Charging VAT on Shipping.
Charge the correct for shipping on your business invoices.
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.
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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).
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).
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).
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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.
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A General Rule of Thumb:
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* Shipping items which are VAT-exempt i.e. zero sales tax. If so, then the shipping costs are also taxed at 0%.
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*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%.
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*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.
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Sending one Invoice with multiple different products which are taxed at different rates.
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It is common to send an invoice with multiple different products and services in the ledger to save processing and accounting time. This sometimes presents and issue when trying to work out shipping costs and VAT as each product may warrant a different shipping amount and also may fall into a different sales tax bracket.
For 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%
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Total Invoice Amount excl VAT = £200
*Add in a link to an example Invoice with the above details populated so you can see how it is displayed.
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As these items are all on one Invoice shipping needs to be applied however it may not be feasible to display a breakdown of shipping costs per item and instead would need to be displayed as a basket of goods for dispatch.
So for instance if the shipping cost is £30 for all combined items then VAT needs to be applied accordingly based on the different VAT thresholds per product.
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The shipping VAT for a single product is calculated using percentage of how much the product costs in comparison to the order’s total cost, the VAT for that product, and the base shipping cost for that order.
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In this example, maternity pads rated at 0% take up 5% of the total order cost
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£10 (Maternity Pads)
= 0.05 ( 5 %)
£10 + £40 + £150
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5% Cost Percentage (0.05) x 0% VAT (0) x £30 (shipping) = £0
% Cost
{
The children’s school uniform, rated at 5% VAT, takes up 20% of the total order cost
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£40 (School Uniform)
= 0.2 ( 20 %)
£10 + £40 + £150
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20% Cost Percentage (0.2) x 5% VAT (0.05) x £30 (shipping) = £0.30
% Cost
{
The games console, rated at 20% VAT takes up 75% of the order’s cost
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£150 (Games Console)
= 0.75 ( 75 %)
£10 + £40 + £150
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75% Cost Percentage (0.75) x 20% VAT (0.2) x £30 (shipping) = £4.50
% Cost
{
Total Shipping Cost Including VAT
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£0 (Maternity Pads) + £0.30 (Children's Uniform) + £4.50 (Games Console) + £30 (Shipping)
= £30 + £4.80
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= £34.80 Shipping Cost Inc VAT
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Our Invoice Builder accurately calculates shipping costs based on the VAT threshold per item so you can invoice your business customer(s) correctly to avoid any late payment issues caused by value discrepancies.
