VAT for UK online shops: what you need to know

This is a general overview, not tax advice. VAT rules and thresholds change, and the right answer depends on what you sell and how your business is set up. Check the current guidance on gov.uk, or ask an accountant, before you make decisions.

When do you need to register for VAT?

You must register for VAT with HMRC if your VAT-taxable turnover goes over the registration threshold. HMRC looks at this in two ways:

• Looking back: if your taxable turnover in any rolling 12-month period goes over the threshold. This is not the tax year or calendar year; you check it at the end of every month.
• Looking forward: if you expect your taxable turnover to go over the threshold in the next 30 days alone, for example because of a large order or a big seasonal peak.

The current threshold is published on gov.uk on the page about registering for VAT. Taxable turnover means the value of sales that are not exempt from VAT, including zero-rated sales, so a shop selling only zero-rated goods can still pass the threshold. There are strict deadlines to register once you go over, and late registration can mean paying VAT you did not charge your customers.

You can also register voluntarily below the threshold. Some businesses do this to reclaim VAT on their costs, for example if they sell mostly to VAT-registered trade customers or sell zero-rated goods. For a shop selling standard-rated goods to consumers, registering early usually means prices rise or margins fall, so think it through with an adviser.

Showing prices and charging VAT

Prices you show to consumers must include VAT if you are registered. In WooCommerce, the usual set-up for a UK shop selling to consumers is:

• Enter product prices including VAT.
• Display prices including VAT in the shop and the basket.
• Set the shop's base location to the UK so tax is calculated from your standard rate.
• Create tax classes for any reduced-rate or zero-rated products and assign them to those products.

If you sell to trade customers too, you may want to show prices excluding VAT to logged-in trade accounts. Our guide to trade accounts on WooCommerce covers that set-up.

If you are not VAT-registered, you must not charge VAT or show it as a separate amount on invoices. Your prices are simply your prices.

Once registered, you need to give a VAT invoice to VAT-registered customers who ask for one. HMRC sets out what a VAT invoice must contain. WooCommerce does not create invoices by default, so most shops add an invoice plugin.

VAT rates for different products

The UK has a standard rate, a reduced rate and a zero rate, and some goods and services are exempt. Which applies depends on the product, and the boundaries are not always obvious:

• Most food is zero-rated, but confectionery, crisps, hot takeaway food and some drinks are standard-rated.
• Children's clothing and footwear are generally zero-rated, within size and design rules.
• Printed books and many e-books and other electronic publications are zero-rated.
• Most other goods, such as homeware, adult clothing, cosmetics and gifts, are standard-rated.

HMRC publishes VAT notices for specific categories, such as food, clothing and publications. If you sell a product near one of these boundaries, read the relevant notice on gov.uk rather than guessing. Delivery charges generally follow the VAT treatment of the goods being delivered, and discounts reduce the price on which VAT is calculated; HMRC's guidance explains the details and exceptions.

Digital goods and services

Selling digital products, such as downloadable patterns, printables, courses or software, brings extra considerations:

• Sales to UK customers count towards your UK turnover in the normal way, and VAT applies once you are registered.
• Sales to consumers in the EU are generally taxed where the customer is, under EU rules. UK businesses can use an EU scheme for non-EU sellers to declare that VAT through one EU country instead of registering in each. The European Commission's website explains the One Stop Shop schemes.
• Evidence of location: for EU digital sales you need to record where each customer is, such as billing address and country of their payment card.

If you only sell occasional digital products, the admin may outweigh the income from EU customers. Some shops limit digital sales to the UK for this reason, or use a platform that acts as the seller for tax purposes.

Records, returns and Making Tax Digital

VAT-registered businesses must keep digital records and submit VAT returns through software that works with HMRC's Making Tax Digital system. For an online shop this means:

• Keeping each order's net amount, VAT amount and VAT rate. WooCommerce stores this on every order.
• Recording payment provider fees and refunds properly, because the amount paid out to your bank is not the same as your sales.
• Keeping purchase invoices for the VAT you reclaim.
• Using bookkeeping software that connects to HMRC, or an accountant who files for you.

HMRC also offers schemes that change how VAT is calculated or paid, such as the Flat Rate Scheme, Cash Accounting and Annual Accounting. Each has eligibility conditions and trade-offs, explained on gov.uk.

Your shop's order data is the starting point for all of this. On Retail Web Hosting the shop runs on WooCommerce, which is open source, so the shop and its order data are yours to export to your bookkeeping software or hand to your accountant.

A short VAT checklist for your shop

1. Check your rolling 12-month taxable turnover every month against the current threshold on gov.uk.
2. Know which VAT rate applies to each product, using HMRC's notices for borderline items.
3. Once registered, set WooCommerce to calculate VAT correctly and show prices including VAT to consumers.
4. Add an invoice plugin that produces compliant VAT invoices.
5. Keep digital records and file through Making Tax Digital compatible software.
6. Get advice before selling digital products or goods to customers abroad. See our guide on selling to the EU from the UK.

VAT is one item on a longer list of rules for online shops. Our UK ecommerce legal checklist covers the others.

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