Is your e-commerce store nearing the VAT threshold?

Let’s start with the big one: do you even need to register for VAT yet? As of 2026, the UK VAT registration threshold sits at £90,000 in any rolling 12-month period’s turnover – not per tax year. That ‘rolling’ part is where many sellers slip up. Here is what that means in practice:

• You must constantly monitor your last 12 months of sales, not just January–December or your regular year end.
• If you go over £90,000, you typically have 30 days to register.
• If you expect to exceed it soon (e.g. a big product launch), you may need to register proactively.

A common mistake is only checking at year-end. That is risky as fast-growing Shopify stores can cross the threshold unexpectedly, especially with seasonal spikes.

Exception from registration

If your turnover exceeds the £90,000 threshold due to a one-off surge, you can apply for an Exception from Registration. To qualify, you must notify HMRC within 30 days of the spike and provide evidence – such as the conclusion of a specific marketing campaign or a return to historical sales averages – proving that your turnover will fall below the £88,000 deregistration threshold over the next 12 months. This allows you to avoid mandatory VAT registration while maintaining compliance during temporary periods of high growth.

Rule: If you are consistently doing £7,500+ monthly, you should already be paying attention.

How to apply for VAT?

Registering for VAT has become more digitised and secure. Since January 2026, HMRC has added a mandatory security layer to prevent “VAT hijacking.”

1. Create a government gateway ID
If you don’t have one for your business, you must create one on GOV.UK.

2. Submit the online application
You will need your UTR (Unique Taxpayer Reference), business activity details, and estimated turnover.

3. The “0990” security phase
Once your application is submitted, HMRC will issue a VAT registration application reference number starting with “0990.”

Note: You must keep this code. To fully activate your account, you must enter this 0990 reference in your Business Tax Account (BTA) to link your new VAT number. This measure was introduced in 2026 to ensure only the business owner can access the VAT records.

4. Setup digital links
Under Making Tax Digital (MTD) rules, you must link your Shopify store to HMRC-compatible accounting software (like Xero or QuickBooks) to ensure your first return is filed digitally.

How to configure shopify tax settings for UK compliance?

Once you are VAT registered, your Shopify setup matters more than you think. If you get this wrong your pricing, margins, and reporting all suffer.

VAT-inclusive vs VAT-exclusive pricing

You have got two options:

• VAT-inclusive pricing – recommended for Business to Customer (B2C) stores:
  • Customers see the final price.
  • Better for conversions.
  • Shopify backs out VAT automatically.
• VAT-exclusive pricing:
  • More common for Business to Business (B2B) stores.
  • VAT gets added at checkout.

Most UK Shopify stores selling to consumers should go VAT-inclusive as it is what customers expect.

Tax settings you should not ignore

Inside Shopify:

• Enable UK VAT rates (standard 20%)
• Set the correct rates for:
  • Shipping (usually taxable)
  • Digital products (can have different rules depending on location)

Also:

• Make sure your product tax categories are correct.
• Double-check reduced-rate or zero-rated items if applicable

Selling to the EU: navigating OSS, IOSS, and the €10,000 threshold

Post-Brexit, selling to the EU is no longer simple, but it is entirely manageable if you understand the system.

The €10,000 Rule

From the 1st of July 2021, if your total EU sales are under €10,000/year, you can usually treat them as UK sales for VAT purposes. Once you exceed that:

• You must charge VAT based on the customer’s country
• That’s where OSS (One-Stop Shop) comes in

If you sell physical goods into the EU IOSS for low-value goods (€150 and under):

• IOSS (Import One-Stop Shop) lets you collect VAT at checkout
• This avoids customers getting hit with surprise customs fees

Without IOSS:

• Customers may pay VAT + handling fees on delivery
• This kills conversions and increases returns

Bottom line — if you’re serious about EU sales, IOSS is not optional – it is a competitive advantage.

The ‘reverse charge’ trap: accounting for shopify platform fees

This is where things get more technical, and where many sellers quietly get it wrong. Shopify often bills UK merchants from non-UK entities. That means:

• VAT is not charged on the invoice
• But you are still responsible for VAT under the reverse charge mechanism

What you need to do

You must:

• Account for VAT yourself on the fees Shopify has charged you under the reverse charge scheme.
• Include it in your VAT return as:
  • Output VAT (what you ‘owe’)
  • Input VAT (what you reclaim)

Done correctly, it usually cancels out. Done incorrectly, it creates reporting errors – and potential HMRC issues.

This is one of those areas where having proper bookkeeping software or an accountant makes a big difference.

Making Tax Digital (MTD) — Integrating Shopify with Xero or QuickBooks

If you are VAT registered in the UK, you must comply with Making Tax Digital (MTD). This means:

• Keeping digital records
  • Using compatible software
  • Making direct VAT submissions to HMRC

Shopify alone does not handle this properly. You need a bridge.

Popular Solutions

• Xero or FreeAgent (if you have Natwest or Mettle) – your core accounting software
• A2X or Link My Books – connects Shopify data to your accounts cleanly

These tools:

• Summarise payouts correctly
• Separate sales, fees, VAT and refunds
• Reduce manual errors

Trying to do this with spreadsheets? It works… until it does not.

Common Shopify VAT mistakes that lead to HMRC penalties

Here is where sellers typically get caught out:

1. Missing the registration window. You crossed £90k – but did not act within 30 days.

2. Incorrect VAT setup in Shopify. Wrong tax rates = wrong VAT collected = profit distortion.

3. Ignoring EU VAT rules.Selling internationally without One Stop Shop / Import One Stop Shop planning leads to:

• Customer complaints
• Delivery issues
• Compliance risk

4. Forgetting reverse charge VAT.This one flies under the radar but matters during investigations.

5. Poor record keepingMTD requires clean digital records and not rough estimates.

Why online businesses need a specialist e-commerce accountant

Here is the honest truth: general accountants often do not understand Shopify properly. E-commerce VAT is not just about filing returns, it involves:

• Platform fees
• Payment processors
• International tax rules
• Inventory and refunds
• Multiple currencies

A specialist e-commerce accountant:

• Knows Shopify’s quirks
• Sets up systems correctly from day one
• Helps you avoid expensive mistakes as you scale

If you’re growing fast, this isn’t a luxury – it’s a protection.

Ready to get your shopify VAT sorted?

If you are running a Shopify, Amazon, Ebay or any e-commerce store and feeling even slightly unsure about your VAT setup, do not wait until HMRC forces the issue.

At Durrani & Co, we specialise in helping e-commerce businesses stay compliant, optimise their tax position, and scale with confidence. Whether you are close to the VAT threshold, already registered, or selling internationally, we will make sure everything is set up properly – without the jargon.

Here’s how we can help:

• VAT registration and Shopify tax setup
• Ongoing bookkeeping and MTD compliance
• EU VAT (One Stop Shop / Import One Stop Shop) guidance
• Accurate handling of Shopify fees and reverse charge VAT

You focus on growing your store and we will handle the numbers. Get in touch with Durrani & Co today for a no-obligation consultation and take the stress out of Shopify VAT for good.