Postage and packaging – VAT or no VAT?
Postage and packaging – VAT or no VAT?
You’ve started to sell goods online to expand your customer base. You’re confused about the VAT treatment of postage and packaging. When does it apply and at what rate?
Stand and deliver
Buying online makes up around 30% of all sales and so if you don’t want your retail business to fall behind you need to get on board. However, one of the drawbacks is having to pack and post the items you sell. This adds to the cost of the goods, especially if you also have to add VAT. The rules for this are a frequent cause of confusion.
Added delivery charges
The first rule to remember is that where you make a separate charge for delivering your goods you must add VAT to it because delivery services are standard-rated. This applies even if you use Royal Mail’s main postal service, which is exempt from VAT. For example, if you sell a food product which is zero-rated and £6 for delivery, you’re in fact charging £5 plus VAT at 20%.
Trap. It doesn’t matter what rate applies to the items you sell, VAT on the delivery charge is always standard-rated.
Free delivery
If you offer free delivery or the price you sell an item for is inclusive of delivery, the VAT treatment of the delivery follows that for the goods you’re selling. For example, if a customer orders a bunch of flowers for £60 including delivery, as the flowers are standard-rated, the delivery charge is also standard-rated. As the VAT is the same as that where you charge separately for delivery, it’s purely a business decision as to whether you want to offer a price including or excluding delivery charges. However, if the goods are zero-rated, by including delivery in the price you can save VAT and keep costs lower for your customers.
Example. A customer orders a cheese selection which was advertised on your website for “£28 with free P&P*”. Because cheese is food it’s zero-rated. If the cost of delivery to you is £5 plus VAT of £1, you can reclaim the £1 in the usual way but you don’t have to pass the cost on to the customer. This means you can sell the cheese for £1 less than if you made a separate charge for delivery.
Tip. This rule applies even if you separately itemised the cost of delivery on the sales invoice.
Packaging
The rules for packaging are essentially the same as those for delivery charges. If you make a separate charge, it’s always standard-rated or it’s included in the price, the VAT follows the rate for the goods. That’s simple enough, but things can get tricky if you’re selling a mixture of zero- and standard-rated items.
A mixed bag
If you sell a consignment of goods some of which are zero-rated, e.g. food items, and others are standard-rated, such as alcohol and chocolates, you must apportion the delivery costs between the goods (zero and standard-rated) and account for VAT accordingly. You can use any fair and reasonable apportionment, it doesn’t have to be based on price. For example, it can be based on weight, bulk or special delivery requirements that cost more, e.g. if they need to be kept refrigerated.
If you charge separately for packaging and delivery, standard-rate VAT applies. Conversely, if you sell goods at a price which includes delivery, the VAT rate follows that of the goods. For a mixed supply of zero and standard-rated items, you must apportion the delivery charges and apply the appropriate VAT rate to each part.