UK Based dropshippers & ecommerce. 20% VAT?

[Walter Hay]

I don't see what all the fuss is about here.

The nonsense talk of offshore companies and loopholes, to avoid paying vat just adds additional confusion and shouldn't even come into it.

@townhaus If you're planning on selling physical products within the UK then register your company or yourself as self employed.

Do not register for VAT straight away.

Once you approach and know you will exceed the VAT threshold, which is currently set at £82,000 turnover per year then register for VAT.

You can either price your goods from the start with VAT in mind, so if/when you do register for VAT your margins are still good.

Or once you register for VAT, increase your prices to counter the loss in profit.

It really is that simple.

There is still another issue to consider. When running my importing business in 4 countries I had to comply with taxation and other laws in each of those countries. I never quibbled about paying whatever taxes were charged for the simple reason that by careful sourcing I made sure I and my franchisees bought at prices that gave sufficient margin to cover all costs and leave a big profit.

Don't worry too much about the taxes and other costs, although you need to factor them in, instead concentrate on buying at the right price.

Profits begin with buying and if you can't buy your chosen product at the right price, look for something else, or use different sourcing methods.

Walter

 

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[mrarcher]

You only have to vat register if you turn over somewhere in the region of £82000. Then when you are registered 20% of turnover has to be paid to vat. If you aren't turning over that much I wouldn't register as you don't have to.

 

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[Phones]

Let me get this clear. If my company is registered in outside of EU and I sell to countries within the EU, then I do not have to charge them VAT? Please clear this up for people who are not from EU but want to sell to EU.

Thank you.

As long as you are shipping from outside the EU, the item will/should be taxed at the border (but for small packages, it mostly isn't). So for packages valued at less than 50$, it's a competitive advantage to be incorporated and ship from outside the EU because it probably won't get taxed (and you can invoice it as an export ex-VAT, while an EU business can't because the customer is inside the EU)

There are companies like Gearbest and Bangood doing high volume fraud, they found a way to put high value packages inside the EU without passing customs (idk how they do it, It enters via UK and then redirected to other countries). What I do know is that I can order a 300$ tablet from Gearbest and not pay VAT, will be here in a week. If I go to the store on the corner the owner will need to charge 300$+23%VAT.

 

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[Walter Hay]

Doubt it. To me it's one of two scenarios. They are either using a bonded warehouse were goods are being put into circulation in a fraudulent way, or they are properly importing it then scheming to claim back the VAT (probably invoicing the goods as if they were exported somewhere else). HMRC must be blind...

Curious to know what @Walter Hay thinks of this

Claiming tax exemption on the import on the basis of re-export is legitimate, but not if the re-export is to another EU country. Getting items out of a bonded warehouse illegally is almost impossible.

The most likely scenario is that they are exporting the products to themselves or more likely to another company that has ownership (on paper) that doesn't identify it as associated with the the ones wanting to evade tax. This is commonly known as transfer pricing and is a common practice among huge multinationals. It can be done between associated companies provided the price is not ridiculously low.

What it achieves is payment of VAT at such a low level that they can happily wear that cost.

Walter

 

[biophase]

I only want to comment on this common practice. It is illegal to make a false declaration for Customs clearance. The importer is the one responsible for every declaration for goods they import, so if Customs decide that the declaration is false, the importer is liable for any penalties.

The supplier will declare false values or state that the product is a gift, because they have no liability. As a result, if lying about the value gets them a sale they''ll do it.

If a person is dropshipping and allowing their suppliers to make false declarations, they are potentially dropping their customers in it. They won't need many customers getting penalized before their reputation begins to stink.

Alternatively, if Customs realize that they are dropshipping, they will investigate, do an audit, and could penalize the person making those sales for every sale they have made. The dropship supplier gets off scot free.

Walter

People in the UK and Europe ask us to do this all the time. We just tell them that our shipping is automated and the customs forms are generated based on the price that they paid. People always trying to get out of VAT.

BTW, I had a friend who got busted for smuggling because he declared an amount too low. Sort of extreme, but if you think about it, that's what it really is. You are trying to get something into the country without really declaring it. So, nope, we don't do any of that stuff.

Edit: I should mention that nothing happened to him here because they are in another country. But he pretty much can't ship stuff into that country anymore.

 

[GlobalWealth]

@GlobalWealth how so?

In europe you still have to collect VAT using the VATMOSS system. This is only true for countries within the european union. You don't collect VAT for customers outside of the EU.

I assume your "how so" was for digital products, correct?

If not let me know.

For digital products it may also depend on your platform.

If you sell ebooks on kindle then you just use a US company (we advise and set up clients with a WY LLC) as the owner of the seller account.

Then your offshore company would own the IP and lease the IP to the WY LLC.

The buyer would not pay VAT even if he lives in the EU as he would be buying on amazon dot com, not dot de, etc.


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[Phones]

For physical products it's impossible. Even if you sell from an offshore company and don't collect VAT the buyer will need to pay VAT on import.

If it is under a certain customs value threshold it will get past customs without collecting VAT.

Individuals who buy goods over the internet or by mail order from outside the EU will now only be charged customs duty if the value of the package is above £135, and the actual amount of duty due is over £9.

Although the duty limits have changed, import VAT is still due on packages valued at over £18. However, if a package is received as a ‘gift’, VAT will only now be charged if its value exceeds £40.​

They will get hit with the VAT by the shipper or customs. If you collect VAT then they won't get hit.

From what I've seen, even if you collect VAT, the customer will still get hit with VAT when the package enters from a non-EU country.
So as an UK drop-shipper, properly invoicing everything he sells, will be at disadvantage vs a non-EU drop shipper.

I asked my accountant if there is anything in PT regulation that makes it possible to invoice EX-VAT when shipping from a non-EU location. He said there isn't, as long as the customer is in the EU (non-business), an EU company will always have to charge VAT no matter where it is shipped from.

The best solution is to stay under the VAT registration threshold (which I think is really high for the UK) , and after that look into offshore incorporation.

 

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[SparksCW]

If you have to avoid VAT to make a margin on your product then it's not a viable business plan.

You don't need to register for VAT straight away, but might as well start as you mean to go on otherwise what happens when you hit VAT threshold and then you stop making money? Seen this a few times before.

Find a different product, niche or create your own product.

 

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[Sanj Modha]

Don't sell in the EU. I'm UK registered and sell outside EU only. Simples.

 

[MrT]

As others have already mentioned, don't concern yourself with VAT registration until you have a turnover which exceeds £82,000 per year.

I run an ecommerce business in the UK and I purposely keep my turnover below the threshold. This is my personal choice and for the time being, it's what works for me and my business.

 

[eTox]

Let me get this clear. If my company is registered in outside of EU and I sell to countries within the EU, then I do not have to charge them VAT? Please clear this up for people who are not from EU but want to sell to EU.

Thank you.

 

[Phones]

Possibly using the Channel Islands?

Doubt it. To me it's one of two scenarios. They are either using a bonded warehouse were goods are being put into circulation in a fraudulent way, or they are properly importing it then scheming to claim back the VAT (probably invoicing the goods as if they were exported somewhere else). HMRC must be blind...

Curious to know what @Walter Hay thinks of this

 

[MrT]

I don't see what all the fuss is about here.

The nonsense talk of offshore companies and loopholes, to avoid paying vat just adds additional confusion and shouldn't even come into it.

@townhaus If you're planning on selling physical products within the UK then register your company or yourself as self employed.

Do not register for VAT straight away.

Once you approach and know you will exceed the VAT threshold, which is currently set at £82,000 turnover per year then register for VAT.

You can either price your goods from the start with VAT in mind, so if/when you do register for VAT your margins are still good.

Or once you register for VAT, increase your prices to counter the loss in profit.

It really is that simple.

 

[GlobalWealth]

Yes this is correct (as far as i understand).

The director of the company should be outside the EU though also.

I'm a UK resident, if I simply create a BVI company and claim that i;m outside the EU, the UK might still deem the company to be operated and controlled by a UK director/management, thus it should have been paying VAT and i could be charged anyway.

@GlobalWealth , do i understand that correctly? ^^

Non-EU residents would be fine having an non-EU company & not to charge VAT for EU based customers. e.g US citizen with US company (or indian, chinese...whatever, don't need to worry about VAT).

If you are UK resident with an offshore company and you ate director of that company the UK can deem that income UK based because of the concept "mind and management".

I have a few UK clients with offshore companies but for them we must provide company management services (similar to nominee services but a bit more involved) in order to legally prove that "mind and management" is not in the UK.

Does that make sense?



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[Ultra Magnus]

Some people are saying that the business isn't viable if VAT is an issue, but that is dismissing the scope of the problem.

I think you might be overstating the problem - almost all UK businesses do pay VAT, and they somehow manage to turn a profit. It might not be worthwhile pursuing a business venture in which paying the same taxes everybody else does loses you money. As Walter Hay pointed out, the trick is to find sources that do allow you to earn your profits. It might be that the supplier's deal isn't good enough - maybe you have room for negotiations?

Ofcourse, i could charge them $100 + $20 VAT

Which is what people actually do. As I wrote above, the VAT is for the customer. After your fiscal term is over you get VAT returns for ALL the items and services you bought for your business that you have an invoice for. Then you substract this amount from the VAT you paid during sales and that's your actual balance. So the 20% is actually 20% from all your sales minus 20% from all the goods and services you purchased that count as your operating costs. That's the actual balance.

This is what I mean when I say that VAT is paid by the customer - businesses get returns for their costs. In your example, if you paid 60$ for the product in the UK, then 12$ of that sum (0,2*60) is VAT. So after you sell the ebook for 100$ and pay 16,7$ VAT ((83,3*0,2) + 83,3 = 100), your actual VAT balance is -4,7$ (16,7-12). This is discounting all the other goods and services you might have paid for, such as hosting or marketing, 20% of which is also VAT and can be deducted if you have an invoice. While companies are offered net prices, they still pay gross and get a refund later on.

Then when you calculate the profit you substract the 20% corporation tax that you will pay at the end of the fiscal term. And that's the actual profit.

In the US, if someone pays 8% sales tax from each transaction, they might pay as much as 38% from the profits at the end of the fiscal year. Some corporations are taxed twice - once for the legal entity, and a second time for the owner as an individual.

I'm sorry if you already know all of this, but it seems like you're treating VAT in the same way as income tax, which it isn't. Here's a government resource about it: https://www.gov.uk/vat-returns/overview

 

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[Walter Hay]

Many people from the EU are still going to buy a product from outside the EU and pay 20% less and hope that they don't get charged later. A lot of the time they will get away with it. I'm pretty sure i've done this and what about all the packages from China labelled 'gift'.

I only want to comment on this common practice. It is illegal to make a false declaration for Customs clearance. The importer is the one responsible for every declaration for goods they import, so if Customs decide that the declaration is false, the importer is liable for any penalties.

The supplier will declare false values or state that the product is a gift, because they have no liability. As a result, if lying about the value gets them a sale they''ll do it.

If a person is dropshipping and allowing their suppliers to make false declarations, they are potentially dropping their customers in it. They won't need many customers getting penalized before their reputation begins to stink.

Alternatively, if Customs realize that they are dropshipping, they will investigate, do an audit, and could penalize the person making those sales for every sale they have made. The dropship supplier gets off scot free.

Walter

 

[townhaus]

If you are a UK based company, you need to charge 20% VAT tax, meaning that even with a 20% markup, you'd be at a loss after transaction fees.

It seems that i'd be uncompetitive against US or other companies that don't have to charge this to the customer (or to pay it out of their own pocket, which i'd be doing).

I also realise this is a problem with another business where i'd be promoting and collecting payment for a third-party's ebook. I would have to pay 20% VAT - which is a hefty chunk out of any commission (30-50% typically).

Is there a way around this (offshore companies etc)?

 

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[GlobalWealth]

For physical products it's impossible. Even if you sell from an offshore company and don't collect VAT the buyer will need to pay VAT on import.

They will get hit with the VAT by the shipper or customs. If you collect VAT then they won't get hit.

If you buy on amazon dot com but ship to Germany, you will pay the VAT upon receipt of the product. So even though the buyer may see a lower fee he will pay VAT anyway as a surprise...and usually not a happily expected surprise.

Digital products are a different story though.

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[GlobalWealth]

If it is under a certain customs value threshold it will get past customs without collecting VAT.

Individuals who buy goods over the internet or by mail order from outside the EU will now only be charged customs duty if the value of the package is above £135, and the actual amount of duty due is over £9.

Although the duty limits have changed, import VAT is still due on packages valued at over £18. However, if a package is received as a ‘gift’, VAT will only now be charged if its value exceeds £40.​

From what I've seen, even if you collect VAT, the customer will still get hit with VAT when the package enters from a non-EU country.
So as an UK drop-shipper, properly invoicing everything he sells, will be at disadvantage vs a non-EU drop shipper.

I asked my accountant if there is anything in PT regulation that makes it possible to invoice EX-VAT when shipping from a non-EU location. He said there isn't, as long as the customer is in the EU (non-business), an EU company will always have to charge VAT no matter where it is shipped from.

The best solution is to stay under the VAT registration threshold (which I think is really high for the UK) , and after that look into offshore incorporation.

I was assuming the OP was over the threshold.

Thus my point is to arbitrage geography for company registration.

I would not normally advise clients use an EU company unless it is necessary for the business model.

In that case we do SLP

If it is under a certain customs value threshold it will get past customs without collecting VAT.

Individuals who buy goods over the internet or by mail order from outside the EU will now only be charged customs duty if the value of the package is above £135, and the actual amount of duty due is over £9.

Although the duty limits have changed, import VAT is still due on packages valued at over £18. However, if a package is received as a ‘gift’, VAT will only now be charged if its value exceeds £40.​

From what I've seen, even if you collect VAT, the customer will still get hit with VAT when the package enters from a non-EU country.
So as an UK drop-shipper, properly invoicing everything he sells, will be at disadvantage vs a non-EU drop shipper.

I asked my accountant if there is anything in PT regulation that makes it possible to invoice EX-VAT when shipping from a non-EU location. He said there isn't, as long as the customer is in the EU (non-business), an EU company will always have to charge VAT no matter where it is shipped from.

The best solution is to stay under the VAT registration threshold (which I think is really high for the UK) , and after that look into offshore incorporation.

I was assuming the OP was over the threshold.

Thus my point is to arbitrage geography for company registration.

I would not normally advise clients use an EU company unless it is necessary for the business model.

In that case we do SLP'S with an offshore owner to avoid income tax. But not VAT.

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[ShadowX]

You can get a US company and bank account without visiting America using this: Stripe.com/atlas

 

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[GlobalWealth]

Let me get this clear. If my company is registered in outside of EU and I sell to countries within the EU, then I do not have to charge them VAT? Please clear this up for people who are not from EU but want to sell to EU.

Thank you.

If you sell physical products you may have issues. Digital products are no problem.

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[eTox]

As long as you are shipping from outside the EU, the item will/should be taxed at the border (but for small packages, it mostly isn't). So for packages valued at less than 50$, it's a competitive advantage to be incorporated and ship from outside the EU (as you can invoice it as an export ex-VAT, while an EU business can't because the customer is inside the EU)

There are companies like Gearbest and Bangood doing high volume fraud, they found a way to put high value packages inside the EU without passing customs (idk how they do it, It enters via UK and then redirected to other countries). What I do know is that I can order a 300$ tablet from Gearbest and not pay VAT, will be here in a week. If I go to the store on the corner the owner will need to charge 300$+23%VAT.

What about the scenario where it's above 50$. Then if I don't collect VAT for them, the customer pays it at their door. But if I collect it, who do I give VAT to and what is the talk about the 82000 threshold?

Thank you @Phones for a clear explanation

 

[Phones]

Claiming tax exemption on the import on the basis of re-export is legitimate, but not if the re-export is to another EU country. Getting items out of a bonded warehouse illegally is almost impossible.

The most likely scenario is that they are exporting the products to themselves or more likely to another company that has ownership (on paper) that doesn't identify it as associated with the the ones wanting to evade tax. This is commonly known as transfer pricing and is a common practice among huge multinationals. It can be done between associated companies provided the price is not ridiculously low.

What it achieves is payment of VAT at such a low level that they can happily wear that cost.

Walter

That sort of what I meant by "invoicing the goods as if they were exported somewhere else". The thing is, they never issue a VAT invoice to the customer, so the company that buys it (the one that buys the goods at a low value) is either "stockpiling" shadow inventory in the UK (because it was already sold), or they are claiming the goods were sent back/exported to a non-EU country.

Eitherway, I don't see any possible loophole here that doesn't enter completely illegal territory.

 

[townhaus]

Let me get this clear. If my company is registered in outside of EU and I sell to countries within the EU, then I do not have to charge them VAT? Please clear this up for people who are not from EU but want to sell to EU.

Thank you.

Yes this is correct (as far as i understand).

The director of the company should be outside the EU though also.

I'm a UK resident, if I simply create a BVI company and claim that i;m outside the EU, the UK might still deem the company to be operated and controlled by a UK director/management, thus it should have been paying VAT and i could be charged anyway.

@GlobalWealth , do i understand that correctly? ^^

Non-EU residents would be fine having an non-EU company & not to charge VAT for EU based customers. e.g US citizen with US company (or indian, chinese...whatever, don't need to worry about VAT).

The customer is responsible with the issue of proving whether or non theyv'e already paid VAT, if they need to claim that to customs (or something like that - i can't remember the last time I imported a product).

 

[Ultra Magnus]

Some great replies in this thread!

@townhaus VAT is intended as a tax paid by the customer, not you. You can't easily bypass it because if you're selling directly to customers they're supposed to give some of the money to their government. Within the EU if you sell to other countries then until you reach a certain limit VAT (different for each member state) is paid in your country. After crossing that threshold the country whose customers are paying VAT to your government require that you register there and pay them. Does that clear things up a little?

The answer to your question is that you shouldn't think of this in terms of a tax that you're paying. Your market strategy cannot be based on having the cheapest price if you're not a multimillion $ business. Why? Because you will be undercut, and you can't win at that game without having sources that allow you to charge little. OTOH, having a price that's second- or third- cheapest is not attractive to any customer (what's the draw there? why not go to the cheapest, or get it at a higher price from a trusted vendor? It makes no sense). It's a race to the bottom and if you're not Walmart you shouldn't be participating.

Also, it's not the case that US companies don't have a form of VAT, they do - it's called sales tax. Look it up here: https://en.wikipedia.org/wiki/Sales_tax. In addition, the income tax brackets for US companies might be higher to compensate for this (iirc it's ~38% vs a flat 19% where I live). While some taxes are lower in the US, it's not the case that US businesses have some sort of unfair advantage over EU companies due to VAT. It's not as clear cut as you seem to believe.

 

[Ultra Magnus]

Have you discussed any of this with an accountant?

If what you write is true then this clearly isn't the best business venue where you live. Consider, however, that the tax structure of the revenue of companies such as stacksocial.com is probably inordinately more complicated than you indicate. I can't elaborate on it because I'm unfamiliar with US tax laws, but if you're paying something it's safe to assume they also pay something in the way of corporate income tax and dividends tax.

Also, a US company that sells more than X$ of product in the UK would probably be obligated by law to register in the UK and pay VAT there. I'm unwilling to believe that the government would support a law that offers unfair advantages to foreign competitors. International trade is governed by separate policies which you should check out before embarking on your business journey.

I recommend consulting the issue with an experienced accountant if you're serious about this idea. At some point you have to pay an expert or read a lot of boring regulations if you want to be sufficiently informed on the ins and outs of your venture.

 

[Sanj Modha]

@townhaus

You're probably overthinking this. I've been questioning a lot about VAT and sales tax for selling to the US as well but I think it comes down to this as others have mentioned:

Find a product which will give you whatever margin you deem worthwhile AFTER factoring in the costs of VAT.
Yes, if you want to cap out a business at £83,000 a year then feel free to find product(s) which you won't charge your customers VAT on and then you can, in theory, offer your products for less than your competitors who have scaled to business above £83,000 and has to charge a higher price / take a smaller margin, to compensate for collecting the VAT.
Otherwise factor it in from the start like other sensible sellers will have or go with a product with a better margin.

Thanks for the stripe link @ShadowX will read up on that!

@Sanj Modha How do you manage with selling outside of the EU?
The US is interesting in particular of course. Do you have a USD denominated bank account? Collect sales taxes?
There seems to be a grey area around the sales tax issues, from what I've read if you were shipping the product to america and having it shipped out from your own warehouse or FBA etc. it would raise a liability for sales tax based on:
http://www.salestaxsupport.com/blog...gn-sellers-should-know-about-u.s-state-taxes/


But I'm not sure with dropshipping?

Could you chime in?

I work with suppliers/vendors in the US so that takes care of most of my problems. I also use Shopify who collect sales taxes at the point of purchase based on the customer's state.

If you're shipping products into the US then it's another ball game. Read up on Amazon FBA blogs. There's lots of useful information within that community.

 

[GlobalWealth]

What kind of product?

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[townhaus]

I was thinking about dropshipping womens clothes from Aliexpress, using Wordpress (woocommerce) store & paypal.

I understand that I would bypass the VAT issue if i was an affiliate as I would just be collecting commissions, but this doesn't suit my business model.

Unfortunately when i'm collecting the payments directly from the customer i have to collect 20% VAT.

For illustration, the issue appears to be the same for selling ebooks via an online marketplace, where I'd pay (typically) a US product creator. e.g i'd collect $100 paypal payment for selling the ebook on my store, and pay say $60 to the creator.

It would be nice to keep the entire $40 as profit (VAT is charged on the selling price & would eat a lot of the margin. Nobody cares that you have merchant fees, marketing & other costs to deal with also).

 

[pastemaker]

For physical products it's impossible. Even if you sell from an offshore company and don't collect VAT the buyer will need to pay VAT on import.

They will get hit with the VAT by the shipper or customs. If you collect VAT then they won't get hit.

If you buy on amazon dot com but ship to Germany, you will pay the VAT upon receipt of the product. So even though the buyer may see a lower fee he will pay VAT anyway as a surprise...and usually not a happily expected surprise.

Digital products are a different story though.

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@GlobalWealth how so?

In europe you still have to collect VAT using the VATMOSS system. This is only true for countries within the european union. You don't collect VAT for customers outside of the EU.