You need to determine whether you should charge taxes. If you're not sure, then consult with local tax authorities or a tax professional. Typically, you need to register for VAT if you are located in the UK and your sales to customers in the UK are equal to or greater than 85,000 GBP within a 12 month period.
VAT on Shopify
If you intend to sell to countries in the EU, then you might need to register with tax authorities in those regions as a result of Brexit. The process varies depending on where your business is based and where you sell, and on individual government requirements. It's your responsibility to determine where you need to register to charge VAT.
a) How to charge VAT on Shopify
After you've registered and have your VAT number, you can set up your taxes. You only need to perform this task once in Shopify.
Follow these steps:
From the Shopify admin, go to Settings > Taxes and duties.
In the Countries/regions section, click United Kingdom.
In the VAT collection section, click Collect VAT.
In ‘VAT number’, enter your VAT number. If you have applied for a VAT number but don't yet have one, then leave this field blank. You can update it when you receive your number.
Click ‘Collect VAT’.
After you set up your tax regions, then you can create tax overrides for any products where the default tax rates don't apply so you can charge the correct VAT for local, EU, and other purchases where VAT is potentially not applicable.
b) VAT variations based on shipping destination
The VAT charged under IOSS is the rate applicable to the respective goods in the EU Member State where the goods are to be delivered.
c) VAT variations based on product type
Some products are VAT free or have reduced VAT - what happens when your store has a mix of VATable and non-VATable products?
When a Shopify store has a mix of VATable and non-VATable products, you can:
Set up different VAT rates: Shopify allows you to set up different VAT rates for different products and regions in your store settings.
Create tax override collections: You can create a collection of products that need a tax override, and then apply the override to the collection.
You can add a VAT extension to the checkout page to capture VAT numbers.
You should consult with local tax authorities or a tax professional to ensure you charge the correct tax rates and file and remit your taxes correctly.
In the UK, there are three different VAT rates: standard, reduced, and zero. Most goods are standard rate, which is 20%. Reduced rate goods are 5%, and zero-rated goods are 0%.
d) Shopify VAT app
There are apps available in the Shopify App Store to help you manage VAT and taxes. Here are some examples:
For $4.99 per month, this app allows customers to validate their EU VAT ID and get tax-exempted in real-time. You can add VAT IDs to existing customers from the Shopify Admin. If you’re on the Shopify Plus plan, you can integrate the validation module directly in the Checkout.
Exemptify also facilitates international sales by displaying correct prices based on the customer location, so your customers know right away what they will have to pay at checkout. It complies with the new EU distance sales regulations and applies the relevant tax rate immediately.
This app reduces product price confusion among customers in your store, by displaying dual VAT - it includes and excludes pricing with products to help you clarify tax deductions & rates.
This app removes all VAT compliance responsibility and burden from global ecommerce businesses in the EU. According to the app listing, Empact empowers Shopify brands and enables them to focus on their sales and core business, starting from VAT/IOSS/OSS numbers provided instantly upon paid registration, combined with a cloud-based system that integrates with Shopify and provides real-time transparency.
Empact provides its users with their own VAT number, removing the burden of this new legislation while providing an applicable threshold of 10,000 euros per seller for sales up to 150 euros each.
Do your customers get charged customs charges?
IOSS is for sales to non-business customers only, therefore if there is a valid EU VAT number for the customer on record, the order will not be eligible for IOSS. In addition, only for orders with value up to €150, or the GBP equivalent, placed on or after 1st July 2021 can the VAT be paid under IOSS. If any of these conditions are not met, customs charges may be collected by the local post / parcel delivery company from the recipient.
e) Setting Up IOSS on Shopify Checkout
Integrating IOSS into your Shopify checkout streamlines VAT handling for your EU customers. Here’s how you can do it:
First, obtain an IOSS registration number through an IOSS intermediary service like EAS.
Second, install the compatible Shopify app provided by your IOSS intermediary to automate VAT calculations.
Input your IOSS number into the Shopify app to ensure proper tax collection during checkout.
Configure your product prices to reflect whether VAT is included or added at checkout.
Adjust your shipping settings on Shopify to align with IOSS requirements for eligible orders.
Test the checkout process to make sure that the IOSS number is correctly applied and VAT is accurately assessed.
Seamless checkout is vital for customer trust and retention. Making sure this is all set up correctly ensures compliance, swift deliveries, and a transparent purchasing process.
Charging VAT on Shopify: FAQs
Q1: What is an IOSS number and what does IOSS stand for?
An ‘Import One-Stop-Shop’ (IOSS) number is a unique number that allows businesses outside the EU to simplify the process of paying VAT and shipping goods to the European Union (EU).
The IOSS number was introduced in July 2021 as part of the EU ecommerce VAT package. It can help: reduce delivery time, avoid hidden costs, and expedite customs clearance.
The IOSS is a special system for paying the VAT on online purchases valued at no more than 150 euros (transports costs excluded from the value).
According to the Royal Mail, ‘IOSS is only for orders with value up to €150 or the payment currency equivalent, meaning that if the value of the order exceeds this amount, import VAT / customs duty will continue to apply and local post and delivery companies may collect these, along with a handling fee, from customers upon delivery. It is recommended you seek tax advice prior to placing an order for delivery to destinations outside the UK, including the EU.’
Q2: How to get an IOSS number in the UK
To get an IOSS number you need to register for the IOSS portal in an EU Member State. If your business is based in the EU, you will generally register in the country in which you are resident.
Businesses based outside of the EU will ordinarily require an EU intermediary to manage the process. (Note that following Brexit, the requirement for an EU intermediary extends to UK businesses.)
In the UK, after you’ve registered you will be issued with a unique 12-digit IOSS VAT identification number. This number will be included in your HMRC business tax account.
Your registration for the scheme will start on the day you receive your IOSS VAT identification number. From this date you must:
charge your customer VAT at the rate applying to the goods in the EU or UK at the point of sale.
keep records of all eligible imports of low value goods you make to consumers in the EU or Northern Ireland (or both) to support the information you give on your return.
complete and submit a monthly IOSS VAT Return including all sales of low value goods to consumers in the EU, Northern Ireland, or both.
make one monthly payment to HMRC of the total VAT due on all your sales of low value goods.
keep your registration details up to date and tell HMRC by the 10th day of the month, following any change.
Q3: What is the difference between IOSS and OSS?
IOSS (Import-One-Stop-Shop) is designed for companies who sell goods to customers in the EU from a third territory, of a value of €150 or less.
An OSS (One-Stop-Shop) is designed for companies selling goods from one EU Member State to customers in other EU countries.
Q4: Is an IOSS number the same as a VAT number?
No, they are different things.
Q5: How does IOSS work on Shopify?
Shopify is a robust platform for global ecommerce operations, but the intricacies of IOSS require additional attention from store owners. IOSS provides a solution, easing cross-border sales for Shopify shoppers in Europe. Shopify does not inherently support IOSS; this necessitates merchants to seek external expertise to leverage IOSS benefits.
The IOSS system can be daunting, but it’s possible for Shopify merchants to integrate this VAT scheme with planning and understanding.
Embracing IOSS can propel a Shopify store’s appeal and efficiency in the EU market. Transparency in pricing alongside simplified customs procedures instils buyer confidence and speeds up transactions, a significant upside for Shopify merchants aiming to succeed internationally.
Q6: Do I need to collect taxes on Shopify?
After you've registered and have your VAT number, you can set up your taxes. You only need to perform this task once in Shopify.
Steps:
From the Shopify admin, go to Settings > Taxes and duties.
In the Countries/regions section, click United Kingdom.
In the VAT collection section, click Collect VAT.
In VAT number, enter your VAT number. If you have applied for a VAT number but don't yet have one, then leave this field blank. You can update it when you receive your number.
Click Collect VAT.
After you set up your tax regions, then you can create tax overrides for products where the default tax rates don't apply.
Q7: Does Shopify report to HMRC?
Shopify doesn't automatically report your sales data to HMRC. However, HMRC can request sales information from Shopify if necessary. As a UK business owner using Shopify, you have the following responsibilities:
Registering for VAT: If your annual taxable turnover exceeds £90,000, you must register for VAT.
Record Keeping: Maintain accurate records of your sales and expenses for tax purposes.
Filing VAT Returns and Tax Payments: Report your income and sales accurately on tax returns and submit any VAT owed to HMRC on time.
Q8: Do I have to have an IOSS number?
The IOSS is not obligatory - you do not have to register for the IOSS, nor do you have to provide an IOSS number to import goods.
However, if you decide not to use the IOSS, you are still obliged to account for VAT. In most cases, the alternative mechanism will be considerably more complex and time-consuming.
You will often be obliged to register for VAT in multiple countries and file multiple VAT returns. You will also have to comply with complex, time-consuming import VAT processes.
The benefit of the IOSS is that it enables you to meet your VAT obligations with a single consolidated IOSS VAT return, and you’ll benefit from expedited, simplified customs clearance.
