommerce

VAT is one of the most challenging aspects of running an online business, not because the rules are impossible, but because they interact across borders, platforms, and technologies.

For ecommerce sellers, VAT is not just a compliance exercise, it affects pricing, margins, customer experience, and cash flow. Getting it right early avoids painful corrections later.

If VAT feels confusing in an online context, that is not a failure on your part, it is a sign that ecommerce VAT has outgrown simple assumptions. Understanding the rules, keeping proper records, and getting advice when needed ensures that VAT supports your growth rather than holding it back.