Dropshipping is a concept that has been growing in popularity in recent years. Our guide outlines what needs to be considered from a VAT, tax and company structure perspective.
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What is dropshipping?
Dropshipping is an order fulfilment method that does not require a business to keep products in stock. Instead, the store sells the product, and passes on the sales order to a third-party supplier, who then ships the order to the customer.
Dropshipping has grown in popularity over the last number of years as there is no stock holding requirement and limited up-front investment. It is possible for individuals to set up an eCommerce website, advertise to their market and sell directly via an arrangement with a third-party supplier.
Dropshipping and VAT
One area that needs to be considered prior to commencing a dropshipping business is Value Added Tax (VAT). VAT is a tax that is applied to good sold within The European Union.
The key determination of VAT application and goods are based on where they are supplied from (S19 VATCA 2010).
Dropshipping from outside EU into EU
If you are dropshipping from outside of the EU into the EU, then the place of supply is considered to be where the goods are shipped from. In this case the place of supply is outside of the EU, which means VAT is not due on the sale of the goods.
While no VAT is due on the sale, there will be VAT levied on the goods when entering the EU. This VAT is applied on the total cost of the goods + shipping and custom duty and is dependent on the rate within the country of entry and whether the value is greater than a prescribed value.
Who pays for this import VAT is dependent on the official Importer of Record (IOR) of a specific order;
- If the IOR is your business, you are required to pay the VAT prior to the release of goods;
- If the IOR is the end customer, they are required to pay the VAT prior to the release of the goods.
If the individual is to be liable for VAT, it is best practice to notify them of this up front in order to avoid returns and reputational damage.
A VAT registered business is entitled to claim a deduction of import VAT paid, provide that the goods will be used for the purposes of taxable activities. In order to evidence that import VAT is paid and support recovery of the VAT in the trader’s VAT return, the trader should retain a copy of the Single Administrative Document (SAD) or customs clearance document.
Dropshipping from within EU
If a business is dropshipping within the EU, or alternatively, taking delivery of a product somewhere within the EU and dispatching it to an end customer, the VAT treatment needs more consideration.
As a starting point, VAT should be based on the country where the goods are being dispatched. For example, if goods are being sold from Ireland to a UK private individual, Irish VAT should apply.
However, if you are selling via a catalogue or Ecommerce website, the transaction falls into Distance Sales regulation (S30 VATCA 2010). As above, VAT is applied based on where the goods are dispatched unless sales to that particular EU country have exceeded a specific threshold in each EU country (This is generally either €100,000 or €35,000 depending on each country).
If they have exceeded the threshold set out for that country, a business is required to register for VAT in that country and charge local VAT rates.
Other Considerations & Dropshipping
There are various other items to be considered prior to starting a dropshipping business.
These include the following:
- Operate as a sole trader or as a limited company
We generally suggest operating as a limited company as it significantly reduces an individual’s personal liability. This will safeguard an individual’s personal assets. MyTax can form a LTD for as little as €99 here.
- Insurance considerations
If you are operating in certain markets e.g. The US, you may consider purchasing product liability insurance. This will again act as a safeguard against any legal issues that may arise.
- Income Tax / Corporation Tax
If you are earning non-PAYE income, you will most likely be liable to Income Tax in Ireland. If you form a company, your company will be liable to Corporation Tax in Ireland. This may vary on circumstances but will require an Income Tax return or CT Return on an annual basis. We advise discussing these implications with your accountant or get in touch with ourselves. It is also recommended that all expenses are tracked and all evidence appropriately stored.
- Financial Costings
Dropshipping is an extremely competitive business which in turn puts pressure on product margin. We advise having detailed financial projections to ensure that your concept will be profitable.
MyTax specialises in compliance, tax and accounting. Do not hesitate to get in touch with us if you have any questions on dropshipping or other Ecommerce arrangement. We would be happy to help.