By Ben Sztejka, Founder of Your Ecommerce Accountant and an ICAEW chartered accountant
For 24 years now, Amazon has been a vital outlet for independent producers and sellers. Since the launch of its third-party marketplace, it has enabled independent sellers to reach a global audience. And with excellent targeting algorithms, it’s been an amazing way to get products seen by potential buyers, albeit for a fee. But while some have complained that Amazon marketplace has become a race to the bottom, with sellers competing for pennies in much the same way as they have always done on eBay, from now on, that could be the least of their concerns, because Amazon has started charging VAT on all seller fees.
What Amazon’s new VAT policy means for sellers
The new VAT policy came into play on 1 August 2024, and it means different things to different sellers. But the overarching upshot is that it is now 20% more expensive to sell on Amazon. So, how is this going to affect different sellers?
VAT registered businesses
For VAT registered businesses, the move by Amazon holds the potential to be positive. Because VAT registered businesses can reclaim the VAT levied on their sales, the new policy should, at worst, have no impact on their profit. At best, it could be beneficial because the lowest priced competitors may be forced to increase the prices of their goods, essentially levelling the playing field by preventing undercutting.
Small independent sellers
For smaller sellers who are not VAT registered, the impact could be more dramatic. If you are already operating on a low margin for your Amazon sales, the only way to remain profitable is to increase your prices. Of course, the risk then is that your sales will fall because you’ve lost your competitive advantage.
What does this mean for shoppers?
Overall, the new VAT policy is likely to mean that shoppers will see a price increase of between 2-7% on Amazon. The impact will not be immediate, as there’s every likelihood that the less savvy sellers will take some time to notice the effect of the introduction of VAT on their business. But the chances are that within the next six months, prices will have risen.
What can sellers do if Amazon is no longer a profitable platform?
There are a couple of different options for non-VAT registered Amazon sellers. The first and most obvious option is to register for VAT. This means that you can reclaim VAT on all the goods and services you purchase for your business – including the fees associated with selling on Amazon. However, if you are working on a very small scale, it may not be worth your while.
The second option is to move away from Amazon. There are other online marketplaces available. They all have different fee structures, but they don’t all charge VAT. There is also the potential to sell through your own online store. However, the difficulty there lies in reaching your audience. As a new etailer, it’s not always easy to access your customer base, so your marketing expenses will increase, which will likely impact your bottom line.
Lastly, it may be possible for you to reduce your buying and production expenses, which may allow you to continue selling on Amazon without increasing your prices or suffering a fall in profit.
The Amazon VAT policy has taken many sellers by surprise. It holds the potential to put an end to that race to the bottom, but it also leaves smaller sellers searching for new ways to operate. But whether buyer or seller, VAT registered or otherwise, the upshot of it all is that products on Amazon are going to be more expensive going forward.
