How To Workout Your VAT Costs When Importing From The US To Sell On Amazon UK (FBA)
This video is in response to one of the questions asked in on one of the Facebook groups that I frequent.
You can download the spreadsheet I created here: VAT Calc.xlsx
I am a UK business owner and I have owned a UK business for number of years, so I know a little bit about VAT and hopefully this explanation will help you out.
A question was asked:
For sourcing I am confused on what amount to add per item to take into account VAT. If I pay $5 for an item, do I add 20% to my purchase price to cover VAT or do I determine what the selling price is and use that as 20% to cover the VAT costs.
Well, it’s not quite as simple as that, and the spreadsheet I have attached will help you identify what you need to take into account when you are buying an item, helping you determine how much you are going to pay in VAT, which will then allow you to work out how much profit you can potentially make.
Note: This is specific for people buying outside of the EU.
If you buy products inside of the EU you will not have to pay import duty and VAT is normally taken into account in the product cost already.
So, lets assume you are buying in the US and we will go through an example using the $5 buying cost that was presented in the question above.
We are buy an item for $5 and we want to sell it for £20 in the UK. We have an exchange rate of 1.675, which is close enough for today, which means we are selling it for $33.50 (just to put it into US dollars to make it a bit easier to understand).
If we have a VAT rate of 20%, that means we are going to be paying £5.58 to HMRC which will come off our bottom-line.
It’s important to know that this VAT that we have to pay will be paid in 2 separate parts.
- First, when you import the goods into the UK
- Second, when the item sells you will pay the difference between the Sell Price and the Buy cost.
When you import the goods into the UK you pay VAT on the actual import value, but there are some additional costs that you have got to take into account. The actual import VAT percentage rate is applied to the total value of all the goods. This will include the price paid for the goods, the cost of transport, postage and packaging, any insurance costs and any duty that you might have paid.
Remember, if you are importing goods over a certain value, it’s about £135, you are going to pay a duty on most products and duty varies. Some products have zero duty but some products can go all the way up to 80% and may be even more. So it is important to bear in mind the VAT you are going to pay is on the total value of the goods including all those additional bits and pieces.
Back to the example, we will stick with $5. That is what we have bought the goods for and that include insurance costs, shipping all that type of thing.
So now, focus on the VAT column. We are going to pay $5.58. So if we bought the goods for $5 and we are selling them for $33.50 and the VAT rate is 20%, you have basically got to divide your sell price by 6 to get the VAT amount.
I’ve included a column for FBA fess and I have used a very simple calculation for this example. I have chosen £1.65 which includes your picking and packing fees and your weight handling fees, plus 15% for a typical commission rate that Amazon will charge.
That will leave you a profit of $15.13 (313%).
The second row; I’ve converted it into UK pounds. So we are taking the same figures… we have bought for $5 and we will sell it for £20, which means we will pay £3.33 to HMRC on the value of the goods.
FBA fees are £4.65 giving a profit of £9.03. Pretty easy.
The next example down is very similar. The buy price is $5 and the sell price is £20 again. The VAT rate is ZERO this time which means we are not going to pay anything to HMRC.
The FBA fees are staying the same but our profit increases and that is why a lot of people starting out selling in the UK start with goods having a zero rate VAT, because you don’t have to pay VAT at all. And your profit is going to increase J
I hope that has been of some help and if you have got any questions let me know in the comments section below and I will try to help out.