In 2026, the intersection of Shopify’s automation and HMRC’s Making Tax Digital (MTD) requirements means your settings need to be precise. Whether you are just crossing the threshold or are a veteran seller, here is how to configure your store for compliance and clarity.
1. The Threshold: When to Flip the Switch
In the UK, the mandatory VAT registration threshold for 2026 remains at £90,000 of taxable turnover in any rolling 12-month period.
- Mandatory Registration: Once you hit £90k, you must register with HMRC and enter your VAT number into Shopify.
- Voluntary Registration: Many smaller sellers register early to reclaim VAT on stock, Shopify fees, and shipping costs.
- Overseas Sellers: If you are selling into the UK from abroad and your stock is held in a UK warehouse (like Amazon FBA or a 3PL in Northampton), the threshold is £0. You must register immediately.
2. Setting Up VAT Collection in Shopify
Once you have your VAT number from HMRC, you need to tell Shopify to start collecting it.
Step-by-Step Configuration:
- Go to Settings > Taxes and Duties.
- In the Regional Settings section, click United Kingdom.
- Click Collect VAT.
- Enter your 9-digit VAT number. If you have applied but haven’t received it yet, leave it blank for now, but be aware you may still be liable for tax on those sales.
- Important: Add your physical UK business address under Settings > Locations. Shopify uses this to determine if you have a “Nexus” (tax presence) in the UK.
3. Pricing Strategy: Inclusive vs. Exclusive
This is where most UK merchants make a strategic error. In the UK, B2C (Business to Consumer) customers expect to see the final price on the product page, including VAT.
- Tax-Inclusive (Recommended for B2C): Go to Settings > Taxes and Duties and check the box: “All prices include tax.”
- Example: You list a shirt for £20. The customer pays £20. Shopify’s backend calculates that £3.33 of that is VAT ($VAT = \frac{Price \times 0.20}{1.20}$).
- Tax-Exclusive (Common for B2B): If you primarily sell to other businesses, you might leave this unchecked. The 20% VAT will be added at the final step of the checkout.
Guru Insight: If you sell both domestically and internationally, use Dynamic Tax-Inclusive Pricing. This allows a UK customer to see £20 (incl. VAT) while a US customer sees £16.67 (excl. VAT), keeping your margins consistent across borders.
4. The £135 Rule and International Sales
Post-Brexit rules (still in full effect in 2026) change how VAT is handled based on the order value.
- Orders ≤ £135: You must charge UK VAT at the point of sale. Shopify handles this automatically once your UK tax region is set up.
- Orders > £135: These are technically “imports.” You can choose to have the customer pay the VAT/Duties to the courier (DDU) or collect it at checkout yourself (DDP).
- EU Sales: Most UK sellers now use the IOSS (Import One-Stop Shop) scheme for EU sales under €150 to ensure a smooth delivery experience without surprise “handling fees” for the customer.
5. Handling Zero-Rated and Exempt Goods
Not everything in the UK is taxed at 20%. If you sell children’s clothes, books, or certain food items, you need Tax Overrides.
- Create a Manual Collection for your zero-rated items (e.g., “Kids’ Collection”).
- Go to Settings > Taxes and Duties > United Kingdom.
- In the Tax Overrides section, click Add product override.
- Select your collection and set the tax rate to 0%.
6. VAT on Shipping: The “Matching” Rule
HMRC rules state that shipping should follow the tax rate of the products in the parcel.
- If you ship a 20% VAT item, the shipping charge must also have 20% VAT applied.
- If the parcel contains only zero-rated items, the shipping is zero-rated.
- Action: In Shopify, ensure “Charge tax on shipping rates” is checked under your UK tax settings.
7. Compliance & Making Tax Digital (MTD)
In 2026, HMRC requires all VAT-registered businesses to keep digital records. Shopify’s built-in reports are a start, but they are not full accounting records.
- The Integration Requirement: You should sync Shopify with an MTD-compatible software like Xero or QuickBooks.
- Bridge Tools: Use apps like A2X or LinkMyBooks. These “bridge” the gap by breaking down your Shopify payouts into sales, tax, and fees, making your quarterly VAT return a 5-minute task instead of a 5-hour headache.
Summary Checklist for UK Sellers
| Task | Where to find it in Shopify |
| Add VAT Number | Settings > Taxes and Duties > UK |
| Set Prices to Incl. Tax | Settings > Taxes and Duties > Tax Calculations |
| Set Up UK Location | Settings > Locations |
| Configure Shipping Tax | Settings > Taxes and Duties > UK |
| Connect Accounting App | Shopify App Store (Xero/LinkMyBooks) |
Conclusion
VAT is a “silent” partner in your business. When configured correctly in Shopify, it flows seamlessly from the customer to your records. When ignored, it becomes a liability that can sink a growing brand.
At Developers Design Guru, we help UK merchants audit their tax settings to ensure they aren’t overpaying—or undercollecting.