Selling at cost for card points: VAT can turn it into a loss

Running an online shop at break-even to collect credit card points can stop paying once the shop crosses the VAT threshold. Registration is triggered by turnover, not profit. Once a seller is registered, one sixth of every standard-rated sale is VAT, and a price set to make nothing has no room for it unless the seller can reclaim the VAT on what they bought.

The model is simple: list products on Amazon, eBay or Shopify, buy only once something sells, and put every purchase on a rewards card. The aim is spend, not profit, and the points become business-class seats and long-haul trips.

It runs on cards at a time when card borrowing is climbing. The Bank of England said on 29 September that credit card borrowing was growing at 13.3 per cent a year, and that the effective rate on interest-charging cards rose to 21.55 per cent in August. Those figures are for personal cards, but the arithmetic below applies to any card.

One version breaks the marketplaces' rules

Holding no stock is allowed. Having another shop post the order for you is not. eBay allows dropshipping "where you fulfil orders directly from a wholesale supplier", but its dropshipping rules say listing an item and "then purchasing the item from another retailer or marketplace that ships directly to your customer is not allowed". Amazon's dropshipping policy lists "purchasing products from another online retailer and having that retailer shipping directly to customers" as not permitted, and requires you to be named as the seller on every packing slip. Both can suspend an account for it.

Turnover, not profit

You must register for VAT if your taxable turnover for the last 12 months goes over the threshold, which has been £90,000 since 1 April 2024, or if you expect it to go over that in the next 30 days alone. Turnover is what customers paid, before platform fees come off, so a shop that keeps nothing can still cross the line. Our guide to reconciling marketplace payouts back to the sales behind them shows how to get from the payout to that figure.

For now, do not expect the marketplace to collect it. Where a UK seller's stock is in the UK when it sells, HMRC's guidance makes the seller liable for the VAT. The government consulted over the summer on making marketplaces collect it for UK sellers too, and at the time of writing had not published its decision.

What the points cost

Illustration, not a real client. Maya is 23 and sells phone accessories from her flat in Hounslow, under the Heathrow flight path. Each order sells for £30. Her UK wholesaler charges £24, including £4 of VAT, and ships in her name. Platform fees and postage take the other £6. She makes nothing on an order and puts the £24 on her rewards card. To keep it simple, leave aside the VAT in the platform fees. Once registered she could reclaim that too, so the bills below are the most she would pay.

She starts in August and sells 800 orders a month: £24,000 of sales, with £19,200 going on the card. By the end of November her sales total £96,000. At today's £90,000 threshold she goes over in November, must register by 30 December, and owes VAT on her sales from 1 January.

From then, at the same prices, £5 of every £30 sale is VAT. What she can reclaim decides the rest.

• With a valid VAT invoice for each purchase, she reclaims the £4 and pays £1 an order: £800 a month.

• With only her card statement, she reclaims nothing, because HMRC says you "must also have valid VAT invoices". She pays £5 an order: £4,000 a month.

Whatever her points are worth, they now have to beat that bill. To cover £800 a month, they would need to be worth more than 4p for every pound on the card. Without the invoices, more than 20p. Business class is lovely. Flying it at a loss isn't.

The card does not wait for the payout

A charge card has to be paid in full every month. If it is not, the issuer can add interest and fees and may cancel the card. Marketplace payouts arrive on the platform's timetable, not the card's, and a shop with no margin has no buffer when one is late.

A credit card lets the balance roll, at a price. At the 21.55 per cent the Bank of England reported for August, a month's interest is more than 1.5 per cent of the balance, so carrying it for a month can cost more than the points it earned.

What to do before the next statement

1. Every month, add up the last 12 months of sales from each platform's own reports, not your bank, and look at the next 30 days too. The threshold is £90,000 at the time of writing; check gov.uk after the Budget on 28 October.

2. Keep a VAT invoice for every purchase. A card statement will not do.

3. Work out how much of the VAT on your costs you can reclaim. The VAT on your sales, less that, is a cost your prices must cover.

4. Check your supplier is a wholesaler that ships in your name, not another retailer.

5. Hold back enough from each payout to clear the card in full on the due date.

6. Get the sum checked before you apply for VAT registration, not after, whether by a bookkeeper or one of the ecommerce accountants who work with marketplace sellers.

The time to run these numbers is before the next card statement, not after the first VAT return.

About the author

Harvey Dhillon is the 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 Oswaldo Martinez on Unsplash.