UK Based dropshippers & ecommerce. 20% VAT?

[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]

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).

 

[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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[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.

 

[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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[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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[maniek00000]

when you set your items price when importing goods, you sum: item price, shipping, VAT and then you put your margins. This way your customers will pay VAT, not you

 

[Sanj Modha]

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

 

[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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[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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[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.

 

[ShadowX]

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

 

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[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.

 

[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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[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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[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]

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?

UK business that do under 82k£ a year in revenue don't have to charge VAT.

About your question, if you are shipping from outside the EU, it doesn't matter if you collected VAT or not, the customer will get taxed and in some countries (like Portugal), it's an hassle and they try to rob you in fees. For instance, a package valued at 300$, if sent via DHL, customer will have to pay nearly 90$ in customs handling, + VAT and duty.

Any business selling in volume >50$ products in the EU will have a fulfilment center inside the EU (and will pay VAT ofc).

 

[Dom117]

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

Thank you for the link!
Although I don't understand how this can be legal.
This way you can easily evade paying taxes in your home country? Or do you pay taxes when you transfer the money from your US account to your EU account?
I'm sure I'm missing something.

EDIT: Good read on Atlas http://flagtheory.com/stripe-atlas/

 

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[happybhoy]

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.

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.

Possibly using the Channel Islands?

 

[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

 

[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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[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

 

[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]

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

Interesting, but i'm concerned it's not as straightforward as doing just that. Perhaps it is?

I'd be worried about getting into any sort of troubles with any US authorities if making any mistakes.

Does anyone here from the UK have a US based company? Any comments on your experience would be appreciated.

 

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[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).

 

[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.

 

[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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[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 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.