VAT is a confusing topic. It’s little surprise, with ever changing rules and lists of exemptions, thresholds and rates as long as a mile. But it is something that can’t be ignored, especially since HMRC have been targeting Etsy Store owners in recent years. Today I run through the basics of VAT and the scenarios where you may need to register your Etsy Shop for VAT.
What is VAT?
VAT is a tax on consumers, rather than businesses. So say you go shopping in Selfridges and buy a new dress for yourself, the price you pay will include VAT currently set at 20%. It is then Selfridges responsibility to pay over the VAT they collected from you to HMRC.
To help businesses along they are not required to pay VAT, so they can reclaim any VAT they are charged but must also charge VAT on everything they sell.
Since being registered for VAT carries such big administrative burdens of calculating and reporting to HMRC, in the UK businesses only need to register for VAT when their turnover reaches the VAT registration threshold of £85,000 per year.
To work out whether you are legally required to register for VAT you need calculate whether your business turnover is over £85,000. Business turnover refers to everything you sell, so if you are on Etsy and have your own website, your business turnover would be the amount you sell through both channels. The turnover of your Etsy store is your gross sales – the amount you sell before deducting any Etsy fees and costs. You can find out details of your sales in your Etsy account by going to Shop Manager > Settings > Options > Download Data.
You must monitor your turnover if you feel you are approaching the threshold because the threshold of £85,000 is based on your previous 12 month period on a rolling basis.
You must also register for VAT if you are going to exceed the £85,000 threshold in the next 30 days, for example if you win a large contract and you know this will push your turnover over the VAT registration threshold.
Can You Register for VAT if you are below the Registration Threshold of £85,000?
Yes, you can apply to register voluntarily and many businesses do opt to do this but Etsy sellers may need to think carefully before doing so. Here are some of the pros and cons of a voluntary VAT registration:
- It will give the impression that your business has a turnover of more than £85,000 making you appear larger;
- You can claim back VAT on your purchases, regardless of your sales, helping to reduce costs while you get your business off the ground (generating tax refunds).
- HMRC can ask for information before releasing any tax refunds;
- As an Etsy Seller you customers are likely to be individuals who cannot claim back VAT. A voluntary VAT registration will mean you need to increase your prices by 20% more which may make you uncompetitive. Or if you are unable to raise your price you will need to pay VAT from what you sell which will impact your profit margin;
- You will need to keep detailed books and submit VAT returns so you may not feel ready to deal with this level of administration.