How does VAT apply to online sellers and ecommerce?

As ecommerce continues to grow, HMRC has introduced specific VAT rules to ensure fair competition between UK and overseas sellers. Whether you sell physical goods, digital products, or services, you need to know how and when VAT applies.

Understanding VAT for online sellers

Value Added Tax (VAT) is a tax charged on most goods and services sold in the UK. Businesses that exceed the VAT registration threshold of £90,000 in taxable turnover within a 12-month period must register for VAT.

Once registered, a business must charge VAT on sales (output tax) and can reclaim VAT on business expenses (input tax). The difference between the two is paid or reclaimed through regular VAT returns.

For ecommerce sellers, VAT applies to both domestic and international sales, but the rules vary depending on where the buyer is based and how the goods are supplied.

When online sellers need to register for VAT

You must register for VAT if your total taxable turnover exceeds £90,000 in any rolling 12-month period. This includes all sales made through your website, marketplaces, or social media.

You can also register voluntarily before reaching the threshold, which allows you to reclaim VAT on purchases but requires you to charge VAT on your sales.

Overseas sellers trading into the UK also have to register for VAT if they store goods in the UK or sell directly to UK consumers through online platforms.

VAT on UK sales

If you sell goods to customers within the UK, the standard VAT rules apply. You must:

• Charge VAT at the appropriate rate (usually 20%) on all taxable sales.

• Issue VAT invoices for B2B customers who request them.

• Record all transactions digitally for Making Tax Digital compliance.

For example, if you sell a product for £100 and it is subject to the standard rate, your total price including VAT will be £120. You then pay £20 to HMRC as part of your VAT return.

Certain goods such as children’s clothing, books, and some food items are zero-rated, meaning you do not charge VAT but can still reclaim VAT on business costs.

VAT for online marketplaces

HMRC holds online marketplaces like Amazon, eBay, and Etsy responsible for collecting and remitting VAT on certain sales. This means the platform, not the individual seller, may account for VAT on sales to UK consumers.

Typically, this applies when:

• The goods are sold by an overseas seller and located in the UK at the time of sale.

• The goods are sold by a non-UK seller and imported into the UK in consignments valued at £135 or less.

In these cases, the marketplace will add VAT at the point of sale and pay it directly to HMRC. The seller receives the net amount and does not need to account for VAT on that transaction in their return.

However, UK-based sellers are still responsible for their own VAT reporting and must include all sales not covered by the marketplace in their VAT returns.

VAT on imports and international sales

International selling can make VAT more complex. The rules depend on where the goods are coming from and going to.

Selling to EU customers

Since Brexit, UK sellers no longer use EU distance selling thresholds. Instead, sales to EU consumers are treated as exports from the UK. These are zero-rated for UK VAT, but the buyer may have to pay import VAT and customs duties when the goods arrive in their country.

If you hold stock in the EU or sell through an EU fulfilment centre, you may need to register for VAT in that country or use the EU’s One Stop Shop (OSS) scheme to simplify reporting.

Selling to non-EU countries

Sales to customers outside the EU are also treated as exports and are zero-rated for UK VAT. You must keep proof of export, such as shipping documentation, to justify applying a zero rate.

Importing goods into the UK

When you import goods from overseas, you must pay import VAT at the border. However, if you are VAT registered, you can usually reclaim this through your VAT return using postponed VAT accounting.

This system allows you to record the VAT on your return rather than paying it upfront, improving cash flow.

Digital products and services

If you sell digital products such as software, downloads, or online subscriptions to consumers in the EU, different VAT rules apply. You must charge VAT based on the customer’s location, not your own.

Businesses can use the Non-Union One Stop Shop (OSS) scheme to declare and pay VAT across multiple EU countries in a single return rather than registering in each country individually.

Reclaiming VAT on business expenses

VAT-registered online sellers can reclaim VAT on expenses related to their business, including:

• Inventory and stock purchases

• Packaging and shipping supplies

• Website hosting and ecommerce software

• Marketing and advertising costs

• Professional fees such as accounting services

To reclaim VAT, you must hold valid VAT invoices and include the amounts on your VAT return. Keep all records digitally for at least six years in case HMRC requests evidence.

VAT pricing and displaying VAT online

If you sell to consumers, UK law requires that prices shown on your website include VAT. Business-to-business sellers can show prices excluding VAT, but they must make this clear.

For example, displaying “£50 + VAT” is acceptable when selling to other VAT-registered businesses, while “£60 (including VAT)” is required for consumer-facing listings.

Incorrectly displaying VAT-inclusive prices can lead to customer disputes or non-compliance with trading standards.

Dealing with refunds and returns

When you issue refunds for returned goods, you must also adjust your VAT records. The VAT previously declared on the original sale can be reduced in your next VAT return.

Keep records of all refunds, including the original transaction, refund amount, and the VAT adjustment, to ensure your VAT account balances correctly.

Common mistakes ecommerce sellers make

Online businesses often face VAT problems because of fast growth or complex sales channels. Common errors include:

• Failing to register for VAT on time.

• Not realising VAT applies to EU or overseas customers.

• Using incorrect VAT rates on listings.

• Claiming VAT on personal or non-business expenses.

• Ignoring the reverse charge or marketplace collection rules.

Using digital accounting software integrated with your sales platforms can greatly reduce these risks by automating calculations and maintaining compliant records.

When to seek professional advice

VAT for ecommerce can quickly become complicated, particularly for businesses selling internationally or through multiple platforms. An accountant experienced in ecommerce taxation can help you:

• Register and comply with Making Tax Digital.

• Determine which sales need VAT and at what rate.

• Apply the correct rules for EU and non-EU sales.

• Avoid double taxation or missed VAT reclaims.

They can also assist in setting up systems to track cross-border VAT obligations efficiently.

Conclusion

VAT applies to all online sellers and ecommerce businesses that meet the registration threshold or sell goods in the UK. You must charge the correct VAT on domestic sales, understand how marketplace collection works, and apply the right treatment to international transactions.

By maintaining accurate records, using reliable software, and seeking professional guidance, you can stay compliant with HMRC and manage VAT effectively across all your ecommerce operations.