Shopify sellers can have a global reach, triggering other taxes, like VAT. If you sell in the European Union, you will need to have the proper VAT controls in place to maintain compliance and ensure accurate reporting. This article covers the specifics of VAT, including when it’s triggered, who it applies to, and how to optimize your Shopify accounting for VAT.
What is VAT?
Value Added Tax, known as VAT, is a tax on both goods and services at each stage in the production process. VAT is a global tax, with the rate varying depending on the location of the sale. For example, the UK has a VAT rate of 20%, but other jurisdictions impose a rate of up to 27%.
VAT is generally paid by your customers at the rate imposed by their country. This means if you make a sale in the EU, your customer will be required to pay the EU VAT rate of 20% on their purchase. Once you have a VAT number, you will remit the tax collected on behalf of your customers.
What Businesses are Subject to VAT?
Shopify sellers are required to collect VAT on purchases made by customers if certain criteria are met. EU-based Shopify stores will go through a local registration process once they have 12 months’ worth of sales to UK customers totaling over 85,000 GBP.
However, if you are not based in the EU, you will need to charge VAT based on the location where your sales are made. You will also need to complete the registration process for VAT in each country you remit tax in. This can be complex, with different processes for each EU country, which is why many Shopify sellers enlist the help of a Shopify accountant.
Obtaining a VAT number also gives you the opportunity to claim deductions associated with supply and material costs. This helps you avoid double taxation on goods and services.
How to Setup Shopify VAT
Before you can set up the VAT function in Shopify, you will need to obtain your VAT number. If you need help with the application process, reach out to a Shopify CPA or ecommerce CPA. Here are the steps you will need to go through in your Shopify storefront:
- Go to settings.
- Select “Taxes.”
- Find the section called “Tax Regions” and select set up next to the “EU” option.
- Navigate to the “VAT Collection” section and select “Collect VAT.”
- Enter your VAT number.
- Select “Collect VAT” again.
You will need to go through this process for each VAT region you are collecting and remitting taxes in. To be sure that you are properly setting up your Shopify VAT function, connect with a Shopify accountant. You don’t want to miss collecting taxes in a jurisdiction. This can lead to your business being on the hook for any VAT due, with fines and penalties.
The Implications of Geographic Location
There have been recent changes to the VAT collection process following the UK’s withdrawal from the EU. As a result, there may be additional steps you need to complete within your Shopify VAT setup process. For one, Shopify sellers will need to go through location-based questions to find the right tax rates. These locations include UK-based businesses, EU-based businesses, and non-EU-based businesses.
Shopify businesses that are based in the US will be classified as non-EU-based businesses, drawing in the implications of cross-border selling. You will need to evaluate your Shopify accounting to pinpoint where customers are purchasing from to charge the right rates. However, as a non-EU-based business, you might be able to register for a simplified intra-sale option, known as Union One-Stop-Shop.
This VAT registration process applies to numerous EU countries, helping you avoid the tedious process of registering in each separate country. If you think you might qualify for this option, find an ecommerce CPA near you.
Optimizing Shopify Accounting for VAT
Before you begin selling globally, you need to be sure your Shopify accounting system is optimized for VAT. This includes properly informing your customers about the implications of VAT in your terms and conditions of sale and amending your Shopify settings to track sales based on location.
Your VAT function should be consistently reviewed for accuracy. Rates can change and you might begin selling in new countries with no current registration. To stay on top of your VAT reporting and remittances, partner with a Shopify CPA that can manage your Shopify accounting. Reach out to one of our team members today to learn more.
