Value Added Tax or VAT as we all know it, is something we all hate. Whenever you see a price that states “+VAT” it’s always “argh why couldn’t you just have told me the full price? Now I have to get a calculator out to work it out!”. Unless you’re already VAT registered of course, then you’ll be thinking “oo I can claim that back!”. But what actually is VAT, when do you need to start worrying about it and how does it work on Etsy? Let’s take it one step at a time.

VAT is a tax that is added to products and services sold by VAT-registered companies. If your rolling 12-month turnover was over the current VAT threshold of £85,000 then you will have to register for VAT. Once you are registered you will need to include VAT in everything you sell. This isn’t as simple as whacking 20% on top of the price. What you sell, where you sell it and where you sell it to, dictates what VAT rate you need to use. This is a good link for checking what VAT rate you should use for your products.

You’ll also need to keep copies of all your receipts. You should be doing this already anyway but it gets a lot stricter once you’re VAT-registered. If you don’t have a receipt proving that your purchase had VAT on then you can’t claim the VAT back. Just like your sales, your purchases will have different VAT rates so you can’t just assume it’ll be 20%. You need the receipt to show what VAT rate you have been charged so you can claim back the correct amount. 

Once you’re VAT-registered you’ll also need to submit a VAT return to HMRC on a regular basis. How often depends on what VAT scheme you’ve signed up for. If we presume you’ve signed up for the most common one, standard accrual VAT, then you’ll submit returns to HMRC quarterly (every 3 months). Depending on how much VAT you’ve collected in from your sales versus how much VAT you’ve paid out on your purchases, dictates how much VAT you’ll owe HMRC or how much they’ll owe you.

So how does it all work on Etsy? First, you’ll need to tell them you’re VAT registered. From then on, all your sale prices must include VAT at the rate applicable to your products. What happens next depends on if you sell your item to someone in the UK or outside the UK:

• Items sold to outside the UK

If you sell your item on Etsy to somewhere outside the UK, it becomes Etsy’s responsibility to handle the VAT. For your side, you would report the sale on your VAT return as zero-rated VAT.

• Items sold to the UK

For items sold to someone in the UK, it is your responsibility to report the VAT on your return. Your sale price will already include the VAT amount so you just need to put that VAT into your return. If you’re not sure of the VAT you can use this calculator. Simply put in your sale price and click “remove VAT” to see how much the VAT element of your selling price was.

Now that you’ve got your sales sorted let’s look at your Etsy fees. Before you became VAT registered you would have seen on your monthly Etsy statements that you were being charged VAT on top of all the fees. The good news here is that when you give Etsy your VAT number they will no longer charge you VAT on your fees. Yey! Instead, it becomes your responsibility to report the fees as reverse charge VAT on your return. The long and short of that is that it makes no difference to the amount of VAT you’ll owe to HMRC.

And that’s it! I guess it wasn’t such a maze after all. If you’d like more help with this you can always get in touch and we can discuss ways I can help you.