Boom time for UK drop shippers
Get ready to release your potential earnings
I will admit that my last blog post about dropshipping in the UK was, probably, a little negative. This is mainly because I got information about the VAT changes from a third-party source. But if you want the actual information it’s always best to go to the source. After reading the guide on the new VAT regulations in the UK from 1st January, I’m positively upbeat and looking forward to it. It’s going to be a boom time for UK dropshipping.
Dropshipping and VAT
Currently, in the UK, if you are dropshipping Import VAT is a noose around your neck that holds you back. Let’s look at the old way before looking ahead to the new VAT environment.
At the moment Import VAT is charged on all orders that have a declared value of £15.00. Below £15.0o0 and it’s covered by the low-value allowance where no Import VAT is payable. But it’s not just the 20% Import VAT that is paid but also the courier admin fee and this can range from £3.50 with DPD up to £8.00 with Royal Mail.
Apart from the extra cost, the real killer is that this is paid for by your customers separately before they can get delivery. This is a really bad user experience. No customer likes to pay for their goods and then be told later they have to pay again to get them delivered. And having a big notification on your website saying customers may get charged again does not really help with sales conversion.
Low Value Import VAT Allowance
So, currently, there are two ways around this. Concentrate on low-value items where the value is below £15.00. You then make your money through quantity sales. This is the method I use. I retail items under £15.00 with free shipping and after all expenses, I average profits of around 25-30% which is a decent margin for retail.
The second way is illegal tax evasion. You find suppliers who are happy to under-declare value to bring it under the £15.00 allowance. This is how you get smartphones worth hundreds of pounds being imported VAT-free. The supplier is happy to mark them as £10 MP3 players. It is, fortunately, getting much more difficult to find suppliers who are willing to do this. With the likes of eBay, Wish, and Amazon, no Chinese supplier wants to be put on a Customs and Excise blacklist and have all their stock seized by the VAT department.
So if you are operating legally you have this £15.00 mill-stone strung around your neck. That is about to change.
Abolition of Import VAT in 2021
On the 1st of January 2021, Import VAT no longer exists. The responsibility of paying VAT on goods sold in the UK and delivered from outside the UK no longer rests on the buyer but on the seller. As a drop-shipper, you now need to charge normal VAT to your customers. There is no low-value allowance, VAT must be charged on all items coming into the country.
As a drop-shipper, you need to register for VAT so you can receive a VAT number and charge your customer VAT and pay that to the Customs and Excise Department.
The VAT turnover threshold does not apply if you are a drop-shipper. Ignore the £85,000 a year turnover threshold if you are an importer. Even if you only turnover £100 a year as a drop shipper you need to register to charge VAT on imported goods.
The benefit of VAT Changes in 2021 to Drop Shippers
This is a real boost for drop shippers as it means your customers are not going to be impacted by the 2nd bill for import VAT and fees. You charge the full amount to the customer and you pay the VAT either monthly or quarterly.
It means that the mill-stone of trying to keep within the £15 low-value allowance has gone. If you wanted to drop-ship those popular e-scooters but decided against it because of the bad user experience of buyers dealing with import VAT – well no more. You can go ahead and sell those £300 or £400 e-scooters and e-bikes confident that the buyer is not going to refuse the delivery because they don’t want to pay Import VAT. Finally, the price you charge is the price that the customer pays, no nasty surprises.
How do New VAT Regulations Work for Dropshipping?
All drop-shippers need to register for VAT. Then when they make a sale to a customer the drop shipper must issue the customer with a VAT receipt.
This VAT receipt must show the dropshipper details and VAT number. It also needs to show, separately, the VAT paid on the order. This needs to be provided to the customer at sale. If you are using Woocommerce there are plugins that will generate pdf receipts and attach themselves to the confirmation email sent by Woocommerce. Just set up Woocommerce to display VAT separately. It’s that simple.
To prevent fraud and potential VAT evasion the Customs and Excise will be using intelligence, big data, and spot checks on all parcels coming into the country. If they have doubts about the parcel then they will contact your customer who must provide the VAT receipt to demonstrate that VAT has been paid.
You need to make it clear in your confirmation instructions for customers to keep the VAT receipt in case either Customs and Excise or Border Patrol contact them about their purchase.
A profitable 2021 thanks to VAT changes
Thanks to the changes there is a really great opportunity to expand drop-shipping into higher value – and higher profit – items. As online sales continue to soar, 2021 could be a very profitable year for UK based drop shippers.