Amazon VAT shake-up threatens small sellers’ cash flow

VAT grab could leave online sellers short of cash

Amazon VAT shake-up threatens small sellers’ cash flow

Thousands of small online sellers could face a nasty cash-flow shock under plans for marketplaces such as Amazon, eBay, Etsy and TikTok Shop to collect VAT before sellers ever see it. The crackdown is aimed at traders who dodge their VAT bills, but compliant businesses could also lose the valuable VAT “float” they currently use for stock, postage and everyday costs. Less paperwork sounds attractive, but for cash-strapped micro businesses the price could be less working capital, more borrowing and another squeeze on already wafer-thin margins.

VAT SHAKE‑UP FOR ONLINE SELLERS

Marketplaces may soon collect your VAT and that could affect you cash flow

HMRC wants online marketplaces to collect VAT on UK sellers’ sales. The change is aimed at reducing the tax gap where sellers don’t comply with the rules, collect the VAT but don’t pay it to HMRC. HMRC says tens of thousands of UK sellers aren’t paying the VAT they owe but accountants worry that compliant small businesses could pay the price.

HMRC’s consultation on extending marketplace VAT liability closes tonight (18th August). The proposal sounds simple: make Amazon, eBay, Etsy, TikTok Shop and other platforms collect the VAT on UK‑based sellers’ sales, as they already do for overseas sellers.

The twist

Sellers who are compliant and do pay the VAT due would no longer have that money in their kitty for the period between it being paid by the customer, and the date it’s paid over to HMRC, which means they wouldn’t have that money available for working capital. The marketplace would collect VAT upfront instead of the seller holding it until their VAT return.

For many small and micro businesses, that VAT float is often the difference between smooth cash flow and a crunch.

What’s changing?

At the minute you sell an item, collect VAT from the customer, hold that VAT and pay it to HMRC every quarter.

Under the proposed rules the marketplace collects the VAT instead of you. You only receive the money minus VAT. That means you have no VAT sitting in your bank and no ability to use VAT cash to bridge quiet periods. It also means there’s no flat rate scheme you can opt for. HMRC knows that sellers may face cash flow impacts.

Many small sellers rely on the VAT they’ve collected but not yet paid over to help cover stock, postage, rent, wages, or supplier bills. You pay HMRC later.

Under the new rules you never see the VAT. The marketplace sends it straight to HMRC. Your working capital shrinks overnight. For some sellers, that’s a major hit.

PROS AND CONS

PROS: There’s no VAT admin because the marketplaces handle it and no risk of VAT mistakes. That means you don’t face late payment penalties or need to chase VAT records. It’s much simpler for sellers.

CONS: The cash flow loss is the biggest issue but there may be other knock-on effects such as having to claim VAT back, if too much is taken, or you can reclaim on stock etc. Marketplace fees may rise to cover their admin costs. You could find it harder to manage stock purchases without VAT float.  For many micro‑sellers, the VAT float is effectively an interest‑free working capital loan and losing it hurts or means you have to borrow elsewhere at higher rates of interest.

VAT repayments

If your marketplace collects VAT but you still pay VAT on stock, packaging, software, postage, etc., you may end up claiming VAT back from HMRC. HMRC refunds can be slow, unpredictable and occasionally queried which can lead to cash flow gaps.

Flat Rate Scheme

Many micro‑sellers use the Flat Rate Scheme because it’s simple, they keep a small margin, and it boosts cash flow. If marketplaces collect VAT, the scheme becomes useless and you lose the margin entirely. For some sellers, that’s hundreds or thousands of pounds a year.

Example

A small Amazon seller turning over £120,000 a year:

• £20,000 of that is VAT

• They hold that VAT for up to four months

• It covers stock purchases and postage

• It smooths cash flow during quiet periods

If Amazon starts collecting VAT the seller loses £20,000 of working capital; may need a loan  or overdrafts; margins shrink and their ability to buy stock upfront is reduced. This is why accountants say the change hits compliant sellers hardest.

Check how much your business relies on VAT float

Look at your last four VAT quarters. How much VAT did you hold? How long did you hold it? What did you use it for?

Model your cash flow without VAT float

Would you need:

• an overdraft?

• a loan?

• slower stock turnover?

• reduced product lines?

Review your pricing

If marketplaces collect VAT, your net revenue per sale changes.

Talk to your accountant asap and ask:

• Would I end up in a VAT repayment position?

• Should I leave the Flat Rate Scheme?

• How do I protect cash flow?

Big change

Nothing is decided yet. There’s a way to go before any law changes, but sellers who prepare early will cope better.

The change targets non‑compliant sellers but compliant sellers may lose working capital.  Marketplaces collecting VAT simplifies admin but removes the VAT float many small sellers rely on. Flat Rate Scheme users could lose their margin, and some sellers may end up waiting for VAT refunds leaving them short of cash. This is a big shift for small and micro businesses selling online. If you rely on VAT float, prepare now.