Breaking Down The Impact Of UK’s Value Added Tax On eBay Sellers

eBay (NASDAQ:EBAY) recently announced that sellers on its U.K. platform will be required to pay a 20% value-added tax (VAT) on fees paid to the company beginning August this year. The new VAT is applicable to sellers that have annual turnover (sum total of all goods sold through the website) in excess of £85,000. This announcement comes as a part of the legal restructuring for the e-commerce company after spinning off PayPal in 2015. eBay’s stock has risen almost 50% in the last year following strong results in the last few quarters. Much of the growth was attributable to strength in eBay’s ticketing business StubHub, which observed a 30% increase in GMV through 2016. Comparatively, marketplace GMV increased by low single digits in the same period. Over the last few quarters, the company has made efforts to enhance the seller experience and improve data structures on its back-end for better search engine optimization. However, an increase in the VAT paid by sellers could negatively impact these trends. Below we take a look at how this can impact sellers.

U.K. As A Market For eBay

The U.K. is a major market for eBay, with roughly 15% of its net revenues in 2016 coming from the region. Net revenues for eBay (including both transaction revenues as well as marketing revenues) in 2016 stood at just under $9 billion, of which the company generated $1.3 billion from the U.K. A key point to note here is that eBay’s revenues from two of the largest markets outside the U.S. (Germany and U.K) have consistently fallen over recent years. For instance, net revenues generated by eBay in U.K. were down from $1.5 billion in 2014 to $1.3 billion in 2016.

In terms of users, eBay had a global active user base of 168 million users at the end of 2016, of which roughly 11% of users or 18 million accounts were from the U.K. ^[1] So around 11% of its total user base helped eBay generate roughly 15% of its net revenues in 2016, partly due to a stronger currency leading to higher spend per customer in dollar terms.

Value Added Tax In The U.K.

The standard rate of value added tax (VAT) in the U.K, which is applicable to most goods and services in the country, has been at 20% since January 2011. Until 2015, many internet companies operated their European operations from Luxembourg to maximize their tax benefits. As a result, companies including eBay could charge 15% VAT to sellers across Europe, among the lowest in the continent. Subsequently, in December last year, Luxembourg authorities decided to reform local tax rules to help prevent global companies from avoiding taxes. More recently, eBay released a statement mentioning its intent to revamp the existing tax structure following the company’s spin-off of PayPal in mid-2015. Beginning August this year, eBay will charge high-volume sellers 20% on the fees charged by the company on all transactions.

Impact of New VAT

The example below demonstrates that magnitude of the VAT for a U.K-based seller on eBay with an annual turnover of over £100,000. If the seller has annual turnover of £500,000, the total transaction fees paid to eBay (or “take rate” as defined by eBay) is approximately 8.5% of gross merchandise value (GMV). In this case the seller pays roughly £42,500 to eBay as transaction fees. In this scenario, the seller would currently pay 15% VAT on the fees or £6,375 as an eBay Europe seller.

This is expected to increase to £8,500 beginning August this year. The total cost incurred by the seller (fees plus VAT) will go up to £51,000 from just under £49,000 currently as shown above. In other words, the total fees plus tax as a percentage of turnover will go up by 40 basis points from 9.8% currently to 10.2% for the seller.

Could The New Rules Drive Away Sellers?

The maximum impact for large sellers is about 40 basis points shaved off their margins. While this can certainly be meaningful for some sellers, it is still better than many alternatives. For instance, the total fees charged by Amazon, including membership fees and transaction fees, can be 12% or even higher. This does not include VAT and Amazon’s other services such as Fulfilled by Amazon. In comparison, as calculated above, the total fees plus VAT paid by eBay sellers will only be around 10.2%. We forecast eBay’s global take rate to remain in the 8-9% range going forward.

eBay’s management indicated last year that the company’s strategy was to maintain a low-to-mid single digit top-line growth rate and keep margins and free cash flows high. eBay was able to achieve this target last year and it returned about $3 billion to shareholders in the form of share buybacks. The company has stated that it intends to return about 50% of its free cash flows to shareholders this year as well. This will be likely unaffected by its corporate and legal restructuring in the U.K, as the company seems on track to give similar returns to shareholders. In the most recent quarter, eBay’s net income stood at just over $1 billion while the company repurchased $410 million of its shares through the quarter.

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1. What fees you’ll pay, eBay UK Seller Center, June 2017 [↩]