How to file VAT returns for Shopify sellers in the UK (Post-Brexit rules)

VAT or Value Added Tax rules are usually very dynamic depending on various affecting variables. However, after the UK departed from the EU (European Union), ecommerce businesses like Shopify sellers have faced significant shifts in the VAT landscape. 

These led to several changes in how VAT is calculated, charged, collected, and filed, especially with cross-border sales. Therefore, this guide provides a comprehensive overview for UK-based online Shopify merchants about the post-Brexit VAT responsibilities to better compliance.

So, what are post-Brexit VAT changes?

Post-Brexit defines the phase after the departure of the UK from the EU VAT regime. This event led to unique VAT treatments for trade between the UK and other EU member states. Some of the notable changes can be the introduction of new VAT reporting systems and the removal of distance selling thresholds.

VAT registration for Shopify sellers

Suppose you are a Shopify seller running a business in the UK. In that case, you are mandated to register yourself for VAT with the HMRC, conditioned that your taxable annual turnover exceeds the current limits of £85,000. But if your turnover is lower than this mentioned threshold, you get voluntary registration that empowers you to reclaim VAT on applicable business expenditures.

Steps for VAT registration:

• Collect essential information: Make sure to prepare all the vital documentation, including your National Insurance Number, business bank account details, and other necessary information related to your online business operations.
• Online registration: You or your Shopify UK accountant may submit your VAT application through the HMRC online portal.
• Receive your VAT number: After successful registration, you will receive a unique VAT registration number from the HMRC, which is technically used for filing VAT returns and is displayed on invoices.

Charging VAT on sales

For a quick reminder, VAT, or Value Added Tax, is a consumption tax applied to the sale of goods and services. It is collected by the seller at the point of purchase.

Domestic sales (within the UK)

When you are making sales to customers within the UK, the standard VAT rate is charged at 20% unless the goods are eligible for exemption or reduced rate. Fortunately, you can alter or configure your tax settings on Shopify so that the correct VAT rate is automatically applied at checkout.

Sales to EU customers

Post-Brexit, any kind of sales or trades to EU customers are identified as exports:

• Business to Business (B2B): For trades with VAT-registered businesses in the EU member nations, the reverse charge mechanism applies. This means buyers are accountable for the VAT charges. So, you must procure and verify the buyer’s VAT number to add it to your invoice.
• Business to Customer (B2C): Post-Brexit, every UK seller exporting goods to EU-based customers must be aware of the abolition of the Low-Value Consignment Relief (LVCR) by the EU, implying that all the imported goods into the EU are now VAT applicable. To ensure its compliance, the EU has also initiated the Import One-Stop Shop (IOSS) scheme, enabling sellers to collect, declare, and remit VAT for goods of up to €150. While participation in the IOSS is voluntary, it simplifies the overall process of VAT charges at the point of sale. This helps prevent sudden charges for consumers upon delivery.

Importing goods into the UK

When you import goods into the UK, taxes like VAT import and customs duties are applicable. As a VAT-registered business, your Shopify UK accountant can leverage the postponed VAT accounting scheme to account for import VAT on your VAT return instead of upfront payment at the border. This helps cash flow by enabling you to reclaim VAT in the same return.

Using the Import One-Stop-Shop (IOSS) for EU sales

As mentioned previously, IOSS is a scheme that simplifies the VAT processes for distance sales of imported goods to EU consumers, with goods value not exceeding €150. When you register for the IOSS, you are liable to collect VAT at the point of sale. This VAT can be remitted through a single monthly return, further simplifying the process and boosting consumer experience by preventing unprecedented charges upon delivery. 

However, non-EU businesses operating in and outside the UK are technically required to appoint an EU-established intermediary to benefit from IOSS.

Steps to register for IOSS:

• Appoint an intermediary: It is a must for non-EU businesses to appoint an EU-based intermediary to represent them.
• IOSS registration: Fulfil the IOSS registration for your business via tax authorities of any EU member state, potentially from where your intermediary is established.
• Integrate IOSS into Shopify: Configure your Shopify settings to charge and collect accurate VAT at checkout and ensure that IOSS numbers are added to the shipping documentation.

Filing VAT Returns

Since you are a VAT-registered Shopify seller, you are obligated to present timely VAT returns to HMRC, generally on a quarterly basis. These VAT returns conclude the VAT you charged on sales and the VAT paid on necessary business expenditures.

Steps to file VAT Returns:

• Maintain accurate records: Make sure to maintain detailed records of all purchases, sales, and expenses.
• Calculate VAT Due: Evaluate the difference between the VAT you have paid on supplies and the VAT you have charged customers.
• File for VAT Return: Periodically submit your VAT return through HMRC’s Making Tax Digital (MTD) online platform. 
• Make payment: To avoid penalties, ensure that any VAT amount owed is paid in full by the set deadline.

Dealing with returns and refunds

Supposing that your consumers return the goods, you have to alter your VAT records accordingly:

• Issue a credit note: Reflect the refund amount and configure the VAT initially accounted for.
• Adjust your VAT return: Lower the output VAT in the period when the refund was initiated.

In the case of goods returned from EU customers, you may warrant full compliance with both UK and EU VAT regulations, potentially involving adjusting IOSS submissions or reclaiming import VAT.

Last words

Post-Brexit, Shopify sellers in the UK are facing more complexities with filing VAT returns, especially for cross-border sales. So, to maintain compliance and fulfil legal obligations, you must understand VAT changes, use the IOSS scheme, and keep detailed records of essential information. Also, by configuring Shopify’s VAT settings and using VAT software, online sellers in the UK can necessarily simplify the tax collection and reporting process for a hassle-free VAT filing system.