Shopify store owners have the opportunity to sell to consumers anywhere in the world, and should be aware of the implications of this. If you sell your goods through Shopify in the European Union, then you need to understand Shopify VAT and how it applies to your business.
This article covers everything you need to know about Shopify VAT, including what it is, when to charge it, and how to set it up.
An Overview Of Shopify VAT
First, let’s explain what VAT is and its relevance for Shopify stores.
What Is VAT?
Value Added Tax (‘VAT’) is a tax on goods and services at each stage of sale - from raw material to finished product/service. VAT is a global tax that varies in rates across the world. For example, the United Kingdom (UK) has a standard rate of 20% but can range between 17 and 27%.
In a nutshell, as a seller, you collect the VAT and pay it over to the government when your customer pays less for your good/service than the VAT you paid to your suppliers to make your final good/service. Businesses within the supply chain will benefit from VAT and consumers will carry the final cost burden.
VAT For EU-Based Stores
EU-based businesses require local VAT registration in the countries in which they hold stock.
In the UK, to be eligible to charge VAT, stores must have 12 months’ worth of sales to UK customers that is greater than or equal to 85,000GBP. In other EU countries, the threshold is 10,000EUR
VAT For Non-EU-Based Stores
If your store is not based within the UK but sells to UK or EU customers, your business needs to ensure that the VAT thresholds are met in accordance with VAT regulations.
In July 2021, EU VAT changes were implemented with the goal of simplifying sellers’ VAT responsibilities. Now, sellers need to charge VAT based on their customer’s location.
So, as a Shopify merchant, you need to ensure that you receive the relevant permission to charge VAT on sales made by completing the relevant processes and forms. This is often very simple once you have your VAT number in your base operating location.
Once these basic requirements are achieved, registering for VAT in the necessary country/countries is your gateway to receiving a VAT number.
Once registered, you can use the VAT number to charge VAT on Shopify, which is not possible without a VAT number. Setting up your VAT with Shopify can be easily done through settings by clarifying your base location and entering your VAT Number.
Shopify does allow the freedom of your store to sell all that you desire. But, it does not inform you of the VAT implications of your sales. Whether you have physical products or digital ones, the product is vatable.
It is important to explore the taxability of your goods or services as it is specific to each country and could be subject to reductions or exemptions.
Obtaining the VAT number can open doors and allow your business to claim expenses on costs of taxable supplies. This means keeping a close record of your receipts is vital!
Who Pays Shopify VAT?
Your buyers pay VAT if your Shopify store meets the relevant sales threshold in the country you are selling in.
As the seller, you collect the VAT and remit it to the tax authorities in the country/countries where you have economic nexus (where you meet the sales threshold).
I Have My VAT Number… Now What?
So, now that you’ve registered with the appropriate EU countries where you sell your goods, what next? Here’s how to set up your Shopify VAT collection and important information about selling domestically and internationally.
How To Set Up Shopify VAT
Follow these steps to set up VAT in Shopify:
- Go to Shopify Settings
- Select Taxes
- Go to Tax Regions and select ‘set up’ next to EU
- Go to the VAT Collection section and click on ‘Collect VAT’
- Choose the country/countries you registered for VAT in
- Enter your VAT number (if you haven’t received your VAT number yet, you can leave this out and update it later)
- Click ‘Collect VAT’
- If you want to add more regions, click on ‘Start Collecting VAT’
Sometimes, the default tax rates won’t apply to certain products. So, if the default rate does not apply to your goods, you can override it.
Your Shopify Location Affects VAT
In January 2020, the UK withdrew from the European Union (EU), which had a ripple effect on the legal system and VAT. As mentioned, VAT changes came into effect on 1 July 2021.
Shopify VAT has taken these changes into account by forcing you to answer the location-based questions and charge the appropriate rate.
The various VAT locations from a European perspective are as follows:
- UK based business
- EU based business - a business not in the UK and classifies as a member of the EU
- Non-EU based business - a business that is neither based in the UK nor the EU
Selling domestically is the least complicated way to collect VAT. Due to Brexit, the EU has redefined domestic law last year. Domestic is no longer across the EU.
If you are UK-based and sell to UK customers, this qualifies as a domestic sale. Similarly, if you are an EU-based store and sell to EU-based customers, this too qualifies as a domestic sale.
Keeping your sales domestic is a sure way to keep your VAT calculations and administration simple. You should be wary of your Shopify settings and ensure that it matches the most recent and permanent location of your business.
Selling Across Borders
Selling across borders as a small business should be carefully considered as it means a VAT registration in the location of the customer. This is additional to the VAT registration in your base location. However, a perk of being an EU-based business and selling to EU customers, means that you can register for a simplified intra-sale option - Union One-Stop-Shop (OSS). This works for multiple EU countries so that you don’t have to apply for VAT in each of them individually.
Pre-sale, you should ensure that your business is adequately prepared to be sold across borders. To ensure you inform your customers properly, you can amend your Shopify settings to be tax inclusive based on location.
This, alongside their currency option being available, will inform customers immediately if your business operates within their country; similar to the terms and conditions of sale. This can be done in the tax settings of your Shopify account.
Make Your Tax Collecting & Bookkeeping Easier With The Right Tools
The most challenging part of VAT is ensuring you are calculating it and collecting it correctly, especially if you are having to deal with the recent VAT changes across the EU due to Brexit.
While Shopify does not automatically collect VAT for you, once you have set up the VAT information in your settings it can help to make the collection process a little easier.
We know being a full-time business owner means being a Jack of All Trades. So, to help you along the way, we recommend linking Shopify to accounting software, like Xero. This will improve accuracy and keep all your accounting on a single system so that you can better manage your bookkeeping.
Reconciley is your best friend when it comes to reconciling your tax-inclusive and tax-exclusive sales efficiently on Xero. It creates invoices in real-time so that you can consolidate all your orders easily. You will be able to accurately manage your bookkeeping and taxes so that you have a complete view of your financials.
Shopify Payments can also make collecting VAT a breeze as it is a portal specifically designed for Shopify. So, although Shopify might not automatically collect VAT for you, it does have your business needs in mind to make navigating VAT that much easier.
Keeping up with your business’ books can be a challenge. Many businesses shy away from taxes, but with Shopify paired with Xero and Reconciley, it will feel as though you have an assistant that knows your business needs!
It is important to ensure that you meet the VAT requirements of the country your business is located in because it is a legal global requirement. The country where you will be trading also plays a vital role in helping your business gain the permission needed to collect VAT.
If you are a non-EU-based Shopify store, you need to consider where your customer base is located. You then need to register for VAT with the countries in which your sales are meeting the relevant sales thresholds - i.e. where you have sales nexus.
Keeping track of your Shopify VAT is just one important aspect of your business bookkeeping.
To help you accurately track all your sales, refunds, and fees, check out Reconciley. Reconcilely automates the process of reconciling your Shopify sales to ensure you always have up-to-date information and are able to track all your orders with ease!