This is an example of one of those simple questions we are asked from time to time, but where the answer is not as simple as we would want.
For an internet retailer it represents a more considerable amount.
As it affects your SALES, the VAT treatment follows what you sell:
- on wholly zero-rated goods (eg children’s shoes) – carriage is included and it is all zero-rated.
- on wholly VATable goods (most things) – carriage is included and it is all VATable.
As it affects your PURCHASES, postal services provided by The Post Office and Royal Mail are exempt (VAT Notice 700/24 Paragraph 1.4). Carriage provided by ParcelForce, DHL, TNT, FedEx, etc is VATable.
Mixed Zero and Standard Supplies – you should apportion it (really…?)
VAT Notice 700/24 Paragraph 2.3
“…In either case there is a single supply for which the VAT liability is based on the liability of the goods being delivered. For example, any element of the price attributed to the doorstep delivery of milk and newspapers will also be zero rated. On the other hand any element attributed to the delivery of standard rated mail order goods will be standard rated.” [emphasis added]
Comment – it’s just too complicated. To handle this correctly depends on the back-office system of the retailer’s website. In our experience some systems seem unable to handle the complexity, and so businesses may just charge VAT on all of it to avoid getting into difficulties with HMRC.
* What’s the difference between Post Office and Royal Mail?
Post Office Ltd runs post offices, Royal Mail plc distributes the mail. They were split into separate companies in 2011, but the postal service provided between them is exempt. However, “ParcelForce” is a trading name of Royal Mail, and ParcelForce does charge VAT on its services.
Disbursements – will not apply
You’ve heard that you don’t have to charge VAT on disbursements. Included here because but want to know why it does not apply.
Suppose the goods arrive damaged. The customer complains to you, but you have to raise a claim against the carrier because the contract for carriage is between you and the carrier. Therefore the contract for delivery is not between the customer and carrier, and it fails some of the tests below:
VAT Guide 700 para 25.1
“You may treat a payment to a third party as a disbursement for VAT purposes if ALL the following conditions are met:
- “you acted as the agent of your client when you paid the third party
- your client actually received and used the goods or services provided by the third party (this condition usually prevents the agent’s own travelling and subsistence expenses, phone bills, postage, and other costs being treated as disbursements for VAT purposes)
- your client was responsible for paying the third party (examples include estate duty and stamp duty payable by your client on a contract to be made by the client)
- your client authorised you to make the payment on their behalf
- your client knew that the goods or services you paid for would be provided by a third party
- your outlay will be separately itemised when you invoice your client
- you recover only the exact amount which you paid to the third party, and
- the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.”
“ALL THESE CONDITIONS must be satisfied before you can treat a payment as a disbursement for VAT purposes.” [emphasis added]