Chapter 6: VAT and your margins

What you'll learn: how VAT changes the profit on every product, why Amazon's fees cost more if you're not VAT registered, and what changes once you are. This chapter is about the numbers. Registering, returns and schemes are for your accountant.

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General information only, not tax advice. VAT depends on your circumstances and on the products you sell, so speak to an accountant before making VAT decisions.

VAT on Amazon's fees

If your business is established in the UK, Amazon charges VAT on its fees: referral fees, fulfilment fees, storage and your monthly plan. Amazon quotes its fees excluding VAT, so the price you actually pay is higher.

• Not VAT registered: you can't reclaim that VAT, so at the UK standard rate of 20% (VAT rates on GOV.UK), Amazon's fees effectively cost you 20% more than the quoted figure.
• VAT registered: you can normally reclaim the VAT on Amazon's fees, so the fees cost you the quoted figure.

The same applies to other business costs that include VAT, such as software subscriptions and prep supplies.

The same product, two VAT positions

Here's the boxed toy from Chapter 5, selling at £24.99 and bought for £12.00 (including VAT) from a retailer. Amazon's fees are £7.10 excluding VAT, including one month's storage. Figures are rounded.

	Not VAT registered	VAT registered, with a VAT invoice for the stock	VAT registered, without a VAT invoice
Sale price	£24.99	£24.99	£24.99
Amazon's fees	−£7.10	−£7.10	−£7.10
VAT on Amazon's fees	−£1.42	None (reclaimed)	None (reclaimed)
Stock cost (including VAT)	−£12.00	−£12.00	−£12.00
VAT collected on the sale (1/6 of the price)	–	£4.17	£4.17
VAT on the stock you can reclaim	–	£2.00	None (no VAT invoice)
VAT due to HMRC	–	−£2.17	−£4.17
Profit	£4.47	£3.72	£1.72

Three things stand out:

1. Once you're VAT registered, you pay VAT on every sale. On a standard-rated product, that's 1/6 of the sale price. It's the biggest single change to your numbers.
2. What you can reclaim offsets part of it: the VAT on Amazon's fees, and the VAT on your stock if you have a valid VAT invoice. What's left is the VAT due: VAT collected on the sale minus VAT on the stock.
3. VAT invoices make a real difference once you're registered. It's well worth choosing retailers that provide them and keeping them alongside your order confirmations.

Not every product is standard-rated.

Some, such as books, children's clothes and most food, are zero-rated or reduced-rated, so the VAT due on the sale is lower or nil. Your accountant can tell you how this applies to what you sell.

The registration threshold

You must register for VAT when your taxable turnover goes over the registration threshold in any rolling 12-month period. Turnover means your total sales, not your profit. Because arbitrage involves buying and selling a lot of stock, turnover can grow much faster than profit.

👉 Check the current figure on GOV.UK: VAT registration.

Good habits:

• Keep an eye on your rolling 12-month sales total. Add it up each month from your Amazon reports or bookkeeping software.
• Talk to your accountant early when you're approaching the threshold, so the change doesn't catch you out, and so you can plan your pricing and sourcing.
• Voluntary registration before you reach the threshold is an option some sellers consider. Whether it helps depends on your situation, so ask your accountant.

Income tax and Corporation Tax

Your profit is taxed too: through Self Assessment as a sole trader, or through Corporation Tax for a limited company (see Chapter 2). The amounts depend on your overall income, so we don't build them into product calculations. Your accountant handles the returns. Your job is to keep tidy records of every purchase and sale.

In ArbiSource

Set your VAT Status on the Settings tab of the Account page (4.3):

• Not VAT Registered: ArbiSource adds the VAT on Amazon's fees to your costs.
• VAT registered: ArbiSource removes the VAT from Amazon's fees (the Fees breakdown no longer includes VAT on Fees) and adds a VAT Due figure next to Profit, ROI and Fees: the VAT collected on the sale minus the VAT on the cost of goods. The buy price is still shown including VAT. Hover over VAT Due to see the breakdown: VAT Due on Sale Price and VAT Reclaim on Purchase. This matches the middle column of the table above.

Two things to allow for yourself:

• VAT invoices: the calculation assumes you can reclaim the VAT on your buy price. If a retailer doesn't provide a VAT invoice, the VAT due will be higher and your real profit lower, as in the right-hand column.
• Zero-rated and reduced-rate products: the calculation assumes the standard rate of VAT. For zero-rated or reduced-rate products, the VAT due will be different, so adjust for these yourself (your accountant can confirm which rate applies).

Video coming soon

a short official video, "VAT on Amazon fees (UK)", walking through the two ArbiSource VAT settings with this chapter's toy example.

Checklist

• I know Amazon's fees cost 20% more if I'm not VAT registered
• I understand that VAT-registered sellers pay VAT on each sale and reclaim VAT on costs with valid invoices
• I'm watching my rolling 12-month turnover against the threshold on GOV.UK
• My ArbiSource VAT setting matches my status