Amazon is introducing significant changes to their billing processes which will directly impact an estimated 280,000 UK sellers. These changes will come into effect from 1 August 2024 and relate to the VAT treatment on selling fees. The changes are expected to impact cashflow and bookkeeping requirements.
At present, Amazon fees are not liable to VAT for UK sellers. The invoicing changes due to be implemented will see all fees become liable at the standard rate of 20%. This includes referral fees, Fulfilment by Amazon fees and any additional costs such as for storage and advertising.
The impact is significant, as direct selling costs will increase by 20% across the entire ecommerce platform, therefore creating downward pressure on gross margins.
The change arises from a switch in legal entity responsible for billing its fees, from Amazon Services Europe S.à r.l. (ASE) to Amazon EU S.à r.l. (AEU). As AEU has branches across the UK, UK sellers will be invoiced by their local AEU branch and local VAT rules will apply to Amazon fees. As usual, such invoices must be retained to comply with VAT reporting requirements.
Staying compliant
From 1 August 2024, UK sellers will need to make changes within their bookkeeping systems to account for selling fees correctly. Instead of the Reverse Charge Expenses tax rate, sellers should now apply the standard 20% VAT rate to all Amazon purchase invoices.
If your ecommerce business is registered for VAT, you can recoup the input VAT incurred on your VAT returns to HMRC in the usual way. This will eliminate the financial impact of these changes but may put interim strain on cashflow. If you fall below the turnover threshold of £90,000 and are therefore not VAT registered, the financial impact to you will be greater.
Similarly, those registered under the flat rate scheme will be disadvantaged. Under the scheme, sellers will continue to pay output VAT at the flat rate of 7.5% for retailing but will be unable to recover the input VAT incurred. The flat rate scheme may be a favourable choice amongst many eligible ecommerce businesses with turnover below £150,000, due to its simplified record keeping requirements.
While businesses can opt to counteract these changes by passing on additional costs to the end consumer, consideration should be given to the impact on competitiveness against larger sellers who will benefit from economies of scale.
For any additional advice or support in updating your bookkeeping systems, please get in touch.