Online sellers: the VAT inside your delivery charge

Nadia's checkout adds £3.99 delivery to every order and runs all of it through one tax setting. Whichever way she sets it, it is wrong for one of her two ranges. (Nadia is an illustration, not a real client: a VAT-registered online shop in Hackney selling scented candles and children's clothes.)

The reason sits in two HMRC notices. For a VAT-registered online seller, the delivery charge is part of the sale, and it takes the VAT rate of whatever is in the parcel: 20 per cent on a candle, nothing at all on a child's coat that qualifies for the zero rate. That holds even when the postage you paid carried no VAT. Check what your checkout does with it before the Christmas orders build up.

One sale of delivered goods

HMRC's notice on postage, delivery and VAT sets the rule. If your terms mean you have to get the goods to an address the customer chooses, which is how nearly every online order works, you are making a single supply of delivered goods. An extra charge for delivery "will follow the liability of the goods", and the position "is not affected by whether the charge for delivery is separately itemised". Free delivery works the same way: VAT on the full price, at the rate for the goods.

Some Royal Mail services are exempt from VAT, which is where the confusion starts. HMRC's main VAT guide deals with it in a line: the charge made to you by Royal Mail may be exempt, but your charge to your customer "is taxable even if it's exactly equal" to it. It also works the other way. Where the goods are zero-rated, the guide says the zero rating "also extends to cover the delivery or postage".

What one setting costs Nadia

In December she sends out 1,200 candle orders and 800 orders of children's clothing, never mixed in one parcel. The candle orders bring in £4,788 of delivery charges, of which one sixth, £798, is VAT. The children's orders bring in £3,192, none of it VAT.

A single shipping tax setting cannot get both halves right. Set it to 20 per cent and she overpays £532 on the children's orders. Set it to no VAT and she underpays £798 on the candles. An underpayment is owed to HMRC whether she spots it or not. An overpayment only comes back if she spots it and corrects it. The answer is to tax delivery by product, not with one flat setting.

Mixed baskets and gift wrap

A parcel holding a candle and a child's jumper needs its delivery charge split between the two rates. HMRC's guide sets no special method. It says the calculation "must be fair" and that you "must be able to justify" it. Splitting by the value of the goods in the basket is easy to run and easy to explain, and our guide to taking the VAT out of a VAT-inclusive price shows the arithmetic for the standard-rated share.

Two charges never follow the goods. A separate charge for packing, which HMRC treats as a packing service, is standard-rated, and a gift-wrap charge is best treated the same way. And where delivery is genuinely not part of the deal, say a customer who could collect but asks you to deliver for an extra charge, the delivery is a separate service at 20 per cent whatever the goods.

Keep the two sides of postage apart in the books, too: what customers pay you for delivery is sales, and what carriers charge you is a cost. Our Christmas checklist covers recording the postage you charge apart from the postage you pay.

Test it this week: put a standard-rated product and a zero-rated one through your own checkout, and read the VAT on each delivery line before the first Christmas order goes out.

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 Brandable Box on Unsplash.