VAT for Dropshippers: What VAT do you charge if you are dropshipping?
As accountants with a lot of small businesses in the dropshipping business model, we are often asked do I have to charge VAT if I am dropshipping? Often, small business owners ponder on the implications of VAT for dropshippers.
So in this article we are going to cover the basics, at least we hope, on the questions and answers around dropshipping and VAT in the UK.
Scenario 1: I am dropshipping from outside the EU into the UK – do I need to charge VAT? (Before Brexit)
Before one can decide if they can charge VAT or not on any transaction, be it a purchase or a sale, you have to determine where the point of supply of goods occur. The point of supply of goods imported from outside the EU into the UK, are considered to be where the goods are shipped from into the UK. So for instance, if you are dropshipping from China into the UK, the point of supply of goods is China. As VAT is a charge on value added, since the value added is outside the charge zone (the UK), there will be no VAT due on the sale of goods, in the same light there is no VAT reclaim on goods bought outside the EU.
Scenario 2: I am dropshipping form inside the EU into the UK – do I need to charge VAT (Before Brexit)
Picking off from the point of supply of goods, since the point of supply of goods is within the EU, there will be a VAT charge on the sale of goods.
Scenario 3: I am dropshipping in the UK from a UK based supplier – do I need to charge VAT (Irregardless of Brexit)
Again by looking at the point of supply of goods, since the point of supply of goods is within the UK, there will be a VAT charge on sale of goods, regardless of Brexit or whatever the trading relationship with the EU after brexit.
Are there any VAT effects for dropshipping from outside the UK?
From scenario one, just because there is no VAT due on the sale (dropshipping from outside the EU, prior to Brexit) does not mean that there is absolutely no VAT effect or that VAT should be ignored altogether. There may be an import VAT when you ship goods into the UK from outside the EU (prior to Brexit).
What happens if there is an Import VAT?
Import VAT is charged on goods from outside the EU into the UK, this is prior to Brexit and no one (including the British government) is absolutely sure what will happen after Brexit. Import VAT duties however only apply on goods above a value of £15 and are payable by the importer on record.
This is where things can get very interesting. The importer on record is classified as the person who is ultimately responsible for the import VAT. If as a business, you are on record (address of delivery) for the import, or goods bought from outside the EU, then your business will be liable to pay the import duties and VAT. However if the ultimate customer is importer on record, which is the case in more dropshipping goods, then they will be responsible for paying any import duties and VAT.
Usually for goods above £15, the customs and excise will hold back on releasing goods until the VAT has been paid and they write to the importer on record (via the Royal Mail delivery cards) to inform them to settle the VAT and import duties charge. These usually contain the charge and payment instructions. That simply means that your customers will not receive their goods until they have paid the VAT and duties charge.
From a customer experience perspective, it is strongly advised that you inform customers of the potential charge of import VAT and duties when they are purchasing from your website.
What happens after Brexit?
We are going to be a bit speculative here, since the rules of VAT charges are on point of origin, it is most likely that if the UK is outside the EU VAT regime, which from all indications it will be, then the EU will be classified as a non VAT charge point of origin for goods imported. However, there is the likelihood of import VAT and duties for goods that are drop shipped from the EU into the UK post Brexit.
My Web Accountants – Drop shipping businesses
We are web based accountants for small businesses in the UK including e-commerce businesses. If you are a dropshipper and need accountancy support or or worried about the effect of VAT on dropshipping. You can get in touch with us using our contact us form. We are more than happy to address your questions.