Do I charge VAT on postage? How a UK online shop treats delivery charges, with a mixed basket worked through

Once a shop registers for VAT, the question comes up on the first return: is the £3.99 we charge for postage inside VAT, outside it, or something else? Many sellers assume postage is exempt because Royal Mail stamps are. For a shop selling its own goods, that is usually wrong. HMRC's VAT Notice 700/24 sets out the rule, and the answer depends on what the goods are and what your terms say about delivery.

The rule: delivery follows the goods

Notice 700/24 says that if, under the contract, you must deliver the goods to a place the customer specifies, you are making a single supply of delivered goods. An additional charge for delivery then follows the VAT liability of the goods. In HMRC's words, "the important test is whether delivery is included in the contract."

For an online shop, delivery is almost always part of the contract: the customer enters an address and pays for the goods to arrive there. So:

• if you sell standard-rated goods, such as homeware or adult clothing, your delivery charge is standard-rated at 20%;
• if you sell zero-rated goods, such as children's clothes or books, your delivery charge is zero-rated too;
• if delivery is free or built into the price, you account for VAT on the full sale price at the rate of the goods.

When postage is always standard-rated

The notice gives one case where delivery is a separate supply: when the contract does not require delivery, but you agree to deliver anyway and make a separate charge. A shop that sells for collection and offers delivery as an optional extra is the usual example. Then the delivery charge is standard-rated, even if the goods are zero-rated.

The Royal Mail exemption does not help here. It covers Royal Mail's own universal service charges to you. What you charge your customer for delivery is your supply, not Royal Mail's.

What the VAT inside a postage charge adds up to

Your delivery price is shown to consumers including VAT. The VAT inside a VAT-inclusive price at 20% is one-sixth of it.

On £3.99, the exact figure is 66.5p. Over 1,000 orders that is £665 of VAT on postage alone. A shop that thought postage was outside VAT and never counted it would find a £665 gap on its returns for every thousand orders. Run your postage through the product margin calculator on the net figure, not the price the customer sees.

A mixed basket

Notice 700/24 does not give a method for an order that mixes zero-rated and standard-rated goods. A fair and common approach is to split the delivery charge in proportion to the value of the goods. Agree the method with your accountant and use the same one every time.

Take a £30 basket: a £20 adult T-shirt (standard-rated) and a £10 child's T-shirt (zero-rated), plus £3.99 delivery.

• Standard-rated share: two-thirds of £3.99 is £2.66, with 44p of VAT inside it.
• Zero-rated share: one-third is £1.33, with no VAT.

Most shop platforms can set a tax class on shipping, but few split it by basket automatically. Check what yours does before you rely on it.

Things to check this week

1. Read your terms: is delivery part of the contract? For most shops it is.
2. Set the VAT class on your shipping rates to match the goods you sell.
3. If you sell any zero-rated goods, decide how a mixed basket's delivery charge is split.
4. Show the delivery cost clearly and early; the drip pricing rules cover where it must appear.
5. If you are not yet registered, the VAT threshold guide sets out the £90,000 test.

Overlyft builds AI staff who join an online shop's team and check each month's orders for the VAT class on shipping lines and mixed baskets, then prepare a summary for you or your accountant to approve before the return is filed.

This is general information, not tax advice. Check HMRC's notice and your own figures with your accountant.