The next step

Further example on how to apportion VAT on sales

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When is postage and packaging VATable?

It’s in the post

Many businesses have seen their mail/online orders increase significantly while the doors to their shop or other outlet have been closed. Or, like our subscriber, they have taken the opportunity to break into mail order to fill a gap in their sales. It’s been very successful for her but one aspect that’s causing her trouble is VAT. She’s read HMRC’s guidance on delivery charges but it’s silent on the question of so-called mixed supplies.

The rules for added delivery charges

The rule where you make a separate charge for your goods is that you must add VAT to it because delivery services are standard-rated. This applies even if you use Royal Mail’s main postal service. For example, if you sell a food product which is zero-rated and charge your customer £6 for delivery, you’re actually charging them £5 plus VAT at 20%.

The rules for included delivery charges

Where the delivery charge is included in the price of the product, the VAT treatment follows that for the goods (often you’ll see this advertised as “post and packaging free” or “price includes delivery in mainland UK”). For example, if a customer orders a box of widgets, and they are VAT standard-rated, the delivery charge you add to the price is also standard-rated. In other words, the VAT is the same as that where you charge separately for delivery. However, if the goods are zero-rated, by including delivery in the price you can save VAT.

Example. A customer orders a cheese selection from our subscriber which she advertised on her website for “£28 post and packaging free”. She pays £5 plus VAT of £1 for the delivery. She can reclaim this VAT in the usual way but doesn’t have to pass it on to the customer. So, she’s either saved £1 or, to look at it another way, she’s been able to sell the goods for £1 less than if had she made a separate charge for delivery. Tip. This rule applies even if she separately itemised the cost of delivery on her 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 no matter whether the goods you’re selling are zero or standard-rated. But if you sell them as post and packaging free or it’s included in the price, the VAT follows the VAT rate for the goods.

Our subscriber. The trouble she has is that many of her sales are a mix of food, some zero-rated such as cheese, and some standard-rated like chocolate and wine. Her prices include delivery to mainland UK addresses and but should she charge the standard or zero rate, bearing in mind that she charges different rates for the goods? The answer is logical. She must apportion the delivery cost between the goods (zero and standard-rated) and account for VAT accordingly. She can use any fair and reasonable apportionment; this could be based on the retail price or cost of the items but there are alternatives which might reduce the VAT cost (see The next step ).

For a further example on how to apportion VAT on sales, visit http://tipsandadvice-tax.co.uk/download (TX 20.18.07).