If you were starting out as a dropshipper last year, you probably weren’t going to be too bothered about the VAT-man … and the truth is that he probably wasn’t too bothered about you either. Collecting the tax was a bit fiddly and so he was only really going to be interested in you if you were earning big bucks … and the chances are that you weren’t.
That is no longer the case: the rules changed in the UK on 1st January 2021 and are going to be changing across the EU from the 1st July 2021. I am just starting out in Dropshipping and it’s something that I am having to come to terms with. I make the point here that I am no expert in taxation – far from it as my accountant will tell you – but I have had to learn about this stuff. I am passing on what I have discovered and my take on the situation so as always and before you make any rash decisions, make sure that you do your own research. Everyone is different and I don’t care what the taxman says, tax isn’t easy!
First of all and with your tax head on, there are three things that you should be considering: the location of the consumer, the location of the supplier … and the location of the POS. It looks like the location of the POS is going to be the key.
Let me say now that I am not talking about small-scale dropshippers in the UK selling to customers in the UK … if the supplier is also in the UK! In this case, you don’t need to register with the VAT-man until your turnover exceeds £85000 in any rolling 12 month period … but you won’t be able to claim back any VAT that you might have paid to your suppliers.
What is Dropshipping?
Dropshipping is a retail model where the retailer doesn’t own or stock the inventory. It’s not quite that straightforward as a quick read of the “What is Dropshipping?” article will reveal but the general principle is that the dropshipper takes the order and collects any payments due from the consumer, the dropshipper passes the order on to the supplier with the appropriate payment.
And here lies the dropshippers’ Achilles Heel: the Point of Sale (POS). If the consumer orders goods directly from the supplier, the consumer as “importer on record” is responsible for paying the VAT; if the dropshipper is doing the ordering, the dropshipper becomes the “importer on record” and is responsible for paying the VAT.
Previously, a dropshipper will have taken an order from a customer along with the payment, which will then have been passed – in this case – on to a foreign, non-EU supplier. Here, the VAT would have been the responsibility of the end-user and not the dropshipper and this made for a very unhappy VAT-man because there was little chance of collecting the tax due on every package entering the UK.
The new VAT rules mean that the dropshipper, responsible for the Point of Sale and taking the cash from the consumer, is now also responsible for the collection of the VAT. That was easy!
This doesn’t impact dropshippers in the UK using suppliers in the UK, selling to consumers in the UK and turning over less than £85000 … but I am betting that if you fall into this category, your VAT-free days are numbered also.
Principles of VAT
I need to say again that I am neither an accountant nor a tax expert … I am, however, a taxpayer and I accept the need for taxation in a civilised world. I can see that the mechanisms supporting the VAT processes are complex, but the underlying principles are fair. Every link in any manufacturing and fulfilment chain that adds value to the previous link should be taxed according to the value of that value add. This, of course, depends on your views about the regressive nature of VAT taxation.
The chain-link principle means that the tax is paid by the last link in the chain: the end-user, or consumer. For every other link in the chain, the VAT is essentially passed on to the next, growing little by little at every step. Whilst arguably fair in principle, it entails a great deal of paperwork, assessment and oversight.
There is much more to think about if you really want to think about it, but whether you agree with it or not, it’s not going anywhere. The processes need to be implemented and systems need to be managed.
Common Dropshipping Scenarios in the UK
The challenges faced by dropshippers in the UK can be categorised according to their origin, their destination and the geographical location of the Point of Sale.
At the moment only the UK, the EU and Rest of the World are particularly relevant, but this may change at any time. If the UK is implementing VAT rule changes and the EU is implementing rule changes, then it’s not unlikely that other countries won’t be far behind, and there may be different rules and requirements for each and every country.
Luckily, the rules around importing from the EU covers all 27 countries, and so one registration should be sufficient for all.
So, dropshipping to UK customers from a “base” in the UK will mean one of the following:
- using UK suppliers to ship to UK customers
- using EU suppliers to ship to UK customers
- using suppliers from somewhere else to ship to UK customers
There will also be cases where goods are shipped to customers not resident in the UK, these are covered later.
My own Dropshipping Scenario
I am selling primarily to customers in the UK and I am sourcing products primarily from the UK. I am trying to stimulate manufacturing in the UK by showcasing bespoke items of furniture, made in the UK. Some of it is dropshipping and some of it isn’t, but the same rules apply.
I am also selling similar products sourced from overseas: some manufactured in the EU and some manufactured outside the EU.
Just to make things more complex, I am also looking at sourcing products from the “Rest of the World” and selling them to customers in the “Rest of the World”.
It feels like things might get a little complicated – I am essentially covering every possible scenario.
End of December – Beginning of January
Before the end of December 2020, VAT liabilities for imports fell to the customer and as a general rule, were not collected as well as perhaps they should have been. From the beginning of January 2021, the liability for the VAT on goods shipped from outside the UK has shifted away from the customer and is now due at the Point of Sale rather than on import.
The Price you see is the Price you pay.
Dropshipping prices after the 1st January 2021 will need to reflect the fact that VAT is included, which means that the prices displayed should be showing the VAT inclusive price. I am sure that there are issues regarding pricing and competitiveness as this means a price hike of 20% for some dropshippers, but that’s not where I am coming from.
From what I have read, the rules appear to require that prices are displayed inclusive of VAT … alongside the products and BEFORE the checkout. I know that this is the preferred approach for the Advertising Standards Authority and the Committee of Advertising Practice and in principle and I am not disagreeing – it works if all parties occupy the same tax jurisdiction.
However, this preferred approach doesn’t work if you are selling into multiple regions where different rates apply.
If I am based, along with my Point of Sale, in the UK selling goods into the EU that are to be shipped from somewhere in the “Rest of the World”, the VAT rate that I shall be needing to apply will be that of the customer’s country of residence – I think! The problem here is that I can’t know which VAT rate to apply until the customer has provided their address … and they are only going to be doing this when they check out.
If there is a requirement to display the VAT inclusive price pre-checkout, then my shop can only be valid in one country, and cross-border sales essentially become illegal by proxy.
I don’t know if this is a legal requirement or just an encouraged practice. I have a question out with my accountant who is waiting on some tax experts to provide some guidance. In the meantime, it’s definitely something to be considered…
Maybe the solution is to host a different webshop variant for each customer geography. I wonder if that is the law-makers’ expectation.
VAT registration for Dropshippers
In the UK, you are probably going to have to become VAT registered. Before January 2021, companies and individuals were only required to register for VAT if their turnover in any rolling 12 month period was greater than £85000. This, I believe, is still the case providing you are only selling goods sourced from the UK in the UK.
However, if you are dropshipping from suppliers outside the UK, VAT is now to be applied to all items and will be due at the point of sale rather than on import. If you are dropshipping goods from outside the UK, you are going to need to register with the UK VAT-man.
But it doesn’t end there: if you are selling into the EU, it seems you are required to register for VAT in the EU by the middle of the year. There is this thing called the one-stop-shop (OSS) VAT return that has been introduced by the EU to simplify the process, but it’s not simple enough to delve into here.
Essentially, the OSS is about submitting returns to a single point rather than individually to each jurisdiction … follow this link for some more information as it’s too much for here.
I think that I am going to end up registering for EU VAT in the Republic of Ireland … as they speak English. I’m pretty sure I’m not the only one. I think there are going to be a lot of UK businesses registering for VAT in the Republic of Ireland in the first few months of 2021.
Am I going to have to register with the VAT-man in every country I sell to? Another question for the accountant …
The impact of Dropshipping End Points
Much of the following section has been condensed from an article published by EcommerceAccountants but my accountants and their expert advisers have also had an input. As always, read it, digest it and then question it … every situation is different.
I make no promises!
In all the cases below, I am assuming that the Point of Sale is in the UK. … just saying!
UK Suppliers and UK Customers
Suppliers in the UK shipping goods to customers in the UK on the instruction of a UK VAT-registered business (turnover >£85k)
If your business turnover is greater than £85000 in any rolling 12 month period, you are going to be charging and collecting VAT at your Point of Sale.
One advantage, if you like, of being registered for VAT is that you can reclaim any VAT that you pay out in the course of operating your business … but only if your supplier is registered for VAT.
UK Suppliers to EU Customers
Suppliers in the UK shipping goods to customers in the EU on the instructions of a UK VAT-registered business
Goods supplied from the UK to the EU are exports. Until the end of June 2021, exports are zero-rated for VAT, and as a VAT registered supplier, you can claim back any VAT you have paid out, assuming your supplier is VAT registered.
From 1st July 2021, the VAT rules across the EU will be similar to those operating in the UK. You will need to be collecting EU VAT for every transaction at the Point of Sale … at the VAT rate appropriate to the location of the customer. This means that you will need to be VAT registered in at least one EU State and you will need to submit quarterly non-union OSS returns. I’m sure that my accountants expert friends know more about this than I do, so I shall be asking them … because it impacts me!
UK Suppliers to “Rest of the World” customers
Suppliers from somewhere outside of the EU or the UK shipping goods to customers in the UK on the instruction of a UK VAT-registered business
The “Rest of the World” (RoW) refers to non-EU (and non-UK) Customers.
Goods supplied from the UK to the Rest of the World are exports and are therefore zero-rated for VAT, and as a VAT registered supplier in the UK, you can claim back any VAT you have paid out, assuming your supplier is VAT registered.
You should consider when shipping to the Rest of the World that there may be implications in respect of sales tax and import duties. It is inevitable that these will vary depending on the country that you are shipping to and so it would make sense to engage with a local expert.
EU Suppliers to UK Customers
Suppliers in the EU shipping goods to customers in the UK on the instruction of a UK VAT-registered business
First of all, and there is no getting away from it, the goods you are selling are not home-grown and so you need to charge and collect the appropriate VAT at your Point of Sale, and that’s the position right now (since January 2021). If you are selling goods to UK customers that originate from outside the UK, you will need to be registered with the VAT-man.
If you are just setting up, I would work on establishing the processes ready for the second half of the year (after 1st July 2021) because the processes now are too onerous. I would be hanging around until the simplified EU processes come online. I think they were due at the beginning of the year but their implementation has been delayed for some reason.
You will need to register in at least one EU country if you are exporting from the EU to the UK, which is what you are doing if you are using EU dropshippers. Once registered, you can reclaim the VAT you have paid on the one-stop-shop (OSS) return and then charge 0% EU VAT. You will, of course, still be charging the UK VAT.
I think I have this bit right, but I shall be asking the accountant and the accountants expert friends and I shall then be posting the details back here as I work out How to Implement the new VAT rules in the UK.
EU Suppliers to EU Customers
Suppliers in the EU shipping goods to customers in the EU on the instruction of a UK VAT-registered business
You can do this without needing to be VAT-registered in the UK, but you will need to be registered for VAT in the EU … somewhere. If this is your thing and you are not doing it now … wait! The new VAT rules take effect across the EU on 1st July 2021 and it’s going to be a whole lot less complicated.
After the 1st July 2021, you should be able to register for VAT and then file your VAT returns through the EU VAT one-stop-shop in a single EU country.
EU Suppliers to the Rest of the World
Suppliers in the EU shipping goods to customers outside the EU and the UK on the instruction of a UK VAT-registered business
You can do this without needing to be VAT-registered in the UK and for this, there is no VAT registration threshold.
The supplier is in the country where the goods are being shipped from, and the goods are being exported so they are going to be zero-rated.
It’s complicated now, but after 1st July 2021, you should be able to register with the VAT-man in at least one EU country, allowing you to submit one-stop-shop (OSS) returns.
Since the goods are being shipped to somewhere in the Rest of the World, you are probably going to need to speak to someone to work out what to do … and that wouldn’t be me!
However, there is a good chance that this scenario is going to apply to me, so it is a question that I shall be asking the accountants and the experts. I shall then be posting the details back here as I work out How to Implement the new VAT rules in the UK.
Rest of the World Suppliers to UK 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
This is easy: if your dropshipping supplier is based anywhere in the Rest of the World and shipping into the UK, you will need to be VAT-registered and you will need to charge and collect VAT on the purchases at the Point of Sale.
There might be little in the way of confusion on the nature of the required VAT registration but that’s not quite the end of the story. I am wondering how likely it is going to be for incoming packages to get a free passage through customs. To what extent will incoming packaged be intercepted by HMRC, and to what extent will the intercepted packages be subject to further charges?
I will ask, but I would bet that they don’t know the answer.
Rest of the World Suppliers to EU Customers
Suppliers from outside the EU and outside the UK shipping goods to customers in the EU on the instruction of a UK VAT-registered business
You can do this without being VAT-registered in the UK, and there is no VAT registration threshold.
That doesn’t, however, mean that you do not need to be registered for VAT.
The EU VAT rules are similar to those of the UK (after June 2021), which means that the EU VAT must be collected at the Point of Sale, and it must be collected at the rate local to the customer. If you are going to be selling RoW goods into the EU, you will need to be VAT registered in at least one EU country and you will then need to be submitting a quarterly one-stop-shop (OSS) EU VAT return.
Rest of the World Suppliers to Rest of the World Customers
Suppliers from outside the EU and outside the UK shipping goods to customers oustide the EU and outside the UK on the instruction of a UK VAT-registered business
There are no UK or EU VAT implications currently but that’s not to say that this won’t happen in the future.
You should be aware that there may be sales tax considerations operating in the country you are selling in to. Find an expert in local tax matters and talk to them.
Questions about the new VAT rules across the UK and the EU
There is an HMRC Policy Paper about changes to the VAT treatment of overseas goods sold to customers from 1st January 2021 which is well worth a read, especially if you are one of those people who enjoy reading HMRC Policy Papers.
There is an equally interesting paper, this one published by the EU, on modernising VAT for cross-border e-commerce.
They may be a little on the dry side but they are necessary reading if you are to avoid being caught out by the new rules … unless you are content to ringfence your business: selling goods of UK origin to customers within the geographical boundaries of the UK.
I have compiled a set of questions based on the contents of the two Policy Papers referenced above and on my own situation, all of which is described in PM Questions: VAT and dropshipping.
Waiting now for the answers.