VAT on Shipping Costs

VAT on Shipping Costs: A Basic Guide

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!

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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 associated that are mentioned in the invoice, like travels, 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.

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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 of thumb, you need to charge a standard rate VAT of 20% for most goods and services and a reduced rate VAT of 5% for children’s products. 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%).
  • Any item on which reduced rate applied, for its shipping costs you need to charge reduced rate VAT (5%). 
  • If you are shipping VAT-exempt items, for their shipping costs you need to charge zero rate VAT (0%).

What If my Customer is Based in the EU?

In case, if you send items to customers (VAT registered in that country) based in the EU, you need to charge a zero rate of VAT for the total price charged (including postage). To do it, you need to have their VAT number, to make sure that you have supplied your stock, located in the UK, to EU customers and to keep it as evidence of purchase and postage.  

If the EU customers are not VAT registered, you need to charge VAT on goods. In addition, you must also pay VAT on the cost of shipping.

Quick Sum Up

At first, the idea of VAT on shipping costs seems perplexing, however, it’s actually 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. 

It doesn’t matter whether you are a self-employed professional, small business, or a large enterprise. Our team of VAT experts are well versed in mitigating your VAT and tax liabilities. Contact our tax team for advice on the capital goods scheme on 020 3441 1258 or email at [email protected]!

Disclaimer: This blog provides just the general information on the above topic.

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