VAT on shipping – When it comes to e-commerce logistics, many online retailers have questions about how to calculate VAT on shipping on their invoices. For example, we often come across questions like these:
- Do I have to pay VAT on shipping costs?
- Why do I have to charge VAT on shipping costs?
- Which VAT rate do I charge on shipping costs?
- How much VAT do I charge on international shipping?
- How can I charge shipping costs to my customers?
It’s no wonder there is so much confusion about these topics. VAT can often be rather complex. That’s why we’ve created this complete guide to VAT on shipping costs in 2021!
The answer is: yes. If you charge your customer for shipping, then your customer must pay VAT on the shipping costs.
Always calculate VAT based on the subtotal amount for the order plus the shipping costs. VAT also applies to other fees included on the invoice, such as travel costs, telephone costs or packaging costs.
So, you may be thinking: ‘Postage stamps are VAT-exempt, right?’
It’s true. You do not pay VAT yourself for 1st and 2nd class stamps from Royal Mail. This is why many online retailers think that they don’t have to charge VAT on shipping when they send a package to a customer.
But this is incorrect. Because in fact, when you provide shipping (including stamps) to your customer, then these are considered ‘products’ that you ‘sell’. And that means, they are subject to VAT. In actual fact, you are ‘selling’ the shipping service to your customers.
VAT on shipping costs—why all the confusion?
Does VAT on shipping costs have you pulling your hair out? You’re not the only one. There are lots of things you’ve got to keep straight when managing your e-commerce logistics.
As you probably already know, Royal Mail offers various VAT-exempt shipping options. As a result, many e-commerce retailers in the UK might mistakenly believe that they do not have to charge VAT on shipping costs.
There is also a lot of confusion over whether to charge VAT on shipping costs when sending items abroad, or when shipping goods that fall under VAT margin schemes. Let’s take a look at the most frequently asked questions about VAT on shipping costs. We’ll start with the most important one:
Many online retailers find it unusual that they have to charge VAT on shipping costs. But tax authorities have clear, important reasons for requiring this.
If retailers didn’t have to charge VAT on delivery costs, this would create an opportunity for tax evasion. For example, you could lower the price of the items on your invoice and charge extra for the shipping costs instead.
That means you’d pay less in VAT to the tax authorities, and you’d be able to pocket the shipping costs without paying any sales tax on them. That’s why shipping costs are not VAT-exempt.
When calculating VAT for your shipping, always use the VAT that applies to the goods you are shipping. That means that the VAT for shipping costs varies, depending on which type of products you are sending.
Currently there are three different VAT rates: 0%, 5% or 20%. When shipping items, select the VAT rate that applies to whichever type of items you are shipping. For a full list of which items belong in which VAT category, be sure to check the website of HM Revenue & Customs or consult a tax advisor.
Most goods and services sold online are subject to the standard rate of 20%. However, many items, including many products for children, may be subject to the reduced (5%) or zero rate.
In any case, the following rule of thumb applies:
- Are you shipping items that are VAT-exempt (zero rate)? If so, then the shipping costs are also taxed at 0%.
- Are you shipping items that are taxed at the reduced rate (5%)? If so, then the shipping costs are also taxed at 5%.
- Does the standard VAT rate (20%) apply to your items? If so, then the shipping costs are also taxed at 20%.
The first example invoice below shows how to correctly apply VAT to shipping costs, while the second one shows an example of a common mistake. For these examples, the items being shipped fall under the 20% (standard) VAT rate.
Even though it seems like a minimal difference, miscalculations like these can quickly add up to large amounts by the end of a business year.
|Men’s shoes (ex. VAT)
Shipping costs (ex. VAT)
|Men’s shoes (ex. VAT)
What if I am sending two different products that are taxed with different rates?
Are you shipping items that fall into different VAT categories? If so, then the VAT for the shipping costs is charged proportionally.
Here’s an example:
Your customer orders two different items. The first is a pair of hiking books, sold at £45.00. The second is a book about hiking trails, sold at £15.00.
The boots are taxed at the standard VAT rate of 20%. In the UK, books are exempt from VAT, which means they fall into the zero rate (0%).
The total for the two items is £60.00. In this case, 75% of the invoice is taxed at the standard VAT rate (20%), while 25% is taxed at the zero rate (0%).
If the shipping costs are £6.00, then you’ll charge 0% VAT on 25% of the shipping costs, and 20% on the other 75%. In this example, that means you’ll charge 20% VAT on £4.50 of the shipping costs, and 0% VAT on the other £1.50.
|Hiking boots (ex. VAT)
Book (ex. VAT)
Shipping costs (ex. VAT)
£10.40 (£45.00 + £4.50 × 21 %)
£0.00 (£15.00 + £1.50 × 0%)
If you’re shipping from the UK to another country, then generally UK VAT does not apply to the items or to the shipping costs. Only when shipping from Northern Ireland to an EU country does VAT apply as usual.
In all other cases, you can apply the zero rate for UK VAT for the items themselves, as well as for the shipping costs you charge to your customers.
However, this does not mean you should forget about VAT altogether, either for the shipping costs or for the items you sell internationally. Although you will not need to charge UK VAT (as your goods will not be consumed in the UK), you may need to account for import VAT to the country you are shipping to. This now includes countries within the European Union. Make sure to check with the local tax authorities of the country you are selling to whether you will need to allocate import VAT to your shipping costs as well.
What about VAT on shipping costs for items taxed under VAT margin schemes?
You must charge VAT on your shipping if you are sending an item that you sell under a VAT margin scheme.
For goods sold under margin schemes, you only pay VAT on your profit (if you are unable to deduct VAT as an online retailer).
These schemes apply only to certain types of products for which VAT has already been paid prior to you selling them. However, the shipping costs are still considered a ‘new’ product. That means shipping is subject to VAT as usual.
How do I handle shipping costs in my financial records?
For tax purposes, make sure to keep a financial record of shipping costs in exactly the same way as you do for other items you sell. You purchase the shipping through a carrier (or a broker such as Sendcloud) and then you sell it on to your customer.
You pay VAT when purchasing shipping yourself, and you charge your for your customer VAT on the shipping costs that they pay to you. In your balance sheet, you’ll either enter the complete invoice amount as a single entry or list the goods and shipping costs separately.
Can I request a refund or deduction for shipping costs?
You may deduct shipping costs. You pay shipping fees to your carrier, and because this is a business expense, you can deduct it from your taxes.
If you paid VAT on those shipping costs, that amount can be deducted from the amount of VAT you pay to the tax authorities on your own sales.
If you did not pay any VAT on (part of) the shipping costs, then you cannot deduct that VAT, but you can still deduct the remaining shipping costs as a business expense. This applies, for example, to 1st and 2nd class Royal Mail postage stamps and some other Royal Mail services that are VAT-exempt.
Shipping costs can be a deal-breaker for many online shoppers today, which you can read more about in our article on e-commerce statistics. We know that most online shoppers would not be willing to pay £7.19 (£5.99 + 20% VAT) for shipping these days. That’s why it’s important to be smart about how you calculate and charge shipping costs.
For example, try raising the price of your products slightly to keep your shipping costs lower. That way, you’ll still earn the same margin, without having to directly charge £7.19 in shipping to your customers.
However, if your customers generally order more than one product under a single order, it’s not such a good idea to transfer some of the shipping costs into the product prices. That’s because your customers generally only have to pay one shipping fee, even if they order multiple products at once.
What’s the smartest way to charge shipping costs to my customers?
We recommend charging no more than £5.00 (ideally no more than £4.95) for standard shipping. That amount includes 20% VAT, which means it’s actually £3.96 for shipping and £0.99 for VAT. So, if you actually want to charge £5.99 for shipping, that means you’ve got to shift the difference (£2.03) to your product prices.
If you’re selling higher-priced or niche-market products, this is often not a problem. But if you specialise in low-cost items (below £20 in value), a price difference of £2.03 might make your products less competitive.
We recommend using a combination of these strategies:
- Calculate part of your shipping costs at marketing costs. Look at how much of the shipping costs you can shift to the product price without making your products less competitive. Charge the remaining amount to your marketing costs. After all, you don’t make a real profit with a one-off sale of a low-cost product. You want your customers to keep coming back for repeat business, and low shipping costs can be a powerful tool for achieving that. So, why not consider shipping as part of your marketing costs?
- Focus on cross-selling. If you’re only able to shift a small portion of the shipping costs into your product price, then you’ll want to make sure that your customers buy multiple products. That means you can offer cheaper shipping without it cutting as deeply into your margins. Carefully design your online shop so that it encourages cross-selling. This will help you to sell more than one item at a time to your customers. There are different ways to go about doing this. The most effective way is to entice your customers to buy more by offering free shipping past a certain order amount.
- Free shipping threshold. The best way to encourage cross-selling and increase your average order amount is to use a free shipping threshold.
And one last tip…
Choose the cheapest shipping option. For example, instead of using a parcel service, see whether your item can be sent with the regular post, or even with a letterbox service. Relatively low-cost products do not necessarily need to be shipped using a parcel service.
Choosing the cheapest option will save you money. Regular post is generally fast enough, and it’s half the price of parcel shipping.
Even though VAT on shipping costs seems confusing at first, it’s actually not that complicated. The answer is clear: Do you charge VAT on your products? If so, then you also charge VAT on your shipping costs.
We hope this article helped answer your questions. Want to start your hassle-free journey to smooth shipping? Why not give Sendcloud a try and sign-up for our free trial.
Need more help with your shipping?
Check out our guides on the following topics for the most efficient advice on your shipping process: