Many online retailers wonder how to work out VAT on shipping charges on their invoices. This topic can be confusing and complicated for many. For this reason, we have tried to explain everything in this simple post. Let’s dive in!
Understanding VAT on Shipping
The Royal Mail offers VAT-exempt shipping services, as they are subject to price and regulatory control. This creates a misunderstanding for many online retailers that they don’t need to add VAT incurred on the cost of shipping. There are a lot of uncertainties about whether to charge VAT when sending items overseas.
People are also confused when they ship goods that are under the VAT margin scheme (tax charged on the difference between what you paid for an item and the price you sold it for).
Paying VAT on Shipping Charges
If you charge your customers for shipping, they need to pay for the VAT incurred on it. Here, you need to work out VAT collectively based on the order and the shipping costs.
In addition, you also need to apply VAT to other costs that are mentioned in the invoice, like travel, telephone, and packaging costs.
Are Postage stamps VAT-exempted?
1st and 2nd class stamps by Royal Mail are VAT exempted. For this reason, other online suppliers believe that they don’t need to charge VAT on shipping when sending packages to their customers.
However, this assumption is incorrect as when shipping, stamps are taken as products that you sell, which means they are VAT-able.
Reasons to Charge VAT on Postage
Many online suppliers wonder about charging VAT on postage. However, it is required by the tax authorities to prevent tax evasion. They can reduce the price of the items on the invoice and charge more for the shipping costs.
It means that you’ll pay less or no VAT to tax authorities and can take the shipping costs without paying any sales tax. For this reason, you need to pay VAT for the cost of shipping.
VAT Rates on Shipping Costs
The VAT charged to the shipping cost will be based on the goods you are sending. It implies that the cost of VAT for shipping varies as per the product type you are shipping. Right now, there are three VAT rates for different goods: Zero-rated VAT (0%), Reduced Rate VAT (5%) and Standard VAT (20%).
So when you ship something you should charge the VAT that applies to that particular. If you don’t know what VAT applies to that item, you can visit the HMRC website or contact a tax expert. As a general rule, most goods and services are charged at the standard 20% VAT rate. Certain items like children’s car seats and domestic fuel are charged at the reduced rate of 5%, while children’s clothing and footwear are usually zero-rated. Here is the rule:
- For the items on which standard rate VAT is charged, for their shipping, you need to charge standard rate VAT (20%).
- For any item on which a reduced rate is applied, for its shipping costs you need to charge a reduced rate VAT (5%).
- If you are shipping zero-rated items, the delivery is also zero-rated.
- If the goods are VAT-exempt, then their delivery is also exempt. That means no VAT is charged, and you generally cannot reclaim input VAT on related costs. This is different from zero-rated supplies, where VAT is charged at 0% but input VAT can still be reclaimed
What If my Customer is Based in the EU?
If your customer is based in the EU, the VAT treatment depends on whether they are a business or an individual. For VAT registered businesses in the EU, your sale will usually be treated as an export from the UK and can be zero rated for UK VAT. As long as the goods are physically shipped out of the UK. You must keep valid evidence of export, such as shipping or courier documentation. The EU business will then account for VAT in their own country under the reverse charge mechanism.
For non-VAT registered customers, you do not charge UK VAT but import VAT and possibly customs duties will normally apply in the destination country. These are usually collected from the customer before delivery.
Do You Pay Sales Tax on Shipping in the UK?
The UK does not have a sales tax system as the US does. Instead, the majority of goods and services in the UK are subject to VAT. Shipping or delivery charges follow the same VAT rate as the goods being sold. That means if the item you are buying is subject to VAT, the shipping cost will usually carry the same VAT rate.
For instance, if you order electronics with 20% VAT, there will additionally be a 20% courier or delivery fee. However if you purchase a zero rated item, such as children’s clothing, the delivery is also zero rated. So yes, shipping is taxed but it follows the VAT rules for the product and not a separate sales tax.
What Is the VAT Rate on Courier Services in the UK?
Courier services are generally standard rated which means the current VAT rate of 20% applies. However, Royal Mail is an exception. Many of its public postal services are VAT exempt because they are treated differently under UK VAT law.
Hence, if you are sending a parcel with a private courier such as DPD, UPS, or Hermes, VAT will almost always be added at 20%. If you are using Royal Mail’s basic postage services, no VAT is charged. This distinction often leads to misunderstanding among businesses attempting to reclaim VAT on delivery charges. So always double-check your supplier’s invoice.
Is VAT Charged on Delivery Fees Separately?
VAT isn’t usually broken out as a separate category just for delivery — instead, the delivery fee takes on the same VAT treatment as the item being delivered. If the goods are standard-rated, delivery is standard-rated. If the goods are zero-rated, delivery is zero-rated too.
For example, a company selling books (zero-rated) won’t add VAT to postage if they charge you for delivery. But a clothing retailer (20% VAT) will apply VAT to both the clothes and the delivery charge. In practice, VAT is included in the overall invoice rather than applied as a stand-alone “delivery tax”.
Do You Pay VAT on Shipping Costs Within the UK?
Yes, VAT applies to shipping costs for domestic deliveries but again it depends on the goods being delivered. Within the UK, delivery is treated as part of the supply of goods. That means the same VAT rules apply across the entire transaction including postage or courier fees.
Quick Sum Up
At first, the idea of VAT on shipping costs seems perplexing, however, it’s not that complex. You have got the answer that if you are charging VAT on your items, you also need to charge VAT on their shipping costs. We recommend using the most cost-effective shipping option to save money.
Disclaimer: This blog provides just the general information on the above topic.
