How to Charge VAT on Postage without Getting into Trouble with the Taxman
Online sales are booming, even as the restrictions on high street retailers loosen after the pandemic. Therefore, for an increasing number of UK retailers getting into e-commerce – even if they have never ventured into the world of online sales before, makes a lot of sense.
This means creating new price lists for your website, and among the many considerations when doing that there’s one question that new e-commerce businesses might not know the answer to – the right answer at least: should you add VAT on postage?
VAT and Post Office Services
Because “universal postage services” provided by the Post Office are exempt, you will not pay VAT when purchasing postage stamps or standard postage for your franking machine. The logical conclusion then is that when calculating how much to charge your customers for goods you have delivered to them, you can ignore VAT in terms of postage.
That is incorrect, and if you do not charge your customers VAT, you will have to cover the cost out of your own pocket because it will be impossible to recover it later. However, it’s not quite as simple as just lumping VAT into your delivery charge, as things are more complicated when it comes to VAT on postage, as we’ll explain if you read on.
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The Composite Supply Rule
For VAT purposes, sending goods by mail counts as a single composite supply. As a result, the postage is included in the total cost of the goods, and the applicable VAT rate includes it.
Here’s a practical example. Gadgets Ltd. sells small electrical goods. When they get into online sales they do not list the price of postage in their product descriptions. This is because when they get to the checkout page, customers can choose from a range of delivery options, according to how fast they want to get their stuff.
However, no matter which service they choose, Gadget Ltd’s customers must be charged VAT at the rate that applies to the purchased items This is standard rate VAT in this case.
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VAT and Postage Included
You charge VAT on the price you charge your customer if it does not mention delivery or postage, i.e. if it is an inclusive price or if you say “postage is free.” To put it another way, the VAT situation is the same as it is for delivered goods.
When paying for postage, don’t forget to claim the VAT you were charged. All non-Postal delivery charges are subject to standard rate VAT (if the supplier is registered). Furthermore, many Post Office fees do as well, such as guaranteed delivery by 9.00 a.m. the next day.
VAT on Postage to the EU
Like most things related to Brexit, some businesses find VAT on postage to EU member countries something they are no longer sure what to do about. The rule here now is applied according to just who you are sending a package to.
If you are sending goods to a business customer, one who has a VAT number in their own country, and can supply you with that number in advance – maybe on the order form – then for the total price charged, including postage, you should apply a zero-rate of VAT.
If on the other hand you are selling and sending goods to a regular customer – someone in France loves your stuff perhaps, and would prefer to buy from you than purchase something at home – then you are required to charge VAT in the same way as you would if they were based in the UK.
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What About Mixed Goods?
Another confusing issue. What if the parcel you will be sending includes a mix of goods, some standard rated for VAT and some zero-rated? For example, Violet has a gourmet gift shop. Some of the goods she sells are zero-rated – like cheese – and some are standard rated, like chocolates. A customer orders both chocolates and cheese to be delivered in the same package. How should she charge VAT on postage now?
The solution seems obvious. She must divide the delivery costs between the goods (zero and standard-rated) and account for VAT in the appropriate way. She is free to use any reasonable apportionment, such as the retail price or the cost of the items. Unless she is selling goods to a VAT registered business in an EU member state, in which case everything is considered zero-rated, and nothing is subject to VAT.
Claiming VAT on Postage
If the goods are standard-rated, a business ordering delivered goods will incur VAT on the postage and will be able to reclaim that VAT as a business cost. Businesses that provide delivered goods and use the Post Office to deliver them are not usually charged VAT, so there is no VAT to reclaim. If other courier and delivery companies are used, on the other hand, VAT will be charged, which can then be reclaimed in the usual way.
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In the past, Some UK businesses attempted to argue that postage costs are a disbursement and are therefore exempt from VAT. However, this is not the case; postage is a part of the supply, not a separate cost to the customer that is covered by the company.
Still confused? Rather than guess and hope for the best, seek the advice of an accounting professional, who will ensure that you are charging VAT on postage the right way, no matter how many packages you send and where they are headed.
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Should I charge VAT on postage costs?
Yes. An excellent way to do this is to simply include the VAT cost in the price the customer is already paying.
If you would like more detailed information, please feel free to book a call with our experts!
What is the VAT rate on postage?
The VAT rates tend to differ depending on the service or products in each EU country. However, the average VAT rate is 20%.