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VAT Advice for Amazon Sellers in the UK

UK In simple terms, VAT is a tax on the sale of goods and services. You pay VAT on the majority of goods and services in the UK. I will not go into lots of detail on how VAT works, as there are plenty of guides online.

The current rate of VAT in the UK is 20% on most goods and services. However, on some goods, a VAT rate of 5% or 0% is used.

UK

Businesses with revenue of over £85,000 in any 12-month rolling period must register for VAT and they then have to charge VAT on any products sold, but they can also then claim VAT on products purchased. This is important as you can only claim back VAT on products supplied by businesses that are VAT registered.

Once VAT registered, you will have to complete a VAT return every three months. This return looks at how much VAT you’ve paid, and how much VAT you’ve collected (from sales). You have to subtract the first from the second, and if this figure is positive (which it normally will be), then you pay this to the Government (HMRC).

How I Registered For VAT

Since the threshold for registering for VAT is £85,000, I sold up to around £82/83k as a Sole Trader (self-employed) and then formed a Limited Company in May 2019.

Since the Limited Company is a separate legal entity to the Sole Trader, the VAT threshold effectively “resets”. This means that I could again sell another £82/83k worth of goods before I registered for VAT on the 1st of October 2019.

The obvious benefit of this is that you get an extra £85k worth of VAT free sales. This is good as being VAT registered reduces profitability.

Before making this plan, I did my research to find out whether VAT registration was for me. See below for some of the considerations that helped me with this decision.

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1. Effect on Profitability

I’ll use a very basic example to explain this. In this scenario, we will consider a VAT registered seller and a seller who hasn’t yet registered for VAT.

The scenario is simple, we buy a product for £50 which we then sell for £100. We assume no other expenses for simplicity and a VAT rate of 20% for the product.

The seller who isn’t VAT registered makes £50 (£100-£50) but the seller who is VAT registered makes £40.

Why is this?

Because they can reclaim 20% of their cost (£10). However, they have to remit 20% of the sale price (£20). This means it’s £80-£40, which is a profit of £40.

Expenses are important as you can claim the VAT back on these, provided the service provider is VAT registered. We will continue the previous example to illustrate this.

Say our expenses are as follows (we will assume all providers are VAT registered).

  • £8 in Amazon fees
  • £1 prep centre cost
  • £1 in other services (all software costs apportioned)

This means that the non-VAT registered seller now has a profit of £40 (£50-£10).

The VAT registered seller can claim back £2 in VAT on these £10 worth of expenses, meaning their profit figure is now £32 (£40-£8).

So claiming VAT back on expenses reduces the impact on VAT registration. Let’s check out some other factors which will also impact profitability and aid your decision making.

2. Extra Admin Costs

I highly suggest you outsource bookkeeping and VAT returns to a qualified accountant. Yes, this will incur a significant monetary expense, however, not doing this will cost you a lot of time, and potentially a lot of money — both in fines and also from not maximising what you can claim.

This being said, you do need to be aware of these additional expenses involved in being VAT registered. You also may have to spend more time/money as invoice collection and general record keeping becomes even more important.

3. 0% Goods

Following the discussion on the effect on profitability, it is important to look at the impact of goods that have a 0% VAT rate. At first glance, it may seem that this would be the same as being non-VAT registered, however, that’s wrong and these are even better, as you can still claim back VAT on expenses, which a non-VAT registered seller can’t.

If we refer back to the previous example and assume this is instead a 0% VAT good, the profit would be £42. This is because before expenses the profit would be the same as a non-VAT registered seller (£50), but you can claim back the £2 VAT on expenses, meaning the profit figure is £42, £2 higher than that of a non-VAT registered seller.

If you can source lots of 0% goods, then your profitability will be impacted less by VAT registration!

The issue is that 0% goods are hard to come by. I won’t make a list, as you will need to research these. GOV.UK provides a good starting point for your research.

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Should You Register for VAT?

I am aware there are a lot of negative points here but ultimately if you’re looking to do this seriously, it’s an inevitable step.

To decide whether this step is right for you though, you need to consider the factors and weigh them up against your personal situation. For some, ticking along at around £80k a year in sales and doing this part-time works perfectly for their business. For others, like myself, VAT registration was an inevitable step as I made the decision (after weighing up impacts on my business) that I wanted to do this full time.

I would suggest you try to understand your profit margin now and consider what it may be after VAT registration. Have a look at some products you’re selling and consider if you could still sell them if VAT registered?

Consider whether you have the resources to increase your revenue. Whilst you can take steps to reduce the impact of VAT registration on profitability, ultimately it will lower your profit margin.

For example, if you sold £150k of goods at a profit margin of 9%, is this better than £80k at 12%? How about if you can do £200k at 8% or 9%? Consider the extra time and resources needed to hit these figures.

One tip I would give is to have a call with a seller who is VAT registered and ask them questions. Don’t rush this decision! It’s a big one, with no obvious right or wrong answer, as it depends on your personal circumstances.

If you decide registration is correct for you and you haven’t yet formed a Limited Company, I would highly advise you take my advice of self-employed to 85k, and then forming a Limited Company to “reset” the VAT threshold.

If you do decide to register then one thing you need to do is…

Stay on Top of Invoice Collection

Whilst a lot of retailers will provide invoices for any orders stored in their records, some only provide invoices for recent orders and other unforeseen events may occur. It’s important to stay on top of invoice collection. A good example here is Mothercare, who went into administration and now you can’t get invoices from them.

I suggest you make sure you don’t have any outstanding invoices over 30 days old. Build a system for this and stick to it. You should work with your bookkeeper to build a system that works for both of you.

Claiming VAT – Suppliers

The Reverse Charge Mechanism

The European Reverse Charge Mechanism is something you need to be aware of. I won’t explain the details of it here, as there are guides that do this better than I can.

What I would like to note is that you should check invoices provided by businesses based in Europe to ensure they meet the correct specifications. Check this with your accountant if unsure.

A lot of the time you need to provide these businesses with your GB VAT number before making a purchase. If they already have a GB VAT number, then this won’t be an issue.

Businesses Outside of Europe

Whilst I don’t usually source products from outside of Europe, I do use some software providers. For example, you won’t be able to claim back any VAT on a Tactical Arbitrage subscription, as this company is based in Australia and there is no VAT element.

Effects on Sourcing

An issue I have encountered being VAT registered is identifying the VAT rates on products at the time of purchase. Once an invoice is supplied by the supplier, you can see what VAT rate they have charged and this is usually what you will charge on the product you sell.

The issue is you need to know what the VAT rate is at the time of purchasing, as this can be the difference between a good product and a bad product.

From the two VAT returns I have assisted in completing, I now have a good idea of the VAT rates on products. You can research the VAT rated for products (Google, HMRC website) and over time you will begin to learn what the VAT rate is. This is fine, but for those like me using VAs (Virtual Assistants) to source, it’s not necessarily feasible to teach them all the VAT rates on different products.

What I have done (and you may have a better system) is to get VAs to assume a VAT rate of 20% on all goods, unless they are in the grocery section, in which case they need to analyse at both 0% and 20%. This is because a lot of groceries are 0% rated. I have also built up a database of all 0% products purchased which helps with future replenishment.

The final tip on this point is to be careful with deal analysis tools, like BuyBotPro etc, which can be misleading. They assume the VAT rate based on the category and this is obviously not always correct. Make sure to check this when purchasing! I would recommend Seller Amp which lets you configure the VAT rates on items you analyse.

VAT Rates in Amazon

You need to set the VAT rates for the products you sell. This is done when you add your inventory to Amazon. If you do not do this, Amazon will assume the product sold has a VAT rate of 20%.

Checking VAT rate

If you are unsure on the VAT rate of an item, you can use an Amazon business buying account to check. Simply log in to your Amazon account and search for the product. Go onto the Amazon business account and search for items. See if prices are excl or incl of VAT.

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7 Amazon Product Research Tactics

The process of researching products to sell on Amazon is exactly that. A process of analyzing what’s selling so that you can grab a slice of the action. The idea is that you research products that you are able to source inexpensively and sell for a profit. Sounds super simple, doesn’t it? Yet, it’s a process that includes numerous important factors that must be considered.

Research Tactics

For example, your niche selection, any brand restrictions, your competition, costs and fees will all impact whether the products you research are viable.

Why is it Important to do Product Research?

If you don’t spend adequate time honing your research skills, you’ll be unable to spot potentially profitable products. Choosing random products just because you like the look of them and ‘think’ they will sell on Amazon will not cut it, because what you ‘think’ and what your research will uncover are likely to be total opposites!

So, don’t sell what you want to sell, sell what sells!

There is no room in the world of running an eCommerce business for you to make guesses or uninformed decisions, particularly if you want your business to be successful and to grow.

One of the main reasons Amazon sellers find product research so challenging is because they simply don’t know what to focus on. And it’s not surprising as not all products are equal. Before you even start your research you should have a handle on what a good product looks like to introduce to your inventory.

Good Products v Bad Products

Ok, so ‘bad products’ might be a little strong, but, there are certainly ‘good’ product characteristics you should consider when you research products to sell on Amazon. The important point is to research products that sell – because of course, you need customers to survive!

But you also must take into consideration the product from your point of view as the seller. For example, you might discover that 50-inch TV’s are selling like they are going out of fashion. Great! But from a practical point of view, as an Amazon seller most likely working from home, you’ll have trouble not only with storage of stock but also shipping fees, not to mention brand restrictions.

So, you need to leave products like that to the big boys and instead concentrate on products that make running your e-commerce business simple and make your research simple too.

Good Products fit the following criteria:

  • Small, lightweight, robust – easy to store pack and post
  • A price point of between £10 and £50 – attracting impulse buys
  • Unbranded (with branding potential) – higher margins available
  • Low competition – a chance to enter the market

By keeping these criteria in mind, you will filter out items that don’t meet these requirements and your research task immediately becomes less daunting and more refined.

Now you don’t need to worry about looking at heavy or bulky products, branded products, perishable goods or products that don’t fall into the impulse buy category.

So, now that you know what you’re looking for, let’s move on to Amazon research tactics that will make finding the perfect profitable product a simple process.

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Top Amazon Research Tactics For Sellers

Research is the key to finding winning products to sell on Amazon. So, you must make sure you do it right and know exactly where to carry out your research!

1. Amazon Lists

The first place you should head to for your research is unsurprisingly Amazon itself. More specifically, the Amazon Bestseller lists, which not only include ‘bestsellers’, but also include ‘movers and shakers’, ‘most wished for’ and ‘gift ideas’ sections. All of these can offer invaluable insights into the type of products you should be considering for your inventory.

Head over to the Amazon Bestsellers page and start your research.

All the tabs you see across the top of the page are super helpful to you when it comes to your Amazon product research:

Use Bestsellers to view the top 100 bestselling products in any category. The trick here is to dig deep into the sub-categories. So, don’t look at the number one seller in the top-level category and choose that as the item you are going to source and sell.

Instead, choose a sub-category and look at the top 100 there instead. Although still popular there will be less competition and you are ‘niche-ing’ down your ideal product. Choose a product to research further and source a similar but better version rather than the exact product.

2. Speak with Your Current Supplier

If you already sell a product on Amazon and have a relationship with a supplier, one of the easiest and most cost-effective product research tactics is to simply speak with your supplier to get the unofficial low down on their best selling products and hottest product trends.

Your supplier should already have their finger on the pulse and will be able to offer you inside information, plus, the more products you purchase from one source, the lower your unit cost will be! By speaking with your supplier, you can actually achieve big discounts and get new product ideas all at the same time.

3. Spy on Your Competitors

Another superb Amazon product research tactic is to check out which products are already successful on Amazon through current PPC campaigns. Amazon sellers spending money on campaigns like this are pretty certain to be profiting from these products otherwise they would not spend the money on the campaigns. When you see the word ‘sponsored’ on Amazon, this means the product is a paid-for advertisement:

4. Utilize Google Trends

 

One of the best tools you can use for your Amazon product research is Google Trends. The first way you can use this tool is by setting up alerts so that you instantly receive notifications about trending or popular topics.

The advantage is that although you are not directly being notified of ‘products’ as such, as a seller you will be able to identify relevant subjects or stories that tie in with your business and product needs. This allows you to explore potential products that you can sell on Amazon.

Alternatively, you can search on Google Trends itself. Simply choose the UK, search for a product and choose web search to see results returned for all related products. Using the earlier example of ‘dog lead’, the search results you’ll see returned are useful for giving you ideas to research even further:

5. Investigate the ‘Customers Also Bought’ and ‘Frequently Bought Together’ Sections

Let’s head back to Amazon now, and a great Amazon research tactic is to view the sections beneath the main listings which can give you insightful product ideas.

You’ll need a rough idea of the niche and product you’re researching, but this tactic will help you not only understand your potential customers thought and buying process, but also give you the opportunity to research and create a unique product bundle.

Products that are frequently bought together on Amazon can be combined into one amazing product that could become a best seller. Products that you see customers also bought are likely to be hugely popular and can be researched further in their own right and either added to a ‘bundle’ or sourced and sold as a stand-alone product.

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6. Look at eBay’s Trending Lists

Whilst you may wish to sell on Amazon, eBay can be a mine of information when it comes to your product research. If an item is available and selling well on eBay, it’s likely to sell well on Amazon too! This is where eBay’s lists are useful for your product research. So, head over to this page and you’ll be able to view all trending product deals across a choice of categories:

Not all products will fit with your research criteria, but it’s an ideal place to spot in-demand products that you can source and sell on Amazon.

7. Browse through AliExpress and Find the Bestsellers

This is a fantastic Amazon product research tactic, yet often overlooked! AliExpress is one of the biggest trade marketplaces that you have free access to, so don’t just use it for product sourcing. Use it for your research as well. Ali Express doesn’t have a dedicated page for best selling products, but you can still investigate which products are popular in three easy steps:

  1. Choose a category or sub-category e.g. pet supplies
  2. Sort results by ‘orders’ to see the highest sold numbers first
  3. Filter the results to display products with a 4* rating

You’ll now see all the top-selling products in your chosen category or sub-category with the added bonus that you can have confidence in that product due to all ratings being 4 star or above from previous buyers.