There are tax changes looming that could – and probably will – spell the end of low-value drop shipping. The low-value exemption of £15.00 before Import tax is applied will end on the 31st December. That’s going to make drop-shipping of low-value items unviable.
Low value and high turnover items are the backbones of many drop shipping businesses. Buy an item from China for a couple of pounds or so. Double or triple the price and by the time you’ve paid off your adverts, bank fees and web hosting you can bring in profits of 25% or more.
It works because the value of the item you sell is less than £15.00 and the customer doesn’t have to worry about paying import VAT or courier admin fee. And at £8.00 for admin charge with the Royal Mail, it can soon add up and make the item financially unaffordable.
I’m currently drop-shipping home decor items and making a reasonable nett profit of 25% or more after all expenses. The products retail at between £12.00 and £15.00 so in that nice sweet spot of getting as close to the limit as possible to maximise profits.
It’s one of the benefits of Brexit. The UK government has greater control of VAT rates etc. The Chancellor has decided that too much tax take is disappearing with under-declaring of goods when people buy direct from China. To stop that Risha Sunak is to remove that low-value allowance.
In my case, the impact will make my products just unaffordable. Take the case of a chair cover set that I currently retail at £12.00 with no import VAT due to the customer. The customer will purchase the item for £12.00 and then be required to pay the import VAT at 20% and Royal Mail admin fee of £8.00 – an additional £10.40.
This removal of allowance will basically shut my drop-business down – at least at the low-value limits. Instead, I’ll need to look at high-value drop-shipping where the customer isn’t going to be put off by the fact of paying import VAT and admin fee.
It means drop-shipping will have to change from meeting the needs of the mass market in the UK to one of becoming procurers of highly original and difficult items to find.
The Covid economic crisis is impacting many business sectors. With Rishi Sunak seeking ways of getting more tax income to pay off the substantial debt he has produced in the fight against the virus, drop-shipping is going to pay a heavy price as an industry.
With just a couple of months away from the date, details are still lacking as to how it will work – and whether it will apply to gift purchases as well as normal purchases.