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Charging VAT
On Shipping
Charge the correct for shipping on your business invoices.Value Added Tax
Charging VAT On Your Shipping Costs
If your business is based in the UK and charges customers for shipping regardless of whether this is done via Royal mail, private courier or bulk cargo, and you are trading with customers which are also based in the UK then you must charge VAT on shipping costs.VAT on Shipping
Do I need to charge it?
There is a misconception that you should not charge VAT on Royal mail shipping however this is not the case. Shipping is essentially classed as an extra product or service that you are selling on to a customer which means it is inevitably subject to VAT – however the rate of VAT will differ depending on the products which you are selling (more on this later).
Adding VAT To Shipping
When should VAT be calculated?
Many businesses often mistakenly leave out shipping when calculating VAT for the total Invoice Sum or balance which is wrong and can cause issues in the accounting process. The total Shipping cost(s) should be fully calculated before overall VAT amount and any discount costs (see example Invoice template).
Importance of VAT on Shipping
Why Add VAT To Shipping?
Whilst it may seem odd to add VAT to shipping costs there is a valid reason for charging VAT on delivery of good and services. For instance, if companies were allowed not to charge VAT on shipping then this could effectively create a tax loophole as companies could effectively lower the price of items on the invoice ledger and transfer this difference by adding it onto “shipping” meaning it would be exempt from VAT ultimately allowing companies to pocket the difference without paying sales tax (VAT).
Charging VAT Correctly
How To Charge The Right Amount Of VAT For Shipping.
The VAT for shipping costs vary depending on the type of product/service that you are selling. For instance, there are three VAT rates: 0%, 5% and 20% which depend on the types of goods/services which you are selling (click here for list). The standard rate is 20% which applies to most goods and services sold in the UK however some products e.g. children’s clothing qualify for 5% VAT and other items such as (items here) actually have a zero VAT rate. Therefore when you are calculating VAT on shipping you should apply the correct amount to the shipping based on the items you are sending. If you do fail to calculate the VAT correctly this could effectively cause an invoice dispute which may delay payment so it is important to get this right first time.
Shipping & VAT Costs
General Rules of Thumb...
Shipping items which are VAT-exempt i.e. zero sales tax. If so, then the shipping costs are also taxed at 0%.
Shipping items at the reduced 5% VAT rate i.e. 5 percent sales tax. If so, then the shipping costs are also taxed at 5%.
Shipping items at the standard 20% VAT rate i.e. 20 percent sales tax. If so, then the shipping costs are also taxed at 20%.
Shipping costs (and any other costs such as packaging, admin or sundries) should come before you calculate VAT on your Invoice. See the example below – the Sales Tax is added right before the Total Sum/balance.
VAT Calculator
Understanding VAT On Shipping & Calculator
Before jumping straight into the calculator, take a moment to work through the working example provided below to fully understand how VAT on shipping actually works.Working Example
Our VAT Example...
Company A sells 3 different items which each command a different VAT rate.- Maternity Pads £10 excl 0% VAT
- Children’s School Uniform £40 excl 5% VAT
- Games Console £150 excl 20% VAT
% Cost
{
£10 (Maternity Pads)
£10 + £40 + £150
= 0.05 (5%)
5% Cost Percentage (0.05) x 0% VAT (0) x £30 (shipping) = £0.00
% Cost
{
£40 (School Uniform)
£10 + £40 + £150
= 0.2 (20%)
20% Cost Percentage (0.2) x 5% VAT (0.05) x £30 (shipping) = £0.30
% Cost
{
£150 (Games Console)
£10 + £40 + £150
= 0.75 (75%)
75% Cost Percentage (0.75) x 20% VAT (0.2) x £30 (shipping) = £4.50
Shipping Cost Calculator
Shipping
VAT
£ 0
Total Product Price (excl. VAT)
£0.00
Total Shipping VAT
£0.00
Total Shipping Cost
£0.00
Overall Cost (excl. VAT)
£0.00
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