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How To Charge VAT On Shopify

 

How To Charge VAT On Shopify?

If you are a Shopify merchant selling goods and services in any of the EU Member Countries, you may want to know when and how to charge VAT on Shopify.

Whether you are an EU-based or a non-EU-based Shopify merchant, you have to charge VAT on the sales that you make to EU customers.

As of August 2020, the way you set up EU taxes on your Shopify store has changed due to VAT Changes that came into force in 2021 and the United Kingdom’s (UK) withdrawal from the European Union (EU).

Therefore, as an EU-based or non-EU-based business selling goods and services in the EU, you must be aware of the VAT changes and what implications these changes have for several aspects of your business.

Accordingly, you must first determine whether you have a VAT obligation in each of the EU Member Countries where you do business. In case you have one, you must VAT-register your Shopify business in all those EU Member States.

Once you register for VAT and receive your VAT Number(s), you can then set up your taxes in Shopify. This will ensure that you charge the correct VAT rates wherever you sell in the European Union.

If you are a Shopify merchant selling goods and services in the EU and want to know how Shopify VAT works, then in this article we will walk you through the step-by-step process of how to charge VAT on Shopify. In addition to this, we will also discuss the queries that you may come across when charging VAT on Shopify.

Read: E-Commerce VAT: Understanding Value Added Tax For Global Sales

What Is VAT For Shopify?

VAT is a consumption-based tax that a taxable person charges on the supply of all goods and services made in the course of his business unless the goods and services are specifically exempt.

It is charged on the additional value of each transaction and is collected at each stage of production and distribution. If a business pays VAT on its purchases, it is known as input tax and if a business charges VAT on its sales, it is known as output tax.

The difference between the output VAT and the input VAT is the VAT amount that is paid to the tax authorities in a particular EU Member State. In the end, the cost of the tax is borne by the final consumer.

As a Shopify merchant, you must first determine whether you should charge VAT in the EU Member State where you do business. In case you are not sure, you must consult tax authorities or seek help from a professional tax consultant.

Read: Shopify VAT Guide: All You Need To Know

VAT For EU-Based Shopify Stores

As an EU-based Shopify merchant selling goods and services to domestic customers in your home country, you must register locally and charge a local VAT rate.

However, if as an EU-based business, you intend to sell goods and services to other EU member countries, you must charge VAT in the Member State where your customers are located. Provided, you surpass the the new EU-wide limit of EUR 10,000 of yearly turnover of cross-border sales of goods and e-services.

Furthermore, to charge the destination country’s VAT rate, you need to either register for a VAT number with the Union One-Stop Shop (OSS) or with that country. Note that OSS is an electronic portal that allows your Shopify store to report certain B2C EU supplies in a single Member State as against registering for VAT in multiple EU Member Countries where you do business or where your customers are located.

If you are an EU-based business selling goods and services cross-border through your Shopify store, you can register for Union OSS in your country of establishment. Through the Union OSS in your country of establishment, you can report all of your intra-EU sales to EU consumers.

On the other hand, if you fail to surpass the threshold for the annual turnover of cross-border sales of goods and e-services, then you must tax sales in the country of departure or the country where your business is located.

Note that the new single EU-wide threshold will apply to you only if you are an EU-based business established in and shipping goods from a single Member State. If you are an EU-based business and you hold stock in multiple EU countries or are located outside the EU, the single EU-wide sales threshold of EU 10,000 will not apply to you.

In such a case, you need to VAT-register locally in each Member country where you hold stock. Remember, when you hold inventory in an EU country for onward sale, it creates a taxable supply and as a result, triggers the obligation to register for VAT in such a country.

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VAT For Non-EU-Based Shopify Stores

Most non-EU-based businesses distance selling imported goods to EU customers through a Shopify store are required to VAT-register in the country where their customers are located.

However, if your Shopify store is established outside of the EU but you hold stock within an EU Member Country for onward sale, you are still required to VAT-register in the country where you hold the stock. This also means that if as a non-EU-based Shopify store, you hold stock in multiple EU countries, you are required to VAT-register in each of the countries where you hold stock.

Such a registration would also imply that you can reclaim any import VAT paid to transport your inventory into the country. Remember, as a non-EU-based seller you can hold stock in the EU. However, the single EU-wide sales threshold of EU10,000 will not apply to you. Furthermore, you can declare your intra-EU cross-border B2C transactions by registering for the Union OSS scheme.

On the other hand, if your Shopify store is established outside of the EU and you don’t hold stock within the EU, you need to pay VAT on all the consignments that are imported to EU customers. This is unlike the previous rule where non-EU-based merchants selling goods and services in the EU were exempted from VAT if the value of the imported goods was less than EU22. This rule has now been abolished under the EU VAT Changes 2021.

Furthermore, to reduce the administrative burden of filing multiple VAT returns, you can register for the IOSS scheme and take its benefit as a non-EU-based business selling goods through your Shopify store.

The Import One-Stop Shop (IOSS) is an electronic portal where EU and non-EU businesses can file their VAT returns or account for the VAT due on their low-value distance sales of imported goods. Accordingly, under IOSS, you can account for the VAT due on your distance sales of imported goods if the intrinsic value of each consignment remains below EUR 150. Also, as a non-EU-based Shopify merchant, you must charge VAT on every order that you deliver to EU customers.

Thus, IOSS can significantly reduce the administrative burden that VAT procedures put on you and help you focus on your core business.

Now what if you supply goods for importation to the EU customers that have an intrinsic value exceeding EUR150? In such a scenario, you must nominate an Importer of Record.

An Importer of Record is a person who is responsible for ensuring that imported goods comply with all customs and legal requirements of the country of import.

Mostly, the Shopify merchant or the online business is the Importer of Record to ensure that customers do not have to undergo complicated processes. However, the merchant can appoint a designated individual as the Importer of Record who can perform potential duties at customs and ensure that import VAT is collected and remitted to the concerned tax authorities in the EU.

In case, you as a Shopify merchant choose to be the Importer of Record, then you will be responsible for remitting the import VAT to the tax authorities in the EU Member Country where the goods have been imported. Furthermore, you must VAT-register your Shopify business in such a Member State to reclaim the import VAT paid on your periodic VAT return.

Also, you must account for the goods transferred to the EU customer on your local VAT return if such a customer is located in the same EU state as your inventory. However, you must account for the goods transferred to the EU customer through an OSS registration if your customer is located in a different EU Member State from your inventory.

How To Charge VAT On Shopify?

Your VAT registration as a Shopify merchant will depend upon the location where your business is established and the intrinsic value of goods or services that you supply through your Shopify store. Mostly, as a Shopify merchant, your VAT will become due in an EU Member Country where you hold stock and in a Member State where your customers are located.

If you choose to expand your Shopify business and intend to supply goods to multiple EU Member States, then you may have to VAT register your Shopify business in multiple Member Countries. This can turn out to be challenging and expensive. Thus, to reduce the administrative burden that VAT processes impose, the OSS and the IOSS schemes are designed. These schemes allow you to VAT-register your online store at a single location and file a monthly or quarterly VAT return depending upon the scheme you are part of.

Once you have registered with the VAT member countries and have your EU VAT number, you can set up your taxes in your Shopify store. Remember that you only need to do VAT settings in your Shopify store once. The following are the steps that you need to take to set up VAT in Shopify:

1. Log in to your Shopify Admin and then go to ‘Settings’. Under ‘Settings’, click ‘Taxes and Duties’.

2. In the ‘Taxes and Duties’ section, go to the Countries/Regions section. In this section, click ‘European Union’.

3. Once you click ‘European Union’, go to the ‘VAT On Sales’ section within the EU page and then click ‘Collect VAT’.

4. Once you click on ‘Collect VAT’, select how you’re registered for VAT.

  • Select One-Stop Shop registration if you’ve registered for the OSS scheme and you intend to submit a single VAT return for all sales to customers in EU member countries.
  • Select Micro-business exemption if your Shopify store makes annual sales of EUR 10,000 or less and you intend to submit a VAT return to your local tax authority. Remember that the micro-business exemption is not available if you have more than one VAT registration.
  • Select country-specific registration if you intend to submit a VAT return directly to the tax authorities of EU member countries that you ship to.

5. Once you choose how you’re registered for VAT, the next step is to click the ‘Next’ button.

6. After you click ‘Next’, you need to do one of the following:

  • Enter your VAT number from the country where you’re registered, and click ‘Collect VAT’ if you selected One-Stop Shop registration. Furthermore, click ‘Add Country’ on the ‘VAT On Sales’ section on the EU page if you need to add additional VAT registrations.
  • Enter your VAT number from your home country and click ‘Collect VAT’ if you selected Micro-business exemption.
  • Enter your VAT number from the country where you’re registered and then click ‘Collect VAT’ if you selected Country-specific registration. Furthermore, click ‘Add Country’ on the ‘VAT On Sales’ within the EU page if you need to add additional VAT registrations.

Remember, that once you add your VAT Number, Shopify will automatically set the tax rates that apply in the areas you’ve registered for.

Also, note that Shopify can help you update the tax settings in your Shopify Admin through their support team. However, it cannot provide you with the legal tax advice. Accordingly, if you need help regarding changing tax settings in your Shopify Admin, you can contact Shopify Support. But if you want to understand your tax obligations, you need to get in touch with a tax professional.

Read: How To Charge Sales Tax In Shopify?

What Is A VAT Number?

A VAT number, also called the Value-Added Tax Identification Number (VATIN), is an identifier used in the EU. Once you register with the tax authority of a member country, it provides you with this number. The EU Member Countries issue VATIN numbers to the merchants to allow them to charge value-added tax.

How Do I Add A VAT Number To My Shopify Store?

Once you have registered for VAT in a Member State, you must follow the steps below to add your VAT number in your Shopify Admin:

1. Log in to your Shopify Admin and go to ‘Settings’. Under ‘Settings’, select ‘Taxes And Duties’.

2. Once you select ‘Taxes And Duties’, go to the ‘Countries/Regions’ section. In this section, click ‘European Union’.

3. Within the ‘European Union’ section, go to the ‘VAT On Sales’ section and click ‘Add Country’.

4. In the ‘Add Country’ page, select the country in which you are registered.

5. On the selected country’s page, go to the ‘VAT Number’ section and enter your VAT Number.

6. Once you enter the VAT number, then click on the ‘Add Country’ button.

7. This step is optional. In case you want to add more regions and account numbers, you can click on ‘Collect VAT’.

In case you want to delete or change your registrations or account numbers, you can click on the three dots right next to the country name and account number in the ‘Tax Registrations’ section.

Read: Do You Need A Tax ID To Sell On Shopify?

How Do I Add VAT Field To Checkout Shopify?

By default, Shopify doesn’t allow you to add or customize the checkout page in Shopify Basic Plans. Only Shopify Plus stores can edit the checkout file through Checkout.Liquid template.

Another alternative is to edit your theme’s language and change an existing field to one where you ask for the customer’s VAT information. You can also ask your customer to provide the VAT information at an earlier point, such as on the product page or at the cart page.

Also, there are a couple of third-party apps that can help you with capturing VAT numbers. Sufio: Professional Invoices is one such app.

Do I Need A VAT Number In The US?

The United States does not have a Value Added Tax (VAT) system. Instead, the U.S. uses a sales tax system, which varies by state and sometimes by local jurisdictions. The sales tax is generally imposed on the sale of tangible goods and, in some cases, services.

Therefore, if you are operating a business in the United States, you would typically need to register for a sales tax permit in the states where you have a sales tax nexus (a significant connection that triggers a sales tax obligation). This is important for collecting and remitting sales tax on taxable transactions.

Read:

However, if you are doing business internationally, you may need to comply with VAT regulations in those jurisdictions.

Suppose, you have a Shopify store established in the US and you are supplying goods for importation to the EU customers. Mostly you are required to VAT-register in the country where your customers are located.

However, if your US-established Shopify store holds stock within an EU Member Country for onward sale, you are required to VAT-register in the country where you hold the stock. Accordingly, as a non-EU-based Shopify store, if you hold inventory in multiple EU countries, you are required to VAT-register in each of the countries where you hold stock.

Remember, as a US-based (non-EU-based) seller, you can hold stock in the EU. However, the single EU-wide sales threshold of EU10,000 will not apply to you. Furthermore, you can declare your intra-EU cross-border B2C transactions by registering for the Union OSS scheme.

On the contrary, as a US-based seller (non-EU-based), if you don’t hold stock within the EU, you need to pay VAT on all the consignments that are imported to EU customers. This is unlike the previous rule where non-EU-based merchants selling goods and services in the EU were exempted from VAT if the value of the imported goods was less than EU22. This rule has now been abolished under the EU VAT Changes 2021.

Furthermore, you can register for the IOSS scheme to file your VAT returns or account for the VAT if the intrinsic value of each consignment remains below EUR 150. Thus, such a scheme is designed to reduce the administrative burden of filing multiple VAT returns. However, if the intrinsic value of a consignment supplied for importation to EU customers exceeds EU150, then you must nominate an Importer of Record in the EU who can help you comply with all customs and legal requirements of the country of import.

What Is The VAT Threshold For Shopify?

To start charging VAT on your Shopify store, you must have an understanding of the changes you need to make for your business due to Brexit and the EU VAT changes that came into force on July 1, 2021.

Under Brexit, Northern Ireland (NI) adopted a dual status. Hence, it is considered part of both the EU and the UK tax regimes.

Furthermore, as a Shopify merchant, if you use registration-based tax settings, then your VAT is calculated based on the order’s origin and destination.

Accordingly, if your customers are located in Northern Ireland and your online store is established in the UK, in such a case, UK VAT applies to orders from within the UK. Likewise, if your customers are located in Northern Ireland and your online store is established in Northern Ireland, in such a case, EU VAT applies to orders from within the EU to customers in NI.

The following table showcases VAT guidelines for Shopify merchants who either have their online business established in the UK or are selling goods to customers in the UK.

I. VAT Thresholds For UK Shopify Merchants

Order Origin Order Destination VAT Applied At Checkout
United Kingdom United Kingdom If you have a UK VAT registration, then UK VAT is charged.
Northern Ireland If you have a UK VAT registration, then UK VAT is charged.
European Union VAT is not charged.
Northern Ireland (NI) United Kingdom If you have a UK VAT registration, then UK VAT is charged.
Northern Ireland If you have a UK VAT registration, then UK VAT is charged.
European Union If you have an EU VAT registration, then EU VAT is charged.
European Union United Kingdom VAT charges depend upon on the cost of the order and whether you have a UK VAT registration.

  • If you don’t have a UK VAT registration, then VAT is not charged.
  • If you have a UK VAT registration and the order is over 135 GBP, then VAT is not charged.
  • If you have a UK VAT registration and the order is equal to or less than 135 GBP, then UK VAT is charged.
Northern Ireland
  • If you have a One Stop Shop (OSS) EU registration or a NI VAT registration then UK VAT is charged.
  • If you have a domestic VAT registration, then EU VAT is charged at the local rate.
  • If you don’t have an EU registration, then VAT is not charged.
European Union If you have an EU VAT registration, then EU VAT is charged.

II. VAT Thresholds For EU Shopify Merchants

After the EU VAT Changes 2021, the individual country thresholds no longer apply for Shopify merchants established in the EU. Instead, a single EU-wide Distance Selling Threshold of €10,000 will apply to the entire EU.

This means that if as an EU-based merchant, you supply goods and services to customers in your home country, then you will charge a local VAT rate on sales made to the local customers. However, suppose as an EU-based merchant, you supply goods and services to customers located in EU countries other than your EU home country. In that case, you will charge a VAT rate depending upon whether you exceed the single EU-wide Distance Selling Threshold of €10,000.

Accordingly, if your combined sales to all other EU member countries are less than 10,000 EUR in total, you will charge the VAT rate of your home country. However, if your combined sales to all other EU member countries are equal to or greater than 10,000 EUR in total, then you will charge the VAT rate applicable in your customer’s location.

Furthermore, to reduce the administrative burden that VAT processes impose, you can register with the new One-Stop Shop scheme (OSS). The OSS allows you to collect and remit VAT for sales in all EU member countries through a single registration, rather than registering for each member state individually.

How Do I Not Charge VAT On Shopify?

Once you set your Shopify account for taxes, it automatically calculates taxes. However, if you want more control over the taxes that you charge, you can override these tax rates within your Shopify Admin.

You can use Tax Overrides within Shopify if you need to do any of the following:

  • control how much tax rate you charge for a particular product
  • manage tax exceptions and exemptions
  • state unique tax rates for shipping destinations
  • state unique tax rates for tax-exempt customers

Say, for instance, if you sell products that are VAT exempted in the European Union or the United Kingdom, you can apply those VAT exemptions using tax overrides within Shopify. Remember, tax overrides apply to online sales as well as to Shopify POS sales.

Now, to set up a tax override, you first need to create a manual collection for the products that are tax exempt. Once you create a manual collection of the tax-exempted products, you can then apply the override to that collection.

Say, for instance, you do not want to charge VAT on the VAT-exempted products, then you can create overrides and set the tax rates to 0%.

To know how to set tax overrides, read our guide on Tax Overrides Shopify: All You Need To Know.

Is VAT Charged On Digital Goods?

Digital goods refer to intangible products or content that are delivered electronically, usually over the Internet. These goods exist in a digital or electronic format, and they are typically consumed, accessed, or used on electronic devices such as computers, smartphones, tablets, or e-readers. Unlike physical goods, digital goods do not have a physical form or substance.

If as an EU-based business, you sell digital goods or services to consumers located in your home country, you must charge VAT at the rate that is applicable in your home country.

However, if as an EU-based business or a non-EU-based business, you sell digital goods or services to EU countries other than your home country, you must see whether the transaction is a B2B or B2C transaction.

In case the transaction is a B2B transaction, then as an EU-based Shopify seller, you don’t need to charge VAT. Remember that B2B transactions are generally subject to the reverse charge mechanism wherein the responsibility for paying VAT is shifted to the customer rather than the supplier or the seller. This means that as an EU-based Shopify merchant, you don’t have to file a separate tax return in every EU country where you sell digital goods or services. All you need to do is take the VAT number from the buyer that you can validate with the VIES Service from the European Commission.

In case the transaction is a B2C transaction, then as an EU-based Shopify merchant, you must charge VAT on all the sales that you make to EU consumers. The rate at which you will charge VAT will depend upon whether you surpass the single EU-wide Distance Selling Threshold of €10,000.

If your yearly EU-wide sales of digital goods and services are below €10,000, then you must charge the VAT rate applicable in your home country on all the cross-border sales that you make to your EU customers. However, if your yearly EU-wide sales of digital goods and services exceed the €10,000 threshold, then you must charge the VAT rate applicable in the EU Member Country where your customers are located.

Then, if you are a non-EU-based Shopify merchant selling digital goods and services to EU customers in a B2B transaction, a reverse charge mechanism will apply wherein your EU customer will report and pay VAT to the tax authority. But if the transaction is a B2C transaction, then as a non-EU-based Shopify merchant, you will always charge the VAT rate applicable in the customer’s country.

Read: What Is Sales Tax On Digital Goods By State?

How Do I Turn Off VAT On Shopify?

If you want to disable VAT on Shopify, you can follow these general steps.

1. Log in to your Shopify Admin and go to ‘Settings’. Under ‘Settings’, select ‘Taxes and Duties’.

2. On the ‘Taxes and Duties’ page, go down to the ‘Tax Calculations’ section.

3. In the ‘Tax Calculations’ section, you will see the following options:

All prices include tax
Charge tax on shipping rates
Charge VAT on digital goods

To turn off VAT and exclude it from your product prices, uncheck the checkbox titled, ‘All Prices Include Tax’.

4. Once you uncheck the ‘All Prices Include Tax’ checkbox, click on the ‘Save’ button to save the changes.

Want Help With Shopify Taxes And Accounting?

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