With the rise of ecommerce platforms like Shopify, many aspiring entrepreneurs looked for ways to establish new Shopify stores through dropshipping.
The low cost of launching a dropshipping business makes it an attractive option―all you really need is a laptop and a good idea to market your product. There are no worries about renting a space or buying up stock because the supplier will take care of all that.
As always, there are some disadvantages to dropshipping, mainly the way it complicates taxes in the EU. How should you pay VAT if your business, supplier, and customers are all based in different countries? Learn the answer to this and more in this article...
Dropshipping is a type of sale where the seller doesn’t hold the products it sells in stock. Instead, the seller purchases stock as and when needed from a third party (a supplier) to fulfil orders.
This is different to the standard retail model because the seller doesn’t own the stock – they act as the middle man.
How it works in practice:
Dropshipping became a popular entry point to ecommerce during the pandemic, but new businesses need to familiarize themselves with any rules surrounding VAT to avoid running into trouble with their local tax authority.
In this article, we'll look at multiple cases and walk you through how to handle VAT in your situation.
It’s important to remember that VAT rules for dropshipping are different to those of the standard retail model. For example, we need to look at where the supplier is located as well as your Shopify store and customer.
To help you on your way, we set out below the VAT rules for dropshipping sales for the following transactions.
In this article we will cover:
- VAT on dropshipping within the same country (UK or EU)
- VAT on dropshipping within the EU
- Shopify store and supplier in one EU country, consumer in another EU country
- Shopify store owner, supplier and consumer in different EU countries
- Dropshipping to the EU with a supplier from outside of the EU
- VAT on dropshipping from the EU to consumer outside of the EU (incl. the UK)
- VAT on dropshipping from the UK to consumer outside of the UK (incl. the EU)
If your Shopify store, supplier, and consumer are all located in the same country (in the UK or EU), you need to charge your home country’s VAT rate at the point of sale, e.g., include the VAT within the selling price.
You will also be able to reclaim any input tax on purchases from your suppliers.
This only applies if your business is VAT registered—you should not charge VAT or reclaim input tax if your business is not VAT registered. This topic is further elaborated on in our VAT guide for Shopify stores in the EU.
As we’ve already mentioned, things can get a little complicated because member states have varying VAT rates. After you set up EU taxes in Shopify, follow this part of the guide to get VAT right for your dropshipping store.
When the supplier and the Shopify store are based in the EU, selling to consumers in another EU country
If your Shopify store and supplier are located in the European Union, and your customers outside your country are still within the EU, you must charge VAT at the rate of your customer's country. There is no selling threshold for this type of transaction—you must register for VAT in that country immediately.
If you are selling B2C, you can use the One-Stop-Shop (OSS) taxation scheme, which allows you to register for VAT in one EU member state and report all cross-border sales on that one EU VAT return. This topic is further elaborated on in our VAT guide for Shopify stores in the EU.
As the delivery of goods crosses national borders, this delivery is considered an intra-community shipment. This means that the purchase of goods from your supplier is tax-exempt. You cannot therefore reclaim any input tax on your purchases from the supplier.
Suppose your supplier is based in Germany, your Shopify store is located in France, and your customer is in Portugal.
Under such circumstances, VAT is charged at the rate of the customer's country, as before. However, unlike the model above, the reverse charge procedure is used when accounting for VAT on purchases from the supplier.
This means that the Shopify store owner has to pay VAT on the purchase of supplies, but instead of paying the supplier the VAT, they pay the VAT directly to the tax authorities. The Shopify store owner can then reclaim this back as input tax.
If the supplier or manufacturer of the products is not based in the EU, it is no longer just about VAT.
In many cases, the EU Shopify store owner does not pay VAT at all to the foreign consumer since the state follows a different VAT system—such as the UK and China.
However, the goods are imported into the EU, and, as a result, customers may have to pay customs fees.
It is therefore important to check the VAT and customer rates of the country in which your supplier is based.
If your Shopify store and supplier are located within the EU, but you are selling goods to a consumer outside of the EU, then your supply of goods will be zero-rated—0% VAT.
Note
Import tax may be payable by the consumer in their home country.
As the goods are moving outside of the EU, this is not regarded as an intra-community transfer. If your supplier is VAT registered, they will therefore charge VAT on purchases at the appropriate rate.
You reclaim all of the input VAT on purchases from your supplier attributable to the zero-rated supplies.
If your Shopify store and supplier are both in the UK, but you are selling goods to a consumer outside of the UK, then your supply of goods will be zero-rated—0% VAT.
Note
Import tax may be payable by the consumer in their home country.
You can reclaim all the input VAT on purchases from your supplier attributable to the zero-rated supplies.
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