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UK Based dropshippers & ecommerce. 20% VAT?

townhaus

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Imagine i want to partner with a US author and promote his ebook product, for a 40% share of revenue.

I tell him i will sell the ebook at $100 and give him $60 on every sale.

If i sell that ebook to a US / non-EU customer things are fine. I collect $100 and keep $40 profit.

I'm not even sure if it's possible or allowed to dynamically adjust the price so that for UK/EU customers, they'd pay $83.30 (instead of $100 like everyone else) + $16.70 (20% VAT).

Ofcourse, i could charge them $100 + $20 VAT and lose some sales.

Either way i'm responsible for collecting the VAT for the UK govt from my customers, so tax authorities will wan't to know which sales were attributed to EU/UK customers and will want 20% on the sale price of those.

Some people are saying that the business isn't viable if VAT is an issue, but that is dismissing the scope of the problem. It certainly can make the difference between a profit and a loss.

Theres a big difference between my $40 margins and $23.30 margins, especially once you consider that i'd have costs.

If i paid 3% transaction fees + it costs $20 in advertising to make a sale (realistic numbers), i'd be left with 0% rather than a 20% profit.

Imagine i reduce the product to $70. I'd be losing money ($58.3 + $11.7 VAT means i don't have enough to pay $60 to my supplier, even assuming zero costs).

For businesses models that would have <20% margin and rely on high turnover, it's impossible - even with 30-40% margins might not be a worthwhile venture.

As i'm aware, a US business can operate profitable and sell to EU customers in these conditions.

Now, if most of my market is outside the EU - which they actually would be in my case - then i don't really mind. I might be better off not selling to EU customers at all.
 
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townhaus

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tldr

I could have a profitable business model with (in my opinion, decent) 20% profit margins, but If i sold to an EU/UK market i'd need to keep turnover at below £83,000/yr

I'd be limited to making £16,600 profits (hardly worthwhile pursuing in my view).

It would be great if i could scale turnover to $1m and earn $200k/yr.

Perhaps it's as simple as switching a button to increase traffic, but as soon as you have to register VAT, my profit margin is gone.

Your $1m in turnover is making $0, instead of $200k, and 1% variation in costs could put you insolvent. (UK scenario)

But for a guy doing the same in the US or India, the business is still profitable.
 
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Eos

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@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?
 

Ultra Magnus

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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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townhaus

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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 :)

You dont have to give the VAT to anyone, it;s not the responsibility for a non-EU business to collect VAT for the EU. If a customer had bought from a competitor inside the EU, they would have charged VAT on top, and may use this proof to avoid being charged twice, or to claim against that if it happens.

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'.
 

Ultra Magnus

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Sorry, I just realised I f'd up the calculations. If you paid 60$, the actual 20% VAT was 10$ from a net of 50$ (50+10=60). So your balance would be -6,7$. But still.
 

townhaus

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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?

Sure i can always try and get a lower price from the supplier. Wouldn't i have done this already though?

My products are digital so theres room for negotiation. Luckily in digital products, there is no cost so large commissions are common e.g 40-60% or more.

Consider stacksocial.com (based in the US). Its like groupon but for software products rather than digital goods. They partner with suppliers to promote the products to their list, and take a cut.

Lets assume its 40%.

If i see a $100 product on stacksocial.com, i'd pay $100 and so does anyone else in the world. The supplier is expecting to get $60 out of this deal.

But say if i start a competitor to stacksocial, I have to either tell my supplier i'd like to pay him $50 sale, charge EU customers $120, or accept that my margin is not going to be $40, but $23.

Someone has to pay the UK tax man, whether it comes from the customer, me or the supplier. At the end of the day i would bear the costs so my profits would suffer.

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.

My suppliers of the ebooks are almost invariably US based (or droppshipper in similar examples) are outside the UK and i pay for services such as offshore freelancers, none of whom charges VAT that is deductable. I'm paying VAT on the total value but cannot subtract VAT from my costs (i wouldn't just be paying 20% on the margins)
 
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townhaus

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@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/
You can have our online store priced in $, and accept USD through paypal. You don't need to be based in the US to do that. People can pay him using their cards from anywhere.

No need for a foreign currency bank account either (if he wires dollars to his bank account, it would just get converted to his local currency).

Accountancy & bookkeeping might be more complex, though.

I'm based in the UK but most of my e-commerce ideas targeted to the US/global, so I'd price in USD.

I'm probably more used to paying for things in $ as i am in £ when i'm online. If i need hosting, software, freelancers etc.

I don't think a non-US business has to concern itself with sales tax at all.
 
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Ultra Magnus

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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.
 

townhaus

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Have you discussed any of this with an accountant?
....
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.

I had a discussion about it on the phone with HMRC which explained it that way.

We both agreed that if instead of my me processing the payment, if i was an affiliate & was paid a $40 commission on a $100 US sale, then there wouldn't be any VAT incurred.

Under this model, I wouldn't have any 'customers' and don't make any sales. I'd only have to pay corporation tax on the company profits.

I did try arguing that this isn't much different in principle. Couldn't i calculate the difference and call it a 'commission' marketing services & facilitating the transaction was my argument (rather than treating it like i'm shipping a product from the US).

This affiliate model wouldn't work for me because i want to be able to have more control over the process.

e.g i get paid immediately rather than 30 days later, customers could add multiple items added to cart, no redirects off the website, i know my buyers email & they can becomes part of my list, tracking and analytics data is transparent, i can offer an affiliate program etc
 
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townhaus

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I had more of a look at what others are doing - EU based sites that sell digital products and accept stripe/paypal etc.

They appear to add VAT on and charge more to EU customers. However theres nothing stopping me from claiming i'm from somewhere else (i did this on envato last week).

If I wan't to claim from Khazakhstan, despite paying with my UK paypal or bank card, there isn't much to stop me doing that.

So should the responsibility be on the e-commerce store or the consumer?

What if HMRC thought that i've had so few EU customers, i must have been letting them away with using false billing addresses, then claim that the business should have to pay non collected VAT after the fact.

Do they want me to back up sales with IPs?

Can anyone with digital products / ecommerce stores comment on this
 

Sanj Modha

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@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.
 

Eos

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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.

Thanks for this!

I was referring just to drop shipping at the moment. So is your Shopify store linked to your UK registered company, which you've mentioned before, and a UK bank account.
But you display the price to customers in the US in dollars and Shopify handles the taxes there, cool.
And you dropship from the US to the US customers but did you start out with doing it from China? Just trying to get my head around the best infrastructure for setting this up efficiently and legally.

Rep transferred :)
 
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Walter Hay

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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
 

biophase

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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.
 

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