UK VAT Changes for Dropshipping from 1st January 2021

UK VAT for Dropshippers

There are changes coming to UK VAT and dropshipping from 1st January 2021.  Previously, someone shipping from china or outside the EU would not be required to charge for VAT. All of this is changing.

Overview

There are changes coming to UK VAT from the 1st January 2021. This article focuses on what is happening and what actions you need to take as a dropshipper. This rule is affecting everyone and therefore all your competitors are impacted by this.

This article is aimed at dropshippers sell on Shopify, Woocommerce, Magento etc… if you are selling via an online marketplace (OMP) such as eBay or Amazon then there are different rules affecting you – we deal this with in a separate article.

How is VAT changing for UK Dropshippers?

Before these changes UK dropshippers sourcing their items from outside the UK and EU, there were no VAT implications because the customer was the importer on VAT and VAT was their responsibility. However, these rules are changing.

1st January 2021 – Point of Sale UK VAT on Dropshipping sales

VAT is changing when you need to account for VAT. VAT will be due at the Point of sale rather than when the item reaches the border.

Therefore, if you are selling on shopify or any other shop then you need to start collecting VAT for these sales.

When you have registered for VAT you need to account for VAT at the point of sale. AS you need you need to account for VAT at the point of sale rather than adding VAT at checkout you calculate VAT from your gross listed selling price.

That means you may have to pay 20% of your sales to HMRC in the form of VAT. This could have a large impact on your profitablilty. You have two choices, increase prices or suffer the VAT yourself impacting your margins.  Before you despair, this rule is impacting everyone and therefore everyone has to register for VAT. This is one the of main reasons for why this rule is being introduced.

To calculate the impact on your margin you can work out what VAT you need to pay using this example. IF you sell a product for £50, to calculate the EX VAT price you need to divided £50 by 1.2 and then * 0.2. £50/1.2 = 41.67 * 20% =£8.33  VAT due. Therefore £41.67 revenue plus £8.33 VAT.

When should UK dropshippers register for VAT

There is some confusion on whether there is a VAT threshold or not. From our reading there is a £85,000 threshold for UK businesses whose goods orginate overseas. This is the paragraph from the guidance.

You will also need to register if you sell goods directly (without using an OMP to facilitate your sales) to UK consumers and the goods are outside the UK at the point of sale. From 1 January 2021 the distance selling threshold for sales from EU member states will no longer apply. There is no VAT registration threshold for businesses established outside the UK so you will be required to register for VAT on any value of sales where you become liable for VAT under these new measures.

We may get more clarity on this at a later date but I believe we can assume that UK businesses have a £85,000 threshold whereas business outside the UK do not have a threshold.

Examples of how dropshipping works from 1st January 2021

Outside EU and UK Suppliers sent to Uk customers.

  1. From 1st January you must collect VAT at the point of sale
  2. Purchases – cannot reclaim VAT from foreign suppliers

You will have to register on the 1st January 2021 if you have VATable turnover of over £85,000.

Outside EU and UK sent to EU customers

  1. No UK VAT due

From 1 July 2021, these rules are likely to come into place in the EU with a simplified one stop shop scheme. Therefore you will more than likely have to register then. Please watch this space.

IF you are in the UK you will need to register for this one stop shop scheme from a EU country. For UK companies we would suggest using Ireland as the website is in English.

Actions

These rules are approaching quickly and have caught a lot of people off guard. If you are a UK business selling goods from outside of Europe and with a turnover of £85,000 you need to register for VAT from the 1st January 2021.

This means you need to review your products and ensure that they remain profitable.

Register for VAT

Do you need help or advice about whether you need to register for VAT. We are specialist ecommerce accountants that deal with dropshipping businesses every day. Please get in touch and we can help you.

Ben Sztejka ACA

Ben Sztejka ACA

I am an ICAEW Chartered Accountant with one core belief, make accounting as pain free as possible and focus on adding value to businesses.

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