Selling Online: An Introduction to Marketplace VAT

In the rapidly expanding world of online sales, understanding VAT is crucial for marketplace sellers aiming to navigate the complexities of international ecommerce. With countries around the world imposing different rules and rates for VAT, staying informed and compliant can be a challenge. This blog post aims to demystify ecommerce VAT for those who are selling online, providing essential insights into what VAT is, how it works, and what you need to know to ensure your business thrives in a global marketplace.

What is VAT?

Value-Added Tax (VAT) is a consumption tax placed on a product whenever value is added at each stage of the supply chain, from production to the point of sale. The amount of VAT the user pays is on the cost of the product, minus any of the costs of materials used in the product that have already been taxed.

Unlike sales tax, which is only charged at the final sale to consumers, VAT is collected at every step of the supply chain. This means businesses charge and collect VAT on behalf of the government; they pay VAT on their purchases and charge VAT on their sales, remitting the difference to the government.

How does VAT work for online sellers?

For online marketplace sellers, VAT can apply in several ways depending on your location, where you sell, and where your customers are based. Here are some key considerations:

Location of your business and customers

Selling within your own country: You'll need to comply with the local VAT regulations, charging the applicable rate to your customers.

Selling to other countries within the EU: If you're based in the EU and sell to customers in other EU countries, you must adhere to the VAT rules relevant to your customers' locations once you surpass the distance selling threshold of €10,000.

Selling outside the EU: You'll need to be aware of the VAT obligations in your customer's country. Many countries now require foreign online sellers to register for VAT and charge it at the point of sale.

VAT registration

Depending on your annual revenue and where you sell, you may be required to register for VAT. This involves obtaining a VAT number, charging VAT on your sales, and regularly submitting VAT returns. It's important to check the registration thresholds and requirements in each country where you do business.

Digital services

Selling digital services introduces additional VAT considerations. Many countries have specific VAT rules for digital goods and services, often requiring foreign marketplace sellers to register for VAT regardless of sales volume.

EU VAT rules for online marketplaces 

The European Union has implemented specific regulations targeting online marketplaces that play a role in facilitating the sale of certain goods and services. These regulations are particularly concerned with how such marketplaces collect VAT on transactions. Below is a detailed breakdown of the key aspects of these regulations:

Defining a marketplace's role

A marketplace is considered to facilitate a sale and thus becomes a deemed supplier responsible for ecommerce VAT collection when it meets any of the following criteria:

• Directly or indirectly setting the terms of supply
• Involvement in authorizing payment transactions
• Participation in the delivery process of the products

Conditions for deemed supplier status

Marketplaces acquire deemed supplier status, necessitating the collection of VAT, if they are facilitating a B2C sale for the following:

• Digital services
• Goods worth up to €150 imported from outside the EU
• Goods, irrespective of their value, owned by sellers outside the EU but located within the EU at the time of sale

Expansion of deemed supplier rule

On December 8, 2022, the European Commission introduced significant reforms under the VAT in the Digital Age (ViDA) initiative. These reforms extend the deemed supplier rule to include platforms within the short-term accommodation rental and passenger transport sectors, requiring them to collect and remit VAT on facilitated transactions where the underlying seller is not required to collect VAT, such as consumers or small business entities. 

This rule does not apply when transactions are conducted by VAT-registered businesses that have provided their VAT identification numbers to the platform.

For ecommerce platforms, the revised rules mandate that the deemed supplier principle, previously applicable only to B2C sales of goods in the EU by non-EU sellers, will now cover all intra-EU supplies of goods, irrespective of the buyer's status or the seller's location.

UK VAT rules for online marketplaces

There will be certain scenarios where online marketplaces are considered the suppliers of goods sold through their platforms, making them responsible for handling VAT. These marketplaces may also share liability for the VAT obligations of sellers who fail to comply.

The regulations surrounding VAT for transactions conducted through online marketplaces are complex and vary based on the location of the goods, the seller's base, and the VAT status of the buyer.

Sales outside the UK

When goods valued at £135 or less, located outside the UK at the time of sale, are purchased by a UK customer, the seller is considered to make a supply to the online marketplace instead of directly to the customer. This transaction, not having been made within the UK, falls outside the jurisdiction of UK VAT regulations.

The subsequent sale is considered a deemed supply by the online marketplace, and how VAT is applied depends on whether the customer is registered for VAT. For VAT-registered customers, the marketplace doesn't add VAT; instead, the customer accounts for VAT themselves, treating the purchase as if they were both the supplier and the recipient.

For customers without a VAT registration, the marketplace proceeds with the sale and applies the relevant VAT rate.

Sales inside the UK

For goods located within the UK at the time of sale, the value of those goods doesn't influence the VAT treatment.

Transactions involving VAT-registered customers necessitate that the seller is also VAT-registered and that they account for UK VAT at the relevant rate.

A transaction from an overseas seller to a non-VAT-registered customer is treated as a zero-rated supply from the seller to the marketplace. The marketplace then handles VAT as needed at the point of sale.

The overseas seller is still responsible for any import VAT and customs duties upon the goods' entry into the UK.

Tips for managing marketplace VAT

Here are a few tips to help you stay on top of your marketplace VAT obligations as an online seller:

• Stay informed: VAT regulations can change, so it's important to stay updated on the laws in the countries where you sell.
• Use VAT automation tools: Several platforms and VAT software solutions can help you calculate, collect, and remit VAT automatically.
• Consult with experts: Considering the complexity of VAT regulations, consulting with a tax professional can be invaluable.

Conclusion

Navigating the VAT landscape is a critical aspect of running a successful online marketplace business. By understanding the basics of VAT, how it applies to your online sales, and employing strategies to manage it effectively, you can ensure that your business operates smoothly and remains compliant with international tax laws. 

Do you need help with your VAT compliance? Book a free call with one of our VAT experts to find bespoke solutions for your business, optimize your VAT costs, and reach millions of new potential customers.

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