How to Set Up Shopify Taxes

Understanding Shopify Taxes

Shopify can automatically calculate and collect taxes based on your store location, customer location, and the products being sold. For most UK businesses, this means collecting 20% VAT on domestic sales.

However, tax configuration varies significantly based on your business structure, VAT registration status, and where you sell. Understanding these factors is essential before diving into settings.

Are You VAT Registered?

Your VAT registration status determines how you configure Shopify:

• •Not VAT registered: You do not charge VAT. Leave tax collection disabled or set rates to 0%
• •VAT registered: You must charge VAT on applicable sales and configure Shopify accordingly
• •Voluntarily registered: Same as above, even if below the threshold

Setting Up UK VAT

For VAT-registered UK businesses selling to UK customers, the standard setup involves configuring 20% VAT with tax-inclusive pricing.

Step-by-Step Setup

1. 1
   Navigate to Tax Settings

   Go to Settings → Taxes and duties in your Shopify admin.

2. 2
   Click on United Kingdom

   Your home country should appear first. Click to configure UK tax settings.

3. 3
   Enter Your VAT Number

   Add your VAT registration number (format: GB123456789). This appears on invoices and confirms you are VAT registered.

4. 4
   Configure Collection Settings

   Ensure "Charge tax on this region" is enabled. The default VAT rate of 20% should be pre-configured.

5. 5
   Check Shipping Tax

   In the UK, shipping charges are subject to VAT. Ensure "Charge VAT on shipping rates" is enabled.

Reduced Rate Products

Some products in the UK qualify for reduced VAT rates:

If you sell products at reduced rates, you will need to set up product tax overrides (covered below).

Tax-Inclusive Pricing

In the UK, prices shown to consumers must include VAT. This means if you sell a product for £24, the customer sees £24 at checkout, and £4 of that is VAT (at 20% rate).

Shopify supports this through the "Include tax in prices" setting, but how it works depends on your setup.

Enabling Tax-Inclusive Pricing

1. 1.Go to Settings → Taxes and duties
2. 2.Scroll to Tax calculations
3. 3.Enable Include tax in prices
4. 4.Save changes

International Tax Collection

Selling internationally adds complexity to tax collection. Since Brexit, UK businesses selling to EU consumers face different rules than before.

Selling to EU Consumers

For goods shipped from the UK to EU consumers:

• •Under €150: You can register for IOSS and collect VAT at the EU country's rate at checkout
• •Over €150: Customer pays import VAT and duties on delivery
• •Without IOSS: Customer pays import VAT on all orders

Setting Up IOSS in Shopify

If you have an IOSS number (directly or through a fiscal representative):

1. 1.Go to Settings → Taxes and duties
2. 2.Click European Union
3. 3.Enter your IOSS number
4. 4.Enable Collect VAT for EU countries

Selling to the USA

The USA does not have a national sales tax. Instead, sales tax is managed at the state level, and rules vary significantly.

• •No physical presence: You may have no US sales tax obligations
• •Economic nexus: High sales volume to a state may trigger obligations
• •Marketplace facilitator: If selling through Amazon, they handle sales tax

Most UK businesses with no US presence do not collect US sales tax. Consult a US tax advisor if you have significant US sales.

Selling to Other Countries

For exports outside the EU:

• ✓Sales are typically zero-rated for UK VAT (you do not charge UK VAT)
• ✓Customers may pay import duties and local taxes on arrival
• ✓You need proof of export for your VAT records

Product Tax Overrides

Some products have different tax rates than the standard 20% VAT. Shopify allows you to create tax overrides for specific products or collections.

Creating a Tax Override

1. 1.Go to Settings → Taxes and duties
2. 2.Click on United Kingdom
3. 3.Click Add override
4. 4.Choose to override by Product or Collection
5. 5.Select the products or collection
6. 6.Enter the override rate (e.g., 0% for children's clothing)
7. 7.Save the override

Tax Exemptions

Certain customers may be exempt from paying VAT, such as VAT-registered businesses or charities. Shopify provides ways to handle these scenarios.

B2B and VAT-Exempt Customers

For VAT-registered business customers making purchases:

• •UK B2B: You still charge VAT. The customer reclaims it through their VAT return
• •EU B2B: With a valid VAT number, sales may be zero-rated (reverse charge applies)

Setting Up Customer Tax Exemptions

1. 1.Go to Customers in your Shopify admin
2. 2.Click on the customer to edit
3. 3.Scroll to Tax exemptions
4. 4.Click Manage and select applicable exemptions
5. 5.Save the customer

VAT Validation for EU Customers

For EU B2B sales where the reverse charge applies:

• 1.Enable Collect VAT numbers at checkout in your tax settings
• 2.Shopify validates the VAT number against the VIES database
• 3.If valid, no VAT is charged on the order
• 4.The VAT number is stored on the order for your records

Tax Reports and Filing

Shopify provides reports to help with your VAT returns, though you may need additional tools for complex reporting requirements.

Accessing Tax Reports

1. 1.Go to Analytics → Reports
2. 2.Search for "tax" in the reports filter
3. 3.Select Taxes or Sales by tax rate
4. 4.Set your date range to match your VAT period
5. 5.Export to CSV for your accountant

Making Tax Digital (MTD)

UK VAT-registered businesses must file VAT returns through MTD-compatible software. Shopify's reports can be exported to accounting software like Xero or QuickBooks, which handle the MTD submission.

Consider apps like A2X or Sufio that bridge Shopify data to your accounting software with proper tax categorisation.

Common Issues