Selling online through your own website or on an ecommerce platform can be a great way to launch a business, or just as side hustle to earn some extra cash. Dropshipping is just one of the ways you can get started. We explain what tax implications you might need to think about, and how dropshipping works.

What is dropshipping?

Dropshipping is a type of retail fulfilment method, which means it’s a process for supplying a customer with the items they purchase.

• A customer visits a website and buys an item.
• The seller doesn’t actually keep items in stock themselves. Instead, the seller passes the order and customer delivery details on to a manufacturer or supplier (this is the “dropshipping supplier”).
• The seller pays the dropshipping supplier their fee, and keeps the leftovers from the sale price.
• The dropshipping supplier prepares the order for delivery and ships it out, fulfilling the order.

Dropshipping stores might sell a range of products from different brands, and a variety of dropshipping suppliers will fulfil the orders. You can set up a product listing on your own website, or create an online store using a sales platform like Etsy or Amazon.

What are the pros and cons of dropshipping?

Like everything in the world of business, dropshipping has good and bad points, so we’ll look at examples from both sides.

The good stuff about dropshipping

• It’s easy and cheap to get started; you basically only need a phone and a laptop. You won’t need to buy stock up-front, or worry about storage costs once it arrives.
• You can sell anything you like – the world is your oyster!
• The manufacturer and supplier can use a network of sellers, which widens their market reach. The seller might have a better understanding of a demographic, or local knowledge which will help them make sales.

Things to consider before you get stuck in

• If your dropshipping supplier messes up, you’ll be the one facing the wrath of your customers. Regardless of who causes the problem, you’re the ‘face’ of the sale, and therefore the one dealing with the fallout.
• It’s an incredibly competitive industry and profit margins can be very low. This can make unforeseen or incremental rises in costs much harder to swallow. It might also mean that multiple sellers are trying to make sales with the same products! Hopefully, the brand will put restrictions in place to avoid flooding the marketplace, but this isn’t always the case.
• Suppliers and manufacturers might also insist on particular requirements, such as the way that product listings are worded, or restrictions on what else you can offer through your store.

What does dropshipping mean for tax?

Running a dropshipping operation, like most business activities, has tax implications. You might need to consider VAT on your sales, income tax and Self Assessment on the money you make for yourself, and Corporation Tax if you operate as a limited company.

Watch our video about paying yourself from your business, and how the legal structure might affect this.
 

Upcoming VAT changes affecting dropshippers

A major reform of EU VAT for ecommerce businesses will affect UK dropshippers who sell to consumers in EU countries.
 

Distance selling and the OSS

Amongst the changes are new thresholds for distance selling, which affects the way businesses report the VAT on sales they make across borders. This ties in with the introduction of a One-Stop-Shop (OSS). There are different processes for this depending on whether your business is in Great Britain (England, Wales, or Scotland), or in Northern Ireland.
 

The tax exemption for low-value items

Known as the Low-Value Consignment Relief (LVCR), customers could import goods into the EU for their own personal use, and not pay import tax on consignments worth €22 or less. This no longer applies.

From 1st July 2021 it’s the seller’s responsibility to collect the VAT at the Point-of-Sale (POS) if the goods will be imported into the EU by a consumer, and are worth less than €150. The VAT will be reported using the new Import One-Stop-Shop (IOSS) – and yes, the world of tax does involve lots of acronyms.

The Import One-Stop-Shop (IOSS)

The aim is to make VAT reporting easier, so the seller or the ‘deemed supplier marketplace’ will register for IOSS in just one EU country. They’ll use that registration to report the VAT they collect on items which are less than €150 and being imported by an EU consumer.
 

Do I have to register for the IOSS?

The big consideration for dropshippers is whether or not you’re responsible for collecting the VAT. As of 1st July 2021, this falls to online marketplaces which ‘facilitate’ a sale. The one who facilitates the sale must collect the VAT, and if they collect it, it’s their job to report it.

Don’t forget to let your customers know!

The price you show on your product listing might increase dramatically once your customer gets to the checkout and any extra import VAT and duties get layered on. If you have regular customers, then you might want to pop them a message to let them know about the changes!

Learn more about our accountancy services. Talk to one of the team by calling 020 3355 4047, or request a call back.

About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible.