VAT for Etsy sellers, how does it work?
VAT (Value added tax) is a tax that we pay on most of the things we buy every day. Most goods and services in the UK are currently charged at 20% VAT. However, some items are VAT-Free, such as basic necessities (e.g. food) and books, whereas others are more expensive, such as petrol.
When do I need to register for VAT?
Not every business needs to manage or charge VAT. Any business with less than £85,000 in sales a year does not need to worry. You can still voluntarily register and manage this, but for most people, it's not worth the hassle.
If you sell more than £85,000 worth of goods, then this changes. Rather than going into the details here, you can read more about how to manage your VAT here.
The key benefit of being VAT registered is that you can claim back the VAT you pay on things you buy for your business. This means that you can save up to 20% on anything you use for your business, from laptops to raw materials like paper.
While this can help save a bit of money, it also means that you now need to pay 20% of all your sales to HMRC.
I’m an Etsy seller, how does VAT work for me?
VAT is the tax that you pay on buying things on Etsy. You pay VAT on almost anything you buy in the UK, including things on Etsy. Unfortunately, while it's the buyer that pays for VAT, you as the seller need to collect and send the VAT to HMRC. However, this depends on whether you are registered for VAT or not.
If you aren’t registered:
If you aren’t registered for VAT, meaning that you don’t sell more than £85,000 worth of goods and you haven’t voluntarily registered, you don’t have to charge VAT to your customers. In this case, Etsy will apply VAT only if your items are purchased from other countries where VAT is a legal requirement when importing.
However, Etsy will charge you an extra 20% on all your fees, such as listing, payment processing fees, transactions fees etc.
You can see in your monthly statement how much Etsy has charged you for your fees, as shown in the picture.
If you’re registered:
If you’re registered for VAT, you’ll need to charge your customers 20% more and you’re the one responsible for sending the VAT to HMRC. When purchasing one of your products, your customers will see the total price with VAT included on each listing, as well as in their cart, invoice, and purchase page.
In this case, Etsy will see you as a “business” customer, therefore you won’t be charged VAT on your fees.
How can Earnr help?
If you're not quite ready to do all this yourself, tools like Earnr can help you with staying on top of your tax responsibilities for your business. While we don't help with VAT returns quite yet, we still help you understand when you should consider registering for VAT.