Etsy VAT on Seller Fees [Guide]

For many Etsy sellers, understanding VAT (Value Added Tax) and its implications on seller fees can be daunting. This guide aims to simplify the process, helping you understand how VAT works on Etsy fees and what you need to do to stay compliant.

A couple of important notes:

• This guide is primarily focused on VAT on selling fees for Etsy sellers who are based in the UK.
• The information in this guide is general. To understand your specific VAT obligations, be sure to consult a VAT advisor.

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Quick review: What is VAT?

VAT is a consumption tax placed on goods and services at each stage of production or distribution. It is commonly used in the United Kingdom and in the European Union. If you are based in a country where VAT is charged, VAT may be applied to certain seller fees when selling on Etsy.

Which Etsy fees are subject to VAT?

Several types of fees on Etsy can be subject to VAT, including:

Listing fees: Charges for listing an item on Etsy.

Transaction fees: A percentage of each sale made.

Payment processing fees: Fees charged by Etsy Payments for processing transactions.

Advertising Fees: Costs associated with promoting your listings through Etsy Ads.

For Etsy sellers in the UK who are not VAT registered, VAT will typically be charged on their seller fees, and they will see this reflected on their Etsy invoices. However, since they are not VAT registered, they cannot reclaim this VAT.

For Etsy sellers in the UK who are VAT registered and have supplied their VAT number to Etsy, the platform does not charge VAT on seller fees. Instead, these fees are handled using the reverse charge mechanism, where the seller accounts for both the input and output VAT on their VAT return, resulting in a neutral effect on their VAT liability.

VAT on Etsy fees is subject to the reverse charge mechanism

Etsy sellers in the UK who are VAT-registered and have a valid VAT number cannot reclaim VAT on Etsy fees because it is subject to the reverse charge mechanism.

The reverse charge mechanism is a VAT accounting procedure where the responsibility for reporting VAT shifts from the seller (Etsy) to the buyer (the Etsy seller). This means that instead of Etsy charging VAT on their fees, the seller must account for both the input and output VAT on the transaction.

For Etsy sellers in the UK, the reverse charge mechanism is applied because Etsy, as a non-UK company, provides services from the Republic of Ireland (where Etsy’s European operations are based).

In practice:

• Etsy charges fees without VAT.
• The seller calculates the VAT that would have been charged and reports it on their VAT return as both a payable (output) and receivable (input) VAT. ( A2X makes this process easy – learn more below.)
• This often results in no net VAT payment but ensures the transaction is recorded correctly for VAT purposes.

This mechanism helps streamline VAT collection and ensures that VAT is properly accounted for across borders.

Accounting for VAT on Etsy fees: Step-by-step guide

As outlined above, VAT on Etsy fees is subject to reverse charge, which means that sellers don’t need to worry about reclaiming VAT charged on fees.

However, Etsy sellers are responsible for accounting for VAT correctly on their VAT returns to remain compliant.

A2X is an accounting automation tool that can make managing VAT on seller fees significantly easier.

A2X will automatically pull your Etsy sales and transaction data and categorise all transactions to the correct account in your general ledger. For VAT on Etsy fees, A2X will automatically identify any Etsy fees, and then you can map these fees to an expense account and apply a reverse charge treatment – making it easier to complete your VAT returns (and your Etsy accounting) accurately and confidently.

Here’s an overview of how A2X works to get Etsy transaction data into Xero:

Here’s a step-by-step guide for how to account for VAT on Etsy fees using A2X.

1. Set up A2X

Setting up A2X is easy and takes just a few minutes.

• Sign up for A2X – No credit card is required, and you’ll be in “free trial mode” until you choose to subscribe.
• Connect A2X to your accounting software (Xero, QuickBooks Online, or Sage). All you need is your accounting software login.
• Connect A2X to Etsy. All you need is your Etsy login.
• Map your Etsy transactions to your Chart of Accounts. A2X has a questionnaire that can help you set this up in just a few minutes.

A2X will automatically map Etsy fees to an Etsy Fees expense account, and you can apply the reverse charge tax rate to these fees, as applicable.

2. Send Etsy transaction data from A2X to your accounting software

Go to the ‘Deposits’ tab in A2X. This is where you can see all of the deposits that A2X has fetched from Etsy.

If you click on the date of a deposit, you’ll be able to see how A2X has identified Etsy transactions and how it will record them in your accounting system.

Click ‘Send to [Your accounting software]’ to send the data to your accounting software for reconciliation.

3. Report on your VAT return

When completing your VAT return:

• Include the value of the Etsy fees in Box 6 (total value of sales and other outputs excluding VAT).
• Enter the VAT amount in Box 1 (VAT due on sales and other outputs).
• Include the VAT amount in Box 4 (VAT reclaimed on purchases and other inputs).
• Enter the amount in Box 7 (purchase value).
• The net effect on the VAT payable to HMRC is usually zero, but it ensures the transaction is properly accounted for.

Note: Xero and QuickBooks Online will automate this process when you choose the Reverse Charge Expenses rate. Keep in mind that this is not available in global versions of Xero and QuickBooks, just UK versions with a VAT module.

4. Keep records

In addition to your accounting software, you can also keep VAT records by downloading your VAT invoices from Etsy:

• Log in to Etsy and navigate to Shop Manager.
• Go to Settings > Finances > Payment account.
• Download and save your monthly invoices for record-keeping and VAT returns.

Questions about Etsy VAT?

Understanding your VAT obligations as an Etsy seller can be complicated! Fortunately, there are experienced accounting and bookkeeping specialists who work with Etsy sellers and are available to help.

Find an Etsy accountant or bookkeeper on the A2X Ecommerce Accountant Directory.