We're aware that tax isn't the most exciting of topics but certainly one that causes much confusion, especially now we have exited the EU.
We must stress that it is your responsibility to consult with an accountant and/or tax professional to verify that your business is charging the correct rates and to ensure that you file and remit your taxes correctly.
However, as your Shopify partner we want to help you alas this brief overview.
Being VAT registered and charging the correct rates
You’re legally obliged to register for VAT if your VAT taxable turnover is £85,000+. If your turnover doesn’t reach or exceed £85,000 you have no requirement to register and you do not need to charge VAT on any products or services that you sell.
In the UK we currently have 3 rates of VAT:
- Standard Rate - 20%
- Reduced Rate - 5% - some items have a reduced rate due to their nature.
- Zero Rate - 0%
In addition some goods and services are exempt from VAT or outside the VAT system. These items include things such as books, children's clothing and sanitary products. For a full list of VAT rates for different goods and services see here.
The difference between zero-rated and exempt
A zero-rated item is still VAT taxable – you just charge your customers 0%. Despite charging 0% VAT you must still record the sale and report it when you do your VAT returns. Sales of zero-rated products/services count towards your 12-month VAT threshold (the £85,000 we mentioned previously).
Items which are VAT exempt do not count towards your threshold so therefore you’re not required to record these sales.
VAT on e-commerce sales
If you are VAT registered then you must display your registration on your website. You must also make customers aware of VAT. You can display your prices as VAT inclusive so there’s no need to list the VAT separately.
VAT and delivery
The general rule is that VAT applies on delivery charges at the same rate as the VAT on the item. So you charge 20% VAT on delivery for goods that are 20% rated, and 0% for goods that are zero-rated. If you offer free delivery, then obviously there is no extra VAT to charge, as it’s all included in the price of the item.
Head over to the Government website for all VAT information.
Shopify tax settings
Right, so let's say you have to charge tax to your customers, how do you set the tax rates up correctly in Shopify?
Firstly, it's important that your store's address is used correctly in the General settings area (settings > general) as your home tax rate is determined by your store's address.
Then you need to ensure you check the box Charge tax on this product on every single product that requires charging tax on. This tick box is in the pricing area in your product pages. You can also edit this using the in-built Shopify bulk editor or some suitable bulk editing apps, like this one.
Once all products are set up, head into the Taxes area in Settings (settings > tax), and ensure you check or uncheck the box All prices include tax depending on your requirements.
If this is ticked then you're saying that the tax is already included within the products prices (typical for retail stores) and thus customer's invoices will be broken down with the amount of tax included in the price. Customers will pay what they see essentially.
If this is left unchecked (typical for wholesale), then any tax charageable on that product will be added in the checkout at the rate set for your country (applied automatically by Shopify) on a separate line. A customer will pay more than what is advertised (if what they are buying are taxable items).
Check the box Charge tax on shipping rates to ensure you comply with the tax laws regarding shipping in your country and then decide if you want to include or exclude tax based on your customer's country (a recent introduction from Shopify).
Include or exclude tax based on your customer's country
If you sell internationally, then you can include or exclude taxes in your product prices based on your customer's location. If you enable this setting, then customers in countries or regions such as the United Kingdom see prices inclusive of their local value added tax (VAT), or exclusive of taxes in countries or regions such as the United States, where buyers expect to see taxes added at checkout.
If you use tax overrides for certain products or collections of products, your margins might be affected. Learn more about considerations for including or excluding tax based on your customer's country.
Your store address in the Shopify admin is used to determine your home tax rate, which is deducted from your tax-inclusive prices when you sell to another tax-inclusive country or region. Changing your store's address in the admin to another country or region will change the home tax rate.
After you activate the Include or exclude tax based on your customer's country setting, prices are displayed correctly at checkout. However, the product pages or the cart do not display the prices correctly unless either of the following is true:
- You sell in multiple currencies and use Shopify payments. In this case, prices are displayed correctly at checkout, on the product pages, and in the cart.
- Customers make their purchases using an address that is located in a region that is eligible for price adjustment, have cookies enabled, have not cleared their browser cache, and are not visiting the store using incognito mode. In this case, prices are displayed correctly at checkout, on the product pages, and in the cart in subsequent visits to the store.
Selling internationally
In the tax area you will see a list of all other countries that you are able to ship to (as set up in your shipping settings). The tax rates for these countries will be calculated automatically by Shopify and so more often than not you can leave these settings as they are.
Before you set up taxes based on destination, verify whether you are obligated to charge sales taxes to your customers, and whether your product is taxable. If you are, then you can enter your VAT number into these countries in order to charge taxes to these locations too.
UK taxes and Brexit
Note: The UK VAT laws that came into force on January 1, 2021 result in new VAT requirements for sales equal to or less than 135 GBP.- If the sale of goods is equal to or less than 135 GBP, then you must register for VAT in the UK. In this case, VAT is collected at the point of sale and remitted by the merchant.
- If the sale of goods is over 135 GBP, then you might not be required to collect VAT at the point of sale. In this case, VAT and duties are remitted by the importer. If you choose to, you can charge your customer for VAT and duties at the time of sale, and then provide these funds to the shipper or importer using a shipping label. Alternatively, you can send the orders without charging VAT and duties, and your customer will pay extra funds at the time of delivery. Learn more about handling VAT and duties.
Learn more about the implications of Brexit for your business.
Overrides
You can set custom tax rates for a collection of products or shipping destinations if you need to. This is common if you are selling products in the UK that qualify at the reduced rate of 5%. Click edit in the country you need to set up the override on and then add the required shipping or product override as per the instructions provided. There are more detailed instructions here.
We hope that this guide provides you with useful information. Should you have any queries then please get in touch and we will do our best to help.
