While much has been done to clarify the rules around VAT in the UK, it remains a complex matter that even the best accountants and financial advisors need to study regularly.
HMRC seeks to address this by periodically releasing updates and simplifications – most recently, the guidelines related to VAT compliance for online retailers and VAT Notice 700. Let us take a closer look at these changes and how they affect your online retail business:
1. Multiple versus single supplies
When a business sells multiple identifiable goods for one price, it is known as a multiple supply. A common example is a hamper of food and beverage items, including standard-rated items (like alcohol or chocolate bars) and zero-rated items (like teabags or Jaffa cakes).
This contrasts with a single supply when the item sold in question is a single item like a book. In the case of a single supply, VAT would be charged depending on the item’s rating (zero in the case of a book).
However, in the case of a multiple supply, the zero-rated portion of the hamper would not contribute to the VAT charged, bringing the overall VAT to less than 20%.
2. Apportioning VAT for multiple supplies
According to the Value Added Tax Act (VATA) 1994 Section 19(4), the recommendation is that multiple supplies be split. It does not, however, include any concrete recommendations or rules for how to split them.
Thus, each business can split the multiple supplies into its constituent items using any “fair and justifiable” method of its choice.
However, at an HMRC consultation in early 2021, it was determined that a single, mandatory method of splitting would be more ideal for levelling the playing field.
While later responses compelled them to scrap the idea of a fixed method ultimately, the recent guidance update states that it is preferred for the business to use the selling price of the items in question over other methods of splitting.
With this clarification in VAT guidelines, the goal is to reduce the number of potential disputes between businesses and HMRC.
3. VAT Notice 700
Section 31 of VAT Notice 700 has been altered in two small but significant ways. First, it replaces “market value” with “selling price” when discussing apportionment examples based on output values.
The goal, presumably, is to avoid the possibility of businesses using the open market value of the item rather than its business-specific market value.
Secondly, the order of the examples mentioned has been changed, with the “selling price” example now stated before the “cost-based” example.
This further drives home HMRC’s preference for the former, as mentioned above. It also clarifies, as before, that if the consideration for the supplies is not entirely in money, the business must account for VAT on the open market value of the supplies.
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Best practices every online retail business should for meeting VAT guidelines
You can navigate the complex world of VAT guidelines with greater confidence and accuracy, ensuring smooth business operations and minimise risk by keeping the following points in mind:
1. Pick an automated solution
As online retail evolves, implications tend to arise in the VAT tax return services. Manual calculations increase the risk of errors. Automating these processes ensures accuracy and efficiency.
Deploy a reliable VAT compliance software solution designed for businesses like yours, which can handle real-time VAT calculations, generate reports, and even automatically file returns.
Choose a solution that seamlessly integrates with common eCommerce platforms like Shopify, Magento, or WooCommerce, helping you meet your VAT guidelines properly.
2. Keep your records shipshape
With the normalised shift to digital transactions, having a digital record-keeping system for your books is crucial. Such systems ensure easy retrieval and audit readiness.
You should maintain detailed records of every transaction, including the date, product, amount, VAT charged, customer details, and more.
As per the HMRC VAT guidelines, VAT records should typically be kept for at least six years (though some records, like capital goods schemes, might need to be kept longer).
3. Conduct regular audits
This proactive approach helps in identifying discrepancies before they become bigger issues. Sometimes, having an expert like Bradleys Accountants review the VAT processes is beneficial to ensure no oversights.
4. Keep in mind cross-border considerations
If your online retail business sells to customers outside the UK, make sure you understand that country’s VAT or equivalent tax rules. Some countries might have thresholds or exemptions for small-scale sellers. You need to keep such VAT guidelines in check.
5. Enable transparent product pricing on the website
Ensure that product prices on your online store clearly state whether VAT is included. This transparency prevents misunderstandings and disputes. All invoices sent to customers should clearly show product prices, VAT charges, and the total shopping amount.
Additionally, implement a GEO-IP tool that determines a shopper’s location using their IP address. This ensures the correct VAT rate is applied during checkout, reducing post-sale complications. VAT on eCommerce sales should not be ignored.
Over to you
In conclusion, the new updates will likely be welcome news for online retailers who may have been struggling with preparing their VAT returns for their multiple supplies.
As always, we recommend working with an experienced VAT accountant like Bradleys, who understands the nuances of your online retail business and can help you prepare a complete and accurate set of returns every year.
Our accounting team boasts extensive expertise in managing VAT returns and guiding online retailers through the registration or deregistration process. If your business is VAT-registered, you must file a VAT return with HMRC quarterly or more frequently.
We meticulously review your financial records for discrepancies, guaranteeing timely and accurate submission of VAT returns. We take VAT guidelines very seriously!
So receive forward-thinking guidance from us, ensuring your business aligns with HMRC regulations and minimises the risk of any inadvertent tax oversight. Contact us to find out more.