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Overview
There are a number of changes coming to UK VAT on the 1st January 2021.
Previously we outlined a summary of the changes coming to VAT here, however, in this article we will be looking at how these changes affect dropshippers and what actions need to be taken by dropshipping businesses now. Actions you need to take.
Note: In this article, the term dropshipping/dropshipper is used to describe when a business makes a sale of an item that it does not own (or hold inventory of) and as soon as the sale is made, places an order with a supplier (usually based outside of the EU) which is then shipped directly to a consumer in the UK. We are assuming that the dropshipper is selling goods via their own shop rather than an Online Marketplace (OMP) such as Ebay or Amazon - There are new rules for OMPs that we will discuss in a separate blog post, so if you sell via your own website (Shopify/Wix/Woocommerce/Squarespace, etc) the rules on this current post/page will apply to you.
The Way VAT is Calculated for Dropshippers is Changing
Until 31st Dec 2020 Dropshipping VAT is due on import to the UK
Previously, if someone dropshipped goods from outside of the EU into the UK, the supply was considered to have been made outside of the UK - This meant that the business making the sale did not need to collect the VAT from the customer. Instead, VAT was due when the goods entered the UK by the Importer on Record. In dropshipping scenarios the Importer on Record is almost always the customer - So technically the customer was the one liable for dropshipping VAT. However, as most goods were small and relatively low value, they were either not picked up by Customs or no Import VAT was technically due.
In dropshipping scenarios the Importer on Record is almost always the customer - So technically the customer was the one liable for dropshipping VAT
From 1st January 2021 Dropshipping VAT is due at Point of Sale (POS)
The changes to VAT that are being introduced mean that when dropshipping from outside the UK (incl. from the EU) into the UK, VAT will be due at the Point of Sale (POS) rather on import into the UK.
If you sell via an online shop, such as Shopify, the POS will be your store payment gateway (Stripe, Shopify Payments, PayPal, etc). This means you will need to start collecting VAT when you make sales through your online store.
Since you need to account for VAT at POS and you cannot add VAT at checkout, you will need to include the VAT within your listed selling price.
This will have a HUGE impact on dropshippers as it means that in order to maintain your profit margins you need to increase your prices by 20%. Realistically most people cannot increase their prices by 20% without negatively affecting their conversion rate, so you will need to absorb the cost.
To calculate how much VAT you need to collect based on the final selling price of a product you need to divide the selling price by 6. For example, if you sell a product for £12, £12/6 = £2, meaning your product is technically being sold for £10 + £2 VAT.
When to Register for VAT - This is Changing for Dropshippers
On top of the changes to how VAT is calculated, the criteria for registering for VAT is changing.
Previously you only needed to register for VAT if your taxable/VATable turnover was above £85,000 - Since most dropshipping sales were outside the scope of UK VAT, most dropshippers did not need to register for VAT.
Now, the rules are: If you are making sales directly to UK consumers (not via an OMP) from overseas, you need to register for VAT immediately from 1st January 2021. This is regardless of whether or not you are a UK company or an overseas business.
If you are making sales directly to UK consumers (not via an OMP) from overseas, you need to register for VAT immediately from 1st January 2021.
Examples of how dropshipping VAT works from 1st Jan 2021
We've listed out the combinations of supply and consumer locations, so that you can see what will be relevant to your business.
UK Suppliers to UK customers
UK VAT Position
- Sales: You need to charge/collect VAT at POS - But only if your business is VAT registered. This will be 20%, 5% or 0% depending on the product type.
- Purchases: You can reclaim the VAT on your UK VAT return - But only if the supplier is VAT registered.
When to Register
- UK Businesses: When your taxable turnover is above £85,000 in a rolling 12 month window
- non-UK businesses: As soon as you intend to make a sale (no turnover threshold) in the UK
UK Suppliers to EU customers
UK VAT Position
- Sales: From the 1st January 2021 these will be known as exports from the UK. Exports are zero rated for VAT - you charge 0% VAT
- Purchases: You can reclaim the VAT on your UK VAT return - But only if the supplier is VAT registered.
When to Register
- UK Businesses: Zero rated sales count as taxable turnover, so you will still (as above section) need to register for VAT if you are making >£85,000
- non-UK businesses: Since you are making a supply from the UK - You need to register straight away.
EU VAT Position
- Until 30th June 2021: VAT is due on import by the importer on record. The business does not need to register for EU VAT.
- From 1st July 2021: Similar to new UK VAT rules, EU VAT must be collected at POS at the rate local to the customer. You will need to register in at least one EU state (we suggest Ireland as their website is in English) and you will need to submit a non-union OSS return (we will post a blog article on this when more information is available).
UK Suppliers to Outside EU (and UK) customers
UK VAT Position
- Sales: From the 1st January 2021 these will be known as exports from the UK. Exports are zero rated for VAT - you charge 0% VAT
- Purchases: You can reclaim the VAT on your UK VAT return - But only if the supplier is VAT registered.
When to Register
- UK Businesses: Zero rated sales count as taxable turnover, so you will still (as above section) need to register for VAT if you are making >£85,000
- non-UK businesses: Since you are making a supply from the UK - You need to register straight away.
Other considerations
- Depending on the country of arrival there may be sales tax considerations in that jurisdiction. You will need to speak with a local expert to determine this.
EU Suppliers to UK customers
UK VAT Position
- Sales: From the 1st January 2021 you must collect/charge VAT on these transactions at POS.
- Purchases: You cannot reclaim VAT from EU suppliers on your UK VAT return.
When to Register
- All businesses (including UK businesses) making these transactions must register from 1st January 2021
EU VAT Position
- Before 30th June 2021: You are making a local EU supply but are exporting it - So will need to register in the each EU country, reclaim the VAT on that return and then charge 0% EU VAT.
- From 1st July 2021: You are making a local EU supply but are exporting it - Same as above however you only need to register in one EU country and can submit OSS return.
EU Suppliers to EU customers
UK VAT Position
- No UK VAT is due
When to Register
- No UK VAT is due - No need to register for UK VAT regardless of this turnover
EU VAT Position
- Before 30th June 2021: Complicated and the position will depend on various factors. This could involve registration in multiple jurisdictions. We recommend speaking with SimplyVAT as they are our go to EU VAT experts.
- From 1st July 2021: Less complicated as you will be able to file OSS returns, so should only require one EU VAT registration.
EU Suppliers to non-EU and non-UK customers
UK VAT Position
- No UK VAT is due
When to Register
- No UK VAT is due - No need to register for UK VAT regardless of this turnover
EU VAT Position
- Before 30th June 2021: You are making a suppler in the country that the goods are being shipped from. Goods are being exported so will be zero rated. This could involve registration in multiple jurisdictions. We recommend speaking with SimplyVAT as they are our go to EU VAT experts.
- From 1st July 2021: Less complicated as you will be able to file OSS returns, so should only require one EU VAT registration.
Outside EU (and UK) Suppliers to UK customers
UK VAT Position
- Sales: From the 1st January 2021 you must collect/charge VAT on these transactions at POS.
- Purchases: There will be no UK VAT to reclaim
When to Register
- All businesses (including UK businesses) making these transactions must register from 1st January 2021
Outside EU (and UK) Suppliers to EU Customers
UK VAT Position
- No UK VAT is due
When to Register
- No UK VAT is due - No need to register for UK VAT regardless of this turnover
EU VAT Position
- Until 30th June 2021: VAT is due on import by the importer on record. The business does not need to register for EU VAT.
- From 1st July 2021: Similar to new UK VAT rules, EU VAT must be collected at POS at the rate local to the customer. You will need to register in at least one EU state (we suggest Ireland as their website is in English) and you will need to submit a non-union OSS return (we will post a blog article on this when more information is available).
Outside EU (and UK) Suppliers to Outside EU (and UK) Customers
UK VAT Position
- No UK VAT is due
When to Register
- No UK VAT is due - No need to register for UK VAT regardless of this turnover
Other considerations
- Depending on the country of arrival there may be sales tax considerations in that jurisdiction. You will need to speak with a local expert to determine this.
Actions to take before 31 Dec 2020
Make sure your business is able to carry on uninterrupted by these changes, and act early.
Register for VAT - effective date 1 Jan 2021
The rules come into force on 1 Jan 2021, so you do not need to register until that date. However, you can avoid a last minute rush by registering EARLY with an EFFECTIVE date of the 1st January 2021.
Review your SKUs and calculate the impact VAT is going to have on your margin for each product
Increase prices and/or kill unprofitable products. This is a tough thing to have to do - but unfortunately if you want to run a successful business it has to be done. Please do not bury your head in the sand - the cost of non-compliance will be worse if you get caught avoiding VAT.
Further Reading/Resources
How to register
We've pulled together a guide on how to register, including steps for doing it yourself, and links to our form if you would like us to handle this for you.
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