Halloween costumes: children's sizes carry no VAT

A witch costume sold in a child's size carries no VAT. The same costume in an adult size carries 20 per cent. For a VAT-registered online seller doing most of the year's fancy dress trade before 31 October, that line is worth getting right on every listing, because HMRC judges it by how the item is designed and how you sell it, not by what your supplier charged you.

The rule is in HMRC's VAT Notice 714. Clothing is zero-rated when it is clothing, is not made of fur, is designed for young children and is only suitable for them. Young means under 14: HMRC's size tables are based on children up to the eve of their 14th birthday.

A costume is clothing. A wand is a toy.

Fancy dress is clothing, so a child's costume can be zero-rated like a child's coat. The notice deals with the extras too. A play outfit sold at one price with an incidental toy is treated as a single supply of children's clothing, and the whole price can be zero-rated. HMRC's own examples are a cowboy suit with a toy gun and a police uniform with toy handcuffs. A witch's dress with a small plastic wand in the same bag works the same way.

Sell the wand on its own and it is a toy, at 20 per cent. Novelty hats, party hats and play hats made of paper or plastic are toys as well, and standard-rated even in children's sizes. Alice bands, hair slides and headbands are accessories rather than clothing, so they carry VAT whatever size they come in.

Sizes, and the one-size trap

HMRC accepts a garment as designed for young children if it falls within the measurements in its tables. For a girl's dress that means a chest of up to 98cm; for a boy's top coat, 114cm. Anything larger needs HMRC's written agreement before you zero-rate it.

The trap for costume sellers is the one-size item. The notice says you cannot zero-rate clothing sold in one size only that fits both children and adults. A one-size cape, or a robe labelled "ages 8 to adult", is standard-rated.

How you list it decides it

Online sellers get their own paragraph. You must clearly identify the goods as being for young children on the page, preferably in a separate children's section, and identical goods must not appear in both the adult and the children's sections. A seller who lists the same skeleton suit under "Kids" and under "Women" to catch more searches has made the zero rate harder to defend.

Buying it zero-rated does not settle it either. The notice is blunt: you cannot necessarily zero-rate goods "simply because they were zero-rated when you bought them". How you hold them out for sale decides the VAT on your sale.

Illustration, not a real client: a VAT-registered costume seller in Bromley sells a vampire outfit at £18 in children's sizes and £24 in adult sizes, both including any VAT. Each child's sale is zero-rated, so she keeps £18. Each adult sale includes £4 of VAT, so she keeps £20. If the children's outfit also sat, unchanged, in her adult section, she would be claiming the zero rate on an item she was also offering to grown-ups.

Hire counts as well

The same line runs through costume hire. The notice lets you zero-rate the hire of any item that would itself be zero-rated, and it names fancy dress costumes. A London hire shop can zero-rate a child's outfit for the school Halloween disco and must charge 20 per cent on the parent's.

Below the VAT threshold

If you are not registered, you charge no VAT on anything. Zero-rated sales still count towards the £90,000 registration threshold, though, so a busy October can push a costume seller over it. A seller whose sales are mostly zero-rated can ask HMRC for an exemption from registration instead, and HMRC decides.

Our VAT registration threshold tracker shows where a rolling 12 months stands, with zero-rated sales counted. Sellers working across Amazon, Etsy and their own shop will find the wider VAT picture in our notes on accounts and VAT for online sellers.

Before the last orders go out this month, open your listings and check two things: that each children's costume sits only in a children's section, and that nothing sold in one size is being zero-rated. The costume is the same. The size on the label and the page it sits on decide the VAT.

About the author

Harvey Dhillon is Founder and CEO of Zmartly, a UK accountancy firm for ecommerce sellers. He grew up in West London and began his career in investment banking finance at Barclays, before going full-time on Zmartly in 2020. He is a Chartered Management Accountant (ACMA, CGMA).

Featured photo by Eyestetix Studio on Unsplash.