Shopify VAT: Everything Sellers Need to Know

If you run a Shopify store, understanding VAT (value-added tax) is crucial for staying compliant and avoiding costly penalties. Whether you’re new to e-commerce or an established seller, this guide breaks down everything you need to know about Shopify and VAT.

Key takeaways

• VAT compliance is essential: Shopify sellers must understand VAT rules, including registration, collection, and remittance, to stay compliant and avoid penalties.
• Simplifying VAT with OSS and automation: The OSS scheme streamlines EU VAT reporting, while tools like the Taxually Shopify app automate tax compliance.
• Accurate VAT setup matters: Configuring VAT correctly in Shopify ensures proper tax collection, transparent pricing, and compliance with local regulations.

What is VAT?

VAT is a consumption tax levied on goods and services at each stage of production and distribution. For e-commerce businesses, this means that VAT must be collected from customers and remitted to the appropriate tax authorities, depending on various factors such as location and sales volume.

VAT registration: when is it required?

Determining when to register for VAT depends on your business's location and sales activities:

• EU-based businesses:
  
  • Domestic sales: If your Shopify store is based in an EU country, you are required to register for VAT in your home country if your sales exceed the local VAT threshold.
  • Cross-border sales: For sales to customers in other EU countries, if your total cross-border sales exceed the EU-wide threshold of €10,000, you must charge VAT based on the customer's location. This can be managed through the One Stop Shop (OSS) scheme, allowing you to report and remit VAT for multiple EU countries via a single return.
• Non-EU businesses:
  
  • Non-EU businesses selling goods to EU customers on Shopify generally have to register for VAT. Businesses can register for the non-union OSS scheme if they supply services (B2C) to customers in the EU or the Import One Stop Shop (IOSS) scheme if they sell physical products valued under €150.

Setting up VAT in your Shopify store

To ensure compliance, follow these steps to configure VAT settings in Shopify:

1. Access tax settings:
   
   • Log in to your Shopify admin panel.
   • Navigate to Settings > Taxes and duties.
2. Set up tax regions:
   
   • In the Tax regions section, click Set up next to the region where you want to collect VAT.
   • For the European Union, select Collect VAT.
3. Enter VAT details:
   
   • Choose the countries where you are registered for VAT.
   • Enter your VAT number for each country. If you haven't received your VAT number yet, you can leave this field blank and update it later.
4. Configure tax rates:
   
   • Shopify will automatically apply the standard VAT rates for the countries you selected.
   • If your products have reduced or zero-rated VAT, you can create tax overrides in the Tax overrides and exemptions section.
5. Display prices with VAT:
   
   • Decide whether to display product prices inclusive or exclusive of VAT. This setting can be adjusted in the Tax calculations section.

By accurately setting up VAT in your Shopify store, you ensure that the correct tax is collected at checkout, aligning with legal requirements and enhancing customer transparency.

Managing VAT on Shopify fees

As a Shopify merchant, it's important to understand how VAT applies to the fees charged by Shopify:

• Subscription and transaction fees:
  
  • For VAT-registered businesses in the UK and EU, Shopify does not charge VAT on subscription and transaction fees. Instead, these fees are subject to the reverse charge mechanism, where the responsibility for reporting VAT shifts from the service provider (Shopify) to the buyer (the Shopify merchant). This means you must account for both the input and output VAT on these transactions in your VAT return.
• Accounting for reverse charge VAT:
  
  • When recording Shopify fees in your accounting software, apply the reverse charge VAT rate. This ensures that both the payable (output) and reclaimable (input) VAT are recorded, typically resulting in a neutral effect on your VAT liability.

Properly accounting for VAT on Shopify fees is crucial for compliance and accurate financial reporting.

Filing VAT returns and remitting VAT

Once registered for VAT, you are obligated to:

• Maintain accurate records:
  
  • Keep detailed records of all sales, expenses, and VAT collected. This includes invoices, receipts, and digital records as required by tax authorities.
• Submit regular VAT returns:
  
  • File VAT returns as per the schedule mandated by your local tax authority, typically quarterly or annually.
  • Include all necessary details, such as total sales, VAT collected, and VAT paid on business expenses.
• Remit VAT payments:
  
  • Pay the VAT owed to the tax authorities by the specified deadlines to avoid penalties.

Utilizing VAT compliance software integrated with Shopify, such as that offered by Taxually, can streamline this process, ensuring accuracy and efficiency in your VAT management.

Leveraging the One Stop Shop (OSS) scheme

For businesses selling cross-border within the EU, the OSS scheme simplifies VAT compliance:

• Single VAT registration:
  
  • Register for VAT in one EU member state and use this registration to report and pay VAT for sales to customers in other EU countries.
• Consolidated reporting:
  
  • Submit a single quarterly OSS VAT return that covers all your eligible cross-border sales within the EU.
• Eligibility:
  
  • Both EU and non-EU businesses can use the OSS scheme (union and non-union, respectively) for sales within the EU.

Implementing the OSS scheme reduces administrative burdens and simplifies the process of expanding your Shopify store across multiple EU markets.

Automating VAT compliance with the Taxually Shopify App

Managing VAT compliance manually can be complex and time-consuming, especially for cross-border sales. The Taxually Shopify app simplifies VAT management for Shopify sellers by:

• Automating VAT calculations to ensure accurate tax collection at checkout.
• Handling VAT registration for multiple countries, including EU and UK compliance.
• Generating VAT returns and filing them directly with tax authorities.
• Providing real-time tax reporting to help you stay on top of VAT obligations.

By integrating Taxually’s app with your Shopify store, you can reduce administrative overhead and focus on growing your business while staying VAT-compliant.

Conclusion

Navigating VAT as a Shopify seller doesn’t have to be overwhelming. By understanding VAT thresholds, registration, and collection, you can ensure your Shopify store remains compliant while building customer trust.

Leverage Shopify’s built-in tax tools and the Taxually Shopify app to streamline VAT management and ensure full compliance. 

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. 

Frequently Asked Questions

Do I need to register for VAT as a Shopify seller?

Yes, VAT registration is required if you exceed local thresholds in your country or €10,000 in cross-border EU sales. Non-EU sellers may need to register under OSS or IOSS.

How do I set up VAT in my Shopify store?

Go to Settings > Taxes and duties, set up tax regions, enter VAT numbers, configure tax rates, and choose whether to display prices with VAT.

How does the One Stop Shop (OSS) scheme help with VAT?

The OSS scheme allows businesses to register for VAT in one EU country and submit a single VAT return for cross-border sales, simplifying compliance.

How do I file VAT returns for my Shopify store?

File VAT returns as per your tax authority’s schedule, report VAT collected and paid, and ensure timely payment to avoid penalties.

Can I automate VAT compliance in Shopify?

Yes, VAT compliance tools like the Taxually app automate tax calculations, registrations, VAT returns, and filings, saving time and reducing errors.