Shopify VAT: How to Do it Right [Guide]

Understanding VAT – and getting it right – is incredibly important for Shopify merchants.

Knowledge of VAT rules and regulations will help your business remain compliant with tax laws. It can also help to ensure you’re charging the right tax rates to customers and reclaiming VAT on eligible business expenses – which will ultimately impact your pricing, profitability, and operational efficiency.

In this guide, we’ll cover the basics of managing Shopify VAT, including when you might need to register, what you usually need to do once registered, how to efficiently keep accurate VAT records, and more.

The information in this guide is general. Please consult a certified VAT professional to understand your business’s specific VAT obligations.

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What Shopify merchants need to know about VAT

VAT, or Value Added Tax, is a consumption tax levied on the value added to goods and services at each stage of production or distribution.

Here are a few things to keep in mind when managing VAT for a Shopify store:

• As a Shopify merchant in the UK, you must register for VAT if your turnover exceeds £90,000.
• If you are VAT-registered, VAT must be collected from customers at the point of sale. Shopify allows you to set up different VAT rates for different products and regions directly in your store settings, adapting to the varying VAT rates across product types and countries.
• After collecting VAT from sales, you must remit it to the relevant tax authorities. Shopify is not responsible for collecting and remitting VAT. While platforms like Amazon and eBay are now responsible to collect and remit VAT on some transactions under Marketplace Facilitator VAT rules, the same requirements do not apply to Shopify. In the UK, VAT returns can typically be filed and payments made online through HMRC. In the EU, you can use schemes like One Stop Shop (OSS) to file and remit VAT.

For a comprehensive overview of VAT, watch the following video featuring Elver E-Commerce Accountants, a leading ecommerce accounting practice in the UK.

Changes to VAT in the UK and EU

Over the past few years, there have been a few legislative changes in the UK and EU that have impacted Shopify merchants and how they manage VAT.

Making Tax Digital

Making Tax Digital (MTD) is a UK government initiative aimed at modernizing the tax system by requiring businesses to keep digital records and use software to submit their tax returns and updates to HM Revenue and Customs (HMRC).

Since April 2019, businesses (including Shopify stores) with a taxable turnover above the VAT threshold (currently £90,000) must keep their records digitally and use MTD-compatible software to submit their VAT returns.

Brexit

Brexit has introduced changes for Shopify merchants in the UK and EU, including the need for customs declarations and potential tariffs on goods crossing borders. Shopify merchants in the UK may need to register for VAT in EU countries where they sell (and vice versa).

The 2021 Ecommerce VAT Package

The 2021 Ecommerce VAT Package was introduced to modernize VAT for digital and cross-border commerce within the EU. Shopify merchants in the EU and UK should be aware of a few of the changes that it introduced:

• One unified VAT threshold of €10,000 for ecommerce sellers in the EU – Individual EU country VAT thresholds have been replaced with a unified €10,000 threshold, requiring merchants to charge VAT at the customer’s country rate on all EU sales above this limit.
• One Stop Shop (OSS) – With OSS, merchants can handle VAT registration and payments for all EU countries through a single portal.
• Import One Stop Shop (IOSS) – The IOSS scheme allows merchants to handle VAT for non-EU goods under €150 at the point of sale and streamline shipping by eliminating import VAT payments, enhancing efficiency, and reducing delays.

Do you need to register for VAT?

Whether or not a Shopify merchant needs to register for VAT depends on several factors.

Note: You very likely need to register for VAT in the EU if you’re a UK-based merchant selling in the EU, regardless of sales thresholds (and vice-versa – you very likely need to register for VAT in the UK if you’re an EU-based merchant selling into the UK, regardless of sales thresholds).

Some factors that will impact whether or not you need to register for VAT in the UK include:

• Exceeding the sales threshold – Merchants in the UK must register for VAT if their taxable turnover exceeds £90,000 within any 12-month period. For sales below this threshold, registration is optional but can be beneficial if a business wishes to reclaim VAT on its purchases. Note that Shopify fees count towards this threshold as they are subject to the reverse charge mechanism.
• Storing stock in the UK – If a seller holds stock in the UK (for example, in a warehouse), you will need to register for VAT, regardless of the value of your sales.

Some factors that will impact whether or not you need to register for VAT in the EU include:

• Exceeding sales thresholds – There is one distance selling threshold of €10,000 throughout the EU. If a Shopify store in the EU exceeds this threshold in any country, they must register to submit EU VAT. Note: UK merchants selling into the UK will likely need to register for VAT in EU regardless of sales thresholds.
• Storing stock in a particular country – Regardless of sales thresholds, if a Shopify store holds stock in a particular country, they must register for VAT in that particular country.

Shopify merchants can voluntarily register for VAT before meeting any of the criteria outlined above, but keep in mind that registering for VAT in any country means that you must adhere to VAT rules and regulations in the country/countries in which you are registered.

What you need to do once you’re registered for VAT

Once your Shopify store is registered for VAT – even if you register before meeting any thresholds – you are required to comply with VAT rules.

Typically, this will require the following:

• Understanding different VAT rates as they apply to your products – Learn more about VAT rates in the UK here, and learn more about VAT rates in the EU here. Work with a VAT professional to ensure you’re charging the correct rates on your product(s).
• Charging and collecting VAT – Shopify has settings that enable you to collect VAT on your product sales (more on this below).
• Providing VAT invoices to customers – If a customer requests a VAT invoice, you may need a third-party tool to generate one – see this Shopify community thread for more details.
• Keeping accurate records – The key to making VAT management easy? Accurate bookkeeping. We’ll cover a few areas of bookkeeping where Shopify merchants and accountants often get stuck below.
• Filing VAT returns and remitting VAT – Accurate bookkeeping with the right tools will make this easy. More on this below.

Setting up VAT on Shopify

Shopify is not responsible for collecting and remitting VAT on your store’s behalf. However, they have settings that enable you to charge VAT.

It’s then up to you to report on and remit VAT.

To set up Shopify to charge and collect UK VAT:

• In the Shopify admin, go to ‘Settings’ > ‘Taxes and duties’
• In the Countries/regions section, click ‘United Kingdom’
• In the VAT collection section, click ‘Collect VAT’
• In VAT number, enter your VAT number. If you have applied for a VAT number but don’t yet have one, then leave this field blank. You can update it when you receive your number.
• Click ‘Collect VAT’

You can create tax overrides for products if default tax rates don’t apply to your products – get Shopify’s guide for how to set up tax overrides here.

To set up Shopify to charge and collect EU VAT:

• In the Shopify admin, go to ‘Settings’ > ‘Taxes and duties’
• In the Countries/regions section, click ‘European Union’
• In the VAT on sales within the EU section, click ‘Add country’
• Select a country in which you are registered
• In VAT number, enter your VAT number
• Click ‘Add country’
• Optional: To add more regions and account numbers, click ‘Collect VAT’

Shopify has some helpful resources for setting up EU VAT – please see here for more information about setting up EU taxes, and see here for more information about Shopify’s EU registration-based taxes feature.

File VAT returns & remit VAT

Another obligation of VAT registration for Shopify merchants in the UK or EU is the requirement to file regular VAT returns and remit the collected VAT.

For UK Shopify merchants: You must submit VAT returns, typically on a quarterly basis, to HMRC via their online portal. These returns should detail your sales and purchases, the VAT you have collected from customers, and the VAT paid on business expenses. After filing, you must also remit the collected VAT to HMRC according to the schedule established by your VAT registration.

For EU Shopify merchants: You are required to file VAT returns in each country where you’re registered, typically monthly or quarterly. By utilizing the One Stop Shop (OSS) scheme, you can streamline this process by filing a single quarterly return covering all your EU sales and remitting the VAT due to each member state through this system.

While Shopify merchants can manage VAT filings and remittance on their own, we recommend working with a tax professional to ensure accuracy and compliance, especially if you have complex VAT requirements or operate across multiple jurisdictions.

Bookkeeping for Shopify VAT: The key to accurate numbers and records

Shopify has features that enable merchants to charge the correct VAT amounts. However, Shopify will not remit VAT on your behalf.

Unlike Amazon and eBay, which must collect and remit VAT on certain transactions under the Marketplace Facilitator VAT rules, Shopify does not have the same obligations.

Shopify merchants must properly track and account for VAT so they can:

• Remain compliant with VAT rules
• Avoid over or under-paying VAT
• Be prepared in the event of an audit
• Understand your store’s profitability or financial position (by reporting on correct numbers)

The key to getting all of your Shopify numbers – including VAT – correct? Accurate bookkeeping. Let’s take a look at a few areas where bookkeeping for Shopify VAT can get tricky and cause errors.

Shopify payments: Don’t record VAT as income

Shopify merchants will be familiar with the fact that you get paid in a lump sum. However, the number in this lump sum isn’t just sales – it’s actually a combination of Shopify sales, fees, shipping income, VAT, gift card liabilities, etc.

It’s crucial to record every Shopify transaction that makes up a payout to the correct category in the Chart of Accounts or balance sheet – including VAT collected (which should typically be recorded as a “current liability” on the balance sheet).

It could lead to major problems if you don’t – for example, if you record VAT as “sales” or “income”, you’ll be overstating your revenue and potentially underreporting and under-paying VAT.

Shopify provides reports (e.g., the Finance Summary) that include how much VAT has been collected; however, going through this report manually can be prone to human error and take up a lot of time.

Fortunately, A2X is designed to solve this exact problem. It will integrate Shopify with your accounting software (e.g., Xero) and categorize Shopify payout data into accurate summaries that reconcile perfectly.

Payment gateway reconciliation & VAT

A helpful feature on Shopify is the ability to add payment options at checkout – e.g., Paypal, Stripe, Klarna, etc.

However, adding these payment gateway options creates complexity in the bookkeeping and reconciliation process.

Payments processed through gateways sometimes do not immediately match the transactions recorded in your accounting software due to timing differences or errors. This is often because payment gateways will deduct fees before depositing funds into the merchant’s account. These fees need to be accounted for separately from Shopify transactions and VAT calculations, as mixing them can lead to incorrect VAT reporting.

Similarly, if customers make partial payments, or if payment is split over multiple transactions, tracking and applying VAT correctly to each part of the transaction can be complex, especially if the partial payments span different VAT reporting periods.

The good news? A2X can help make payment gateway reconciliation easy.

Accounting for Shopify expenses

For businesses in the UK, most Shopify expenses (e.g., subscription fees) will be reverse charge expenses because Shopify generally bills from the Republic of Ireland (in the EU).

As such, merchants in the UK and Ireland don’t have to pay VAT upfront and then reclaim it later; they simply report it in their VAT return. Shopify merchants located in Ireland can often reclaim the VAT.

This is also why it’s so important to record VAT correctly in your accounting records – you’ll need to report the correct amounts in your VAT return.

As discussed above, A2X can separate out the VAT amounts that you need to report on from Shopify’s lump sum payment, making this easy to report on and helping to ensure the numbers are accurate.

How A2X makes bookkeeping for Shopify easy

A2X is an ecommerce accounting automation solution designed to simplify bookkeeping for sales channels like Shopify, Amazon, eBay, and Etsy.

If you’re already using accounting software like Xero, you’re likely aware that there’s no easy way to get your Shopify transactions into Xero.

That’s where A2X comes in. Not only will A2X organize your Shopify payouts into accurate summaries that reconcile perfectly in your accounting software, it can also make accounting for VAT easy by splitting out EU VAT from UK VAT. Learn more about setting up A2X for Shopify VAT here.

Watch the video below to understand how A2X can integrate Shopify and Xero to make bookkeeping accurate and easy.

Ready to get started? Sign up for a free trial of A2X today!