The PaymentMonkey is trying to set up a DropShipping eCommerce business in the UK and has, understandably, some questions regarding VAT and DropShipping. The PaymentMonkey has accepted Google as his friend and has done the VAT and DropShipping searches and has also spoken to … The Accountant. The Accountant has some go-to VAT tax experts that are called upon in circumstances where the complexities of the VAT taxation rules are beyond the comprehension of normal people.
The Accountant is going to be calling upon them!
VAT and DropShipping backstory
It’s 2021 and I am wondering why no one wants to employ me. There are a couple of things that I would point the finger at but sheltering behind a barrier of blame isn’t going to help me, and I don’t think that anyone one else is really going to care.
Tilting at Windmills hurts you more than the Windmill.
Robert A Heinlein
So …
I had an idea!
The idea needed validating.
I followed the reseach process and concluded that there was potential.
I wanted to focus on developing business with UK manufacturers rather than taking the better-understood path of DropShipping from the Far East. In my niche, there are a lot of top-end, low-volume, high-quality UK manufacturers selling through small individual sites and by word of mouth. Interestingly, in my niche, there are very few far-eastern manufacturers doing the same.
I think I can make a difference here, helping to boost the UK manufacturing base to support the provision of more jobs for more people.
But, I am also interested in selling these niche, high-end products overseas into non-UK markets … and to make things fair, I also want to support artisan DropShippers across Europe and further afield.
I want to do all this with good and honest intentions … but here be dragons!
Notwithstanding the current situation of self-imposed trade barriers restricting the flow of goods in and out of the UK, there is now hanging over us, an international web of intrigue and wizardry that is manifested as VAT rules, liabilities and traps for the unsuspecting.
I think I understand the principles, I have already talked generally about these in “What’s VAT got to do with DropShipping?” but I have some more specific questions that I am formulating for The Accountant.
VAT and DropShipping
Let’s start from a position where we accept that VAT is happening. It’s a regressive tax but the principle behind its application to the value chain is fair to the value chain. It’s not going anywhere!
Oh … and there are implications of the VAT rules that will potentially impact your business elsewhere, indirectly. I shall be raising these issues too.
I need to know the specific rules that will apply in the following cases:
Selling UK-manufactured goods to UK-based customers
Suppliers in the UK shipping goods to customers in the UK on the instruction of a UK VAT-registered business (turnover >£85k)
I know that there is turnover threshold for VAT registration in the UK (currently £85000) and this is well understood.
There is an Advertising Standards Authority expectation, or maybe it should be referred to as an actual requirement, that websites intended for an end-user audience display the VAT-inclusive price. Only B2B sites are justified in presenting prices exclusive of VAT.
This works in a closed UK environment because there will be only one eCommerce store servicing the whole of the UK, and the same VAT rates will therefore apply to the whole of the UK. The challenge comes later when the eCommerce site is opened to non-UK residents, specifically those living in regions with different VAT rates to the UK.
I don’t think there are any gotchas here, but I am going to ask about the potential for confusion that could be caused by the Rules of Origin legislation. I am assuming at this time that any customs duty would be included in the suppliers pricing as it should already have been paid.
Selling UK-manufactured goods to EU-based customers
Suppliers in the UK shipping goods to customers in the EU on the instructions of a UK VAT-registered business
I am not particularly interested in the rules as they stand now; it’s February and the new legislation is taking effect on 1st July 2021. I can wait and I suspect that even if you are reading this before 1st July 2021, you can wait too. I don’t think anybody is going to be so excited about VAT that they will want to get their teeth into establishing a set of pre-OSS processes only to have them simplified by the EU in July.
So, after 1st July 2021, it looks like I will need to be registered for VAT in at least one EU country if I want to sell goods into the EU. Is this the case, or is it likely that multiple registrations would be required?
Ireland looks like it would be a good bet, but I suspect the Irish VAT-man is going to be inundated with registration requests from UK exporters. Is it possible that Ireland may end up restricting the number of registrations available to UK businesses?
If I am selling UK-manufactured products into the EU, will I need to ensure that there is documentation covering the Rules of Origin legislation to avoid inappropriate and unnecessary taxation?
What is likely to be the extent of the interaction between Rules of Origin legislative requirements and the submission of VAT returns?
Is there going to be an audit process to ensure VAT compliance or is it more likely that the Rules of Origin declarations will be policed by the port authorities?
The VAT rates across the EU is not standardised, the rates vary from region to region.
Is it neccesary to acount for the VAT collected on a region-by-region basis so that the appropriate revenue can be aportioned to each nation?
Which brings us back to a question that I have raised before: is there a legal requirement to use the VAT-inclusive value when displaying consumer-facing prices?
The challenge of showing VAT-inclusive pricing on a multinational website is twofold:
- logically, the appropriate VAT rates cannot be determined until the customer’s address is known,
- the eCommerce site is a UK site that just happens to make products available overseas.
If there is a requirement for every eCommerce site that is shipping outside its immediate region, then there is going to be a requirement for multiple pricing structures based on the customer declaring the nature of their residence up-front. This is not really a taxation question, rather it is an eCommerce website question, but it is a question that is going to have to be resolved if we are going to be doing DropShipping with confidence.
The question I shall be asking is if the need to show VAT-inclusive pricing is a legal requirement, and if that is the case in all regions. This isn’t getting any easier …
Selling UK-manufactured goods to customers in the Rest of the World
Suppliers from somewhere outside of the EU / UK shipping goods to customers in the UK on the instruction of a UK VAT-registered business
I am assuming here that the VAT rule changes in the UK and those expected across the EU will have little impact on the rules across the Rest of the World (RoW).
I am asking The Accountant specifically about the US, and I will add the answers to questions relating to the Rest of the World (not including the US) as they arise. At the moment, I suspect that each region may have different rules that will need to be respected. I know that the import tax questions may impact the end-user customer more than the UK shipper, but it is good to understand the complete picture as it may have a bearing if there are returns to be considered.
Selling EU-manufactured goods to UK-based customers
Suppliers in the EU shipping goods to customers in the UK on the instruction of a UK VAT-registered business
First of all, there is no question about the need to register with the VAT-man in the UK, you need to register with the VAT-man in the UK.
The goods you are selling are manufactured in the EU and are then exported to the UK, but they are deliverd directly to the UK-based customer who has paid UK-rate VAT on the purchase.
This is where I become confused.
A UK-based eCommerce site is selling EU-manufactured goods to a UK-based customer who has purchased these goods on the UK-based site from a UK-based seller and paid UK-rate VAT for the privilege.
The goods are shipped from the EU manufacturer directly to the UK-based customer once the UK-based seller has paid the EU-based manufacturer.
Is the VAT collected destined for UK coffers?
Does the EU-based manufacturer deliver the goods to the UK-based customer on behalf of the UK-based seller without collecting any VAT anywhere?
Is this a tax-free export from the EU to the UK, that is then taxed by the UK?
All of the value chain VAT added as the goods are manufactured will be reclaimed by the EU-based manufacturer locally.
Does this mean that the manufactures gov are out of pocket and the UK gov is quids in?
Am I guilty maybe of some fundamental misunderstanding?
Don’t forget, these are the questions, not the answers!
Selling EU-manufactured goods to EU-based customers
Suppliers in the EU shipping goods to customers in the EU on the instruction of a UK VAT-registered business
Assuming that I am VAT registered in the EU and I have understood the one-stop-shop approach to cross-border VAT administration, I don’t see this as anything to be concerned about. It is, after all, the single market of the EU that we are talking about. This bit is probably going to be easy.
Now, to avail myself of a .eu top-level domain name. Not going to happen unless I can set up an office in the EU. Maybe something to think about.
Selling EU-manufactured goods to customers based in the Rest of the World
Suppliers in the EU shipping goods to customers outside the EU / UK on the instruction of a UK VAT-registered business
Similar to the situation regarding selling UK-manufactured goods to the Rest of the World, I am not even sure what questions to ask.
I am asking The Accountant specifically about the US, and I will add the answers to questions relating to the Rest of the World (not including the US) as they arise. At the moment, I suspect that each region may have different rules that will need to be respected. I know that the import tax questions may impact the end-user customer more than the UK shipper, but it is good to understand the complete picture as it may have a bearing if there are returns to be considered.
Selling goods manufactured in the Rest of the World to UK-based customers
Suppliers from outside the EU and outside the UK shipping goods to customers in the UK on the instruction of a UK VAT-registered business
I am currently negotiating terms with a manufacturer in Georgia. They are keen to get on and do something but I am not sure of the implications on my UK tax / import duty / VAT responsibilities. Previously, whenever they have sent products out into the Rest of the World, the responsibility for taxation has gravitated in the direction of the importer on record – a technical term that in this case means the customer.
I am assuming that I will now be required to add VAT to the imported products, but I don’t know the details.
Next question …
Selling goods manufactured in the Rest of the World to EU-based customers
Suppliers from outside the EU / UK shipping goods to customers in the EU on the instruction of a UK VAT-registered business
I am thinking that the EU situation is going to be pretty much the same as the UK situation, with the added requirement of registering for VAT in the EU.
I am assuming that VAT will need to be added at the customer’s going rate and then paid using the one-stop-shop VAT return process, and I am assuming that no tax can be reclaimed on the imported goods.
Selling goods manufactured in the Rest of the World to customers based in the Rest of the World
Suppliers from outside the EU / UK shipping goods to customers outside the EU / UK on the instruction of a UK VAT-registered business
This is too much to think about. Each country is going to be different and each country is going to engage with suppliers and sellers in their own way. I will report back as expand the reach but it is going to be piecemeal.
I will be looking at the case of the US as this woud cover the scenario of a UK-based eCommerce operation selling US-manufactured goods to US-based customers.
None of this is easy.
A Summary of questions about the impact of VAT on DropShipping
Specifically, I need to understand the VAT / tax / duty implications of:
- selling UK manufactured products in the UK
- selling UK manufactured products in the EU
- selling UK manufactured products in the RoW (Rest of the World)
- selling EU manufactured products in the UK
- selling EU manufactured products in the EU
- selling EU manufactured products in the RoW
- selling products manufactured in Georgia (not the US) to the UK
- selling products manufactured in Georgia to the EU
- selling products manufactured in Georgia to the RoW
I am assuming that all products will be priced above any minimum thresholds, whatever they might be – £250 minimum product value. I am now thinking that I need to understand the thresholds too.
Once The Accountant has procured the answers, and they make sense, and I have understood them, I will make them available here: “How to implement VAT rules for DropShipping in the UK“.
A final thought and something to think about
There is an argument that says don’t do any of this, just make sure that you sell at the tax-inclusive rate and trouser the cash. But … you would need to hang on to it so that when the VAT-man catches up with you, you can pay up, oh … and maybe develop a taste for prison food in the meantime. The time, money and energy you save would go a long way towards stimulating the trade that these rules are inevitably going to stifle … unless of course, you are a large multi-national company with an entire army of accountants all lined up and taking this stuff in their stride, in which case you can already manipulate your position to enable you to avoid paying taxes.
I am not making that argument!
