VAT Explained: How To Avoid Delaying Your Amazon FBA Acquisition
A thin layer of dust coats the champagne bottle you brought out weeks ago.
Celebrations have been on hold while you’re waiting for your value-added tax (VAT) registration to go through.
Nothing else puts a damper on the mood than being told that the transfer won’t be finalized until you have registered for VAT.
This adds extra time to the migration period and delays the deal from finalizing.
However, VAT is an integral feature of Amazon FBA businesses that sell products in the United Kingdom (UK) and the European Union (EU). Not preparing for it can make the acquisition process more difficult than necessary and delay your celebrations of buying an Amazon FBA business.
Your ability to run the business can also be crippled if you aren’t properly registered.
This article explores the concept of VAT and whether you need to apply for it.
What is VAT?
VAT, also known as Goods and Services Tax (GST) in some countries, is a consumption tax applied at every stage of an item’s production when it increases in value.
Over 160 countries use VAT, but it’s most commonly used in all 27 EU states and the United Kingdom (UK).
Consider the following example of an Amazon FBA business selling furniture, with VAT being charged at 20%.
As you can see above, VAT is added at each stage of production.
A seller adds VAT on top of their sales price. The government claims VAT, but not the entire amount thanks to the VAT reclamation process. Businesses can claim back the VAT of purchases used for the business.
Understanding how VAT works is helpful, but understanding why you need to apply for a VAT number is equally useful.
Why Do I Need to Apply for VAT?
If your business isn’t registered for VAT and isn’t paying tax on time, you fall at risk of receiving heavy fines or Amazon de-listing your Amazon Seller Account until you furnish proof of your registration.
EU states conduct regular audits to verify if businesses are VAT-compliant. Taking the chance of not registering and hoping you won’t be caught in such checks isn’t recommended.
But why do you need to apply for VAT?
It boils down to how our migration process works.
A non-EU citizen who acquires an Amazon FBA business that sells in the UK & EU markets must be registered for VAT. There is one circumstance you can delay applying for a VAT number involving setting up a UK Ltd, which we’ll cover further on.
If you were buying an FBA business that was selling in the US, we could facilitate an Amazon Seller Account transfer that takes between two to six weeks to complete (including the 14-day inspection period). However, the VAT component means an account transfer isn’t possible when transferring UK/EU Seller accounts to a non-UK/EU citizen.
Instead, we’ll initiate a listing transfer that takes anywhere from eight to twelve weeks to process.
So we’ve established that you need to apply for VAT when you’re buying a business in the UK/EU.
There are different conditions that determine where you apply for a VAT number and which VAT rate you should follow.
Charging the Right VAT Rate
Each Amazon FBA business has its own characteristics that define their VAT obligations.
The VAT rate you charge customers in other EU countries is affected by the following factors:
- Where inventory is being stored?
- How the business handles logistics?
- How much revenue does the business generate?
You set your local country’s VAT rate by default (where you initially registered for VAT) since you store your inventory in that country.
However, you might need to consider applying for VAT in different EU states based on the business’s operations.
If inventory is stored in other countries, you’ll need to register for VAT there as well.
In this situation, you might need to register for several VAT numbers if you sell in several Amazon European marketplaces.
Many FBA owners usually don’t store inventory in several fulfillment centers unless it’s more cost-effective to do so.
Besides the place of storage of inventory, you may need to pay for VAT based on the type of “distance selling” you choose to fulfill orders.
Distance Selling Methods
There are three different ways to sell on Amazon that affects VAT compliance:
- Pan-European FBA
- Multi-country Inventory (MCI)
- European Fulfillment Network (EFN)
The Pan-European FBA approach requires you to store inventory across the seven main distribution centers across Europe. If you take this approach, you’ll need to register for VAT in all EU Amazon markets (UK, Germany, France, Spain, Italy, Poland, and the Czech Republic).
MCI allows you to choose a country to register for VAT and store your inventory, but you’ll need to arrange the logistics for cross-country sales.
Most FBA customers use EFN for distance selling because all orders can be fulfilled from one fulfillment center while paying your local VAT rate, as long as sales don’t exceed the threshold.
All EU states have different distance selling thresholds and are worth bearing in mind.
For example, if your UK registered business generated sales of less than €100,000 on the German marketplace, you would charge the UK VAT rate at 20%. Sales totaling more than €100,000 in a 12-month period would require you to sell at Germany’s VAT rate of 19%.
Here’s a full list of the European VAT rates, accurate as of January, 2020.
There’s one more thing to consider before you apply for VAT—whether you register a business entity in the UK/EU or you have a US LLC.
The Exception to the Rule
If you plan to register under a non-EU business, you’ll need to immediately register for and start paying VAT.
However, resident companies in the EU have a VAT registration threshold.
You can delay registering for a VAT number until revenue surpasses this threshold.
Let’s take our furniture store example and say it was selling on the UK Amazon marketplace and inventory was stored in the UK, too.
The sales threshold in the UK is £85,000 in a 12-month period.
You could set up a UK Ltd company through the Companies House for a nominal fee and associate the Amazon FBA with this UK Ltd company.
As long as sales stay below £85,000 in a 12-month period, you can delay applying for a VAT number. However, if you can forecast sales going over the threshold, you need to register within 30 days of that happening.
This could be important to your business especially if pricing is competitive among other sellers in your niche. Adding VAT to sales can significantly increase costs for a customer. If a consumer compared products, and everything else was the same except the price, they’d naturally choose the cheaper option.
However, if you set up a legal business entity in a different country from the Amazon FBA business for sale and arrange for the inventory to be transferred to where your new legal entity is, this will cause you to lose the Amazon Prime badge. In turn, this may severely affect the conversion rate and sales.
Once you figure out whether you need to apply for VAT to run your Amazon FBA business, it’s time to get your plan in action.
How To Apply For VAT
You can apply for a VAT number through the post since distance selling is involved.
We’d strongly recommend hiring a local tax agent, who’ll be familiar with the law and fluent in the language. VAT forms are now in the local language and less likely to be translated into English.
Your tax agent will receive the VAT certificate within 30 working days.
- You’ll need to provide the following supporting documentation:
- Proof of incorporation
- Proof of VAT registration in the resident country/taxable status for non-EU sellers
- An outline of how you plan to sell in the country
- Sales contracts as proof of authenticity
- Proof of inventory (supplier invoices)
Saving Where Possible Through Returns and Reclaims
After you’ve decided whether you need to apply for VAT, it’s worth noting that you can reclaim VAT paid on goods or services used for the business.
This includes VAT on pay-per-click (PPC) campaigns, buying a new computer, or even office space if you work from home.
Typical items under costs of goods and services that you can reclaim VAT include:
- Cost of hiring transport
- Expenditure relating to means of transport
- Road tolls/road user charge
- Travel expenses (taxi fares, public transport fares)
- Food, drink and restaurant services
- Admissions to fairs and exhibitions
- Expenditure on luxuries, amusements and entertainment
- Other (PPC campaigns, OPEX services fees, import VAT, and all Amazon fees)
Every three months, your tax agent needs to submit a VAT return that informs the government what you spent and what you can reclaim during this accounting period.
It’s mandatory to submit VAT returns whether you’ve registered for a VAT number or not.
You can also reclaim VAT from buying inventory.
Let’s revisit the Amazon FBA furniture store example. The manufacturer sells the chair to the business owner at €120 (€100 as the sales price and charges €20 in VAT).
When a customer buys the chair from the Amazon FBA business at €240, the Amazon FBA business can claim back €20 in VAT and pay only €20 (€40-€20).
Clear the VAT Hurdle to Finalize The Deal
There are a lot of moving parts to Amazon FBA businesses that can make it confusing to determine whether you need to apply for a VAT number, and if so, in which country.
Taking the time to label a potential FBA business based on the aforementioned criteria helps you plan ahead of time. Before the migration period begins, you will know the steps you need to take regarding VAT.
Amazon also recognizes how important it is to understand VAT and added an educational section around the topic (you need to sign in to your Amazon Seller account to access it).
Don’t let this three-letter word stall the final part of the acquisition process.
If you have more questions about VAT or just want to chat about purchasing a digital asset, schedule a time to talk to us here.