Business development · 8 August 2017

British retailers hit hard by VAT changes to eBay fees

eBay fees change
The eBay fees change has come without much warning for retailers

New measures introduced to eBay fees on the ecommerce platform mean thousands of businesses not VAT registered will incur extra costs from selling online.

Earlier in the summer, eBay wrote to business sellers and informed each that from 1 August 2017 VAT would be applied to all fees. The 20 per cent tax now being applied will have less of an impact on those which are VAT registered, but could erode margins for those trading under £85,000 and on the flat rate scheme.

Parties likely to be impacted by the rise in eBay fees the most are those that transitioned from being a private seller, which do not have VAT added to sales, to a business seller.

The eBay fee changes were introduced in response to powers given to HMRC by the chancellor in 2016. This meant Britain’s tax regulator could force online marketplaces to ensure overseas customers were registered and accounting for VAT.

As part of the new payment policy, sellers can reclaim VAT from eBay transactions on VAT returns. Previously, eBay deducted VAT from sales if a VAT number was provided by a seller alongside special dispensation which removed VAT fees entirely.

Alan Pearce, VAT partner at law firm Blick Rothenerg, said: “So far, according to HMRC, over 7,000 new ‘internet traders’ applied for VAT registration in 2016, compared with just 700 in the previous year, suggesting that the new powers are having a significant effect. It is expected that these new measures will secure a much needed additional £875m of VAT revenue by 2021.”

In March 2017 HMRC published a report called “Tackling the hidden economy: Sanctions”. Contained within it was a look at the kinds of new penalties and sanctions that could be applied to those operating in the so-called “hidden economy”.

Following a two month consultation period between August and October in 2016, HMRC concluded that the 2014/15 tax gap due to the hidden economy stood at £6.2bn – 17 per cent of the total tax gap.

Business Advice spoke to one small business retailer about the impact, and discovered cash flow was a particularly prevalent issue.

Tim Grinsdale is director at TOAD Diaries, a business which has a current turnover of £200,000 and does 40 per cent of its selling through eBay.

His first point was simple, eBay did not provide enough advanced warning about the changes. “UK sellers were officially noticed on 21 July. This left us with less than three weeks to assess the impact of this change and adjust accordingly,” he added.

When asked about the changes to his business, Grinsdale pointed towards cash flow. Despite being VAT registered, having to recoup this money later will produce the need for a rethink on eBay selling. “Prior to the VAT change, we could use the revenue generated on eBay in a more fluid way. For example, we could increase our AdWords spend to drive more sales before our quarterly VAT return was due. Thus leveraging the benefit of having the VAT cash-in-hand.

“This advantage is principally what has justified our strategy on eBay as the profit margins on the platform are much tighter than those on our site. Ebay prices will likely need to change to compensate.”

Grinsdale now believes that for TOAD Diaries to maintain its end price for customers, the business risks losing money. “There is a balance to be struck as eBay customers, in particular, tend to be seeking keener pricing. So we risk losing sales if we price too high in adjusting for this change.”

One strategy Grinsale believes could work is adding the postage price separately, instead of building it in. This would mean only paying the 20 per cent VAT rate on the product, not overall price. However, taking away free postage decreases the visibility of listings on eBay, so this approach risks reducing sales.

While his business is VAT registered, and so can claim back the tax at a later date, the business owner believes the eBay fees change will negatively affect sellers across the board because of the adverse cash flow situation.

The email sellers were sent to advise on the eBay fees change

eBay fees email

Blick Rothenburg’s Pearce said: “The impact of this change will be felt by those signed up with eBay as unregistered UK Businesses Seller. In effect, those operating under the £85,000 VAT registration threshold. They will need to absorb the VAT on eBay’s fees by reducing overall profit or look to pass on the additional cost to customers by increasing prices.”

Business Advice took some of these worries to eBay and the platform told us it was corresponding with all sellers as per the normal approach with user agreement changes, and is sending out reminders. The ecommerce platform said it would provide invoices that allow sellers which are VAT registered and otherwise eligible to deduct VAT on VAT returns.

We wanted to know which seller demographic would now take home less per sale, but eBay said this was hard to quantify as sellers often sell across marketplaces and in different places and only the tax authority can deem who is above the UK VAT threshold – which is why the changes apply to all sellers. Effective 1 August 2017, eBay changed the contracting party for eBay users residing in the UK from a Luxembourg entity to a UK one, which is subject to UK tax law.

Despite being a VAT registered business, Grinsdale believes the eBay fees change will slow business growth. “As mentioned, we use the value of the cash flow advantage to fund some of our marketing efforts. The change means less marketing and therefore fewer sales, which would normally feed into company growth.”

Once your business is VAT registered, make sure you’re not making these common mistakes.

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ABOUT THE EXPERT

Hunter Ruthven is the editor of Business Advice. He is also the editor of Real Business, the UK's most-read website for entrepreneurs and business leaders at the helm of growing SMEs. Alongside this, he is part of the team that hosts the Growing Business Awards, First Women Awards and Future 50 initiative. Prior to his role at Real Business, he was editor at competitor website Growth Business and head reporter at M&A Deals. Throughout his career he has interviewed leading entrepreneurs including Alex Chesterman, Lopo Champalimaud, Sarah Wood, James Averdeick and Alex Saint.

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