Business owners are no longer limited to state borders when it comes to selling goods. In fact, global ecommerce is at the forefront of innovation, allowing Shopify sellers to make sales anywhere in the world. However, being a global seller does come with more regulations, especially if you sell in the European Union and the United Kingdom.
The European Union and the UK assess a Value Added Tax, known as VAT. This article will cover everything you need to know about Shopify VAT, including what it is and how to set it up.
What is VAT?
VAT is a tax assessed on goods and services in each stage of the supply chain, from the purchase of raw materials to the sale of the final good or service. The VAT rate depends on the jurisdiction, as rates can vary. For example, the United Kingdom charges a flat rate of 20%, while Germany has a rate of 19%.
This doesn’t mean that you are required to pay a flat rate on every purchase or sale your business makes. In fact, a majority of the VAT burden is passed down to your customers and you can claim exemptions.
EU-Based vs. Non-EU-Based Shopify Sellers
Shopify sellers are placed into two different categories: EU-based and non-EU-based. EU-based storefronts will be required to register for local VAT in the countries they hold stock. In addition, you must meet a certain sales threshold, which is 85,000GBP in the UK and 10,000EUR in other countries.
Non-EU-based stores aren’t always required to register for VAT. If you sell to the UK and EU countries, you will need to register and remit VAT once certain thresholds are met. Additionally, the decision to charge VAT is now based on your customer’s location. This means you need to go through the necessary processes and ensure accurate delivery addresses to remit the right VAT to each jurisdiction.
How Does Shopify Handle VAT?
Like sales tax, Shopify leaves VAT implementation and collection up to sellers. Before you can start collecting VAT from your customers, you will need to go through the registration process to obtain a VAT number. Once you have a VAT number, you can begin charging customers VAT based on their location. However, you will still need to remit the amounts collected to the respective countries.
A major drawback of Shopify is the lack of insights surrounding VAT. Unlike Shopify state sales tax collection, Shopify will not notify you if you are required to remit VAT. This makes it important to maintain proper Shopify accounting records or work with a Shopify CPA that can guide you on when VAT collection is necessary.
How to Setup Shopify VAT
The process for implementing VAT in your Shopify storefront is relatively simple. Follow the below steps:
- Go to your Shopify settings.
- Select “Taxes.”
- Navigate to “Tax Regions” and select “Set Up” next to the EU option.
- Scroll down to the “VAT Collection” section and click “Collect VAT.”
- Choose the countries you want to collect VAT from.
- Add your VAT number.
- Click “Collect VAT.”
You will repeat this process for each region that you need to collect VAT from. Be sure you double check the rate being charged in each jurisdiction. In addition, confirm that each good subject to VAT is being assessed at the correct rate. Sometimes, you need to override the default rate if you have exempt goods or services.
The Impact of BREXIT on VAT
In 2021, the United Kingdom made the decision to exit the European Union. This does add another layer of complexity to your Shopify VAT collection processes. If you are located in the UK and sell to UK customers, this is considered a domestic sale. Similarly, if you are located in the EU and sell to a UK customer, this is also considered a domestic sale.
However, if you are located in the US and sell to the UK or EU, this is classified as a cross-border sale and you will be considered a non-EU-based business. For more information surrounding domestic and cross-border sales, reach out to an ecommerce CPA.
The Key to Success: Shopify Accountants
Understanding when you are required to collect and remit VAT can be confusing, especially following BREXIT. This is why many ecommerce sellers turn toward the experts, such as a Shopify CPA or an ecommerce CPA.
Working alongside someone who understands when VAT is triggered is essential to stay in compliance with regulatory agencies. For more information, reach out to schedule your free consultation today.
