Etsy and VAT - everything you need to know
Etsy and VAT - if there anything more confusing? I got quite a shock when I started selling on Etsy when I saw that I'd been charged VAT on my fees. Then I found that all my customers had been charged VAT even though I'm not VAT registered. What was going on?
Looking at some of the Seller forums, it seems like I'm not the only one. There are hundreds of questions flying around, such as:
How does Etsy collect VAT on physical products?
Is there VAT on Etsy Fees?
Do I need a VAT number to sell on Etsy?
How does VAT work if you sell digital products on Etsy?
Does Etsy charge VAT to customers??
I've tried to pull together everything I've found out about VAT and how it's handled on Etsy. I'd like to stress that this is purely based on my own research. I've also had discussions with other Etsy Sellers and found information from Etsy themselves.
It should be used for general information only and I would highly recommend that you speak to a local expert, bookkeeper or accountant before taking any action based on the information you find here.
Etsy & VAT on Fees
Let's start with the bad news! Unfortunately, if you are located in a vatable country then you will be charged VAT on your Etsy fees. Here in the UK, that means that you pay an extra 20% on all your fees. This includes Listing, Payment Processing Fees, Transactions fees etc. This is an extra expense for your business that you need to include in your bookkeeping.
You'll find the detail of everything you have been charged in your Etsy Payment Account under the Type "VAT" (also known as GST / PST) in some countries. In the next column you will find which fee the VAT is based on e.g. Listing fees, Transaction, Payment Processing fees etc.
The only exception to this is for vat registered businesses. Once you submit your VAT ID to Etsy then you are then treated as having a “business to business” relationship with Etsy. This means that the VAT doesn’t have to be charged.
Vat on Etsy Sales
Digital Products
I was very surprised when I made my first sales on Etsy when the customer was charged VAT on top of my sales price. I immediately thought I'd done something wrong and clicked something by mistake when I was setting up my shop - but no, this is something that applies to all sellers of Digital products on Etsy - wherever you are based.
To be crystal clear, this only applies to Digital products that are available for Instant Download. Products that you email out manually (e.g. personalised printable art) are effectively treated as a Physical product (see below)
The other thing to note is that the VAT amount is based on the country where the buyer lives, NOT the country where the seller is based.
If you are based in the US and sell to someone in the UK then VAT will be applied at 20%.
If you are in the UK and sell to someone in the US then no VAT is charged. The USA is not a Vatable country (although sales tax may be applied, which is similar).
The impact of this is that the prices you set will be inflated by various amounts depending on the country which makes it very hard to set your pricing strategy. I suggest that you look at where the majority of your sales are made and take account of the VAT rate of that country when looking at your pricing.
How the VAT is handled
The good news is that this is handled completely by Etsy and you do not get involved at any time.
Etsy calculates the amount of the VAT automatically and includes it in the price seen by the customer.
VAT is collected when the customer pays. This is then held by Etsy who pay it over to the relevant tax authorities.
If your customer downloads an official VAT invoice for their purchase, the invoice is from Etsy not from you.
You never see this money and so do not need to report it in your bookkeeping. The difficult part is seeing how much has been collected. You also need to trust that all the calculations are correct and identify them in your payment account.
This is complicated in your Payment Account Statement as the VAT is included in the Amount Column against the Sale but “disappears” before you get to the net column.
Etsy VAT Example
In the sale of this digital product example above, the customer paid £3.60 which included £0.60 VAT collected by Etsy. You can see that in the final column (the amount actually paid over for that sale) this £0.60 has "disappeared". For this reason it is important to always check your Sales numbers and not just take the figures shown in the "Amount" column.
You can find out more about Etsy and VAT on digital products in their help pages here
Don't worry if this seems way too complicated. You can always try one of our Automated Bookkeeping Templates, designed specifically for Etsy Sellers that do all this hard work for you.
Physical Products
Charging VAT to customers in the EU
As of 1 July 2021, Etsy will also collect VAT from EU buyers for physical products when they receive a package from a non-EU country if the value of the package (excluding delivery and taxes) is less than or equal to €150.
As for digital products above, this is handled completely by Etsy and you do not get involved at any time.
Etsy calculates the amount of the VAT automatically and includes it in the price seen by the customer.
VAT is collected when the customer pays and is held by Etsy who then pay it over to the relevant tax authorities.
If your customer downloads an official VAT invoice for their purchase, the invoice is from Etsy not from you.
For other physical product sales, then VAT works in a completely different way. Remember, this also applies to digital products that you manually email to customers.
You only charge VAT to customers if you are a VAT registered business. You must then upload your VAT number onto the Etsy site. Read exactly how to do this here
This creates a business to business relationship between you and Etsy and has the benefit that you will no longer be charged VAT on your fees.
Unfortunately, the charging of VAT to customers is not so straight forward.
You have to calculate the amount of the VAT manually and include it in the price seen by the customer. ( You may also need to charge VAT on shipping as well if the item shipped has VAT on it),
Etsy collects the VAT when the customer pays but they then pay it to you as part of your deposit income
You are responsible for paying that VAT to the tax authorities
If your customer wants to see an official VAT invoice for their purchase, you'll need to produce this manually and send to them
Setting up your Product Pricing
Your difficulties start when you first list your product. There is nowhere on the product listing set-up to separately identify the amount or % of VAT to be charged.
It is your responsibility to manually calculate the VAT for your prices. You then need to use the gross price on your listing. For example, if your product is priced at £100 before VAT, the VAT is £20 and so you list the product at £120 on Etsy.
Every time you sell that product, you need to transfer £20 from your sales income, report it on your VAT return and pay to the authorities. You also need to do this for any shipping that you charge to customers for shipping vatable products.
Getting to your VAT numbers
The next difficulty for VAT businesses, comes when you need to track the VAT charged on your sales. Etsy does not provide any reports to show the VAT included in your sales. This means that you will need to calculate it manually.
If you sell a mix of standard rate, zero rate, and/or exempt products, you will need to track your sales at a product level to get to this information.
If you sell internationally, some countries are exempt from tax (mainly non European countries). You need to track your sales by country to get to this calculation.
The best report to use for your VAT calculations is the OrderItem report. This contains all the information you need on items and customer country. The only thing missing is the information on refunds. You need to filter and group by country and have a way to identify any products that are at different rates.
Bookkeeping Template for VAT Registered Sellers
If you're already VAT registered then check out my template made especially for you which will take care of all those calculations for you. It looks at the product sold and the country sold to, calculates the vat by line & hives it off into a separate report that will help you complete your VAT returns when due.
Recap of key Etsy & VAT points
Etsy charges VAT on fees to all sellers who are based in a Vatable country and are not VAT registered.
If you sell instant download digital products, Etsy charges VAT on your sales based on the rate in the country where your customer is located.
Etsy handles this VAT themselves and you will not receive the VAT in your deposits
VAT registered and sell physical products - you must add VAT to your product prices and shipping charged to customers and you must manually calculate the VAT charged, save it and pay to the tax authorities when required.
Made on the Common automated spreadsheets will calculate the amounts your need and give you the correct figures for your bookkeeping.
I am sure that by now you have reached the same conclusion as me, which is that VAT is a nightmare on Etsy! I highly recommend working with an experienced bookkeeper or accountant to make sure your numbers are correct as this area is very complex and Etsy do not make it easy for us Sellers!
Make sure that you know what category you fall into and what your responsibilities are when it comes to VAT and Etsy.
Don't forget, if the calculations and tracking seem like too much hard work then check out our automated spreadsheets. These will help you track the VAT charged on your fees, the VAT collected directly by Etsy and even the manual calculations you need if you're VAT registered.
I'd love to hear your thoughts on Etsy and VAT and if you've come across anything that I've missed.
Sarah x
More reading on your Etsy finances
Get started with your Etsy Payments
Etsy Payments: How to understand your Monthly Statement
Etsy Sellers: How to Quickly and Correctly Record your Etsy Sales
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