In dropshipping, the seller takes the order and the supplier ships directly to the customer. The seller never handles the goods, but for VAT it is still making a sale. Online marketplaces add another layer: in some cases the marketplace, not the seller, is treated as making the sale to the customer.
Dropshipping from a UK supplier
The supplier sells to the dropshipper, and the dropshipper sells to the customer. If both are VAT registered:
- the supplier charges VAT to the dropshipper, which reclaims it;
- the dropshipper charges VAT to the customer on its own price.
The dropshipper’s margin is effectively taxed. Below the VAT registration threshold, a UK dropshipper charges no VAT and cannot reclaim the supplier’s VAT.
Dropshipping from an overseas supplier
When goods are shipped from outside the UK directly to UK customers, the value of each consignment matters:
| Consignment value | Treatment |
|---|---|
| £135 or less | VAT at the point of sale; the seller must charge UK VAT (or the marketplace does, if it facilitates the sale) |
| More than £135 | an import: import VAT (and any duty) at the border, paid by whoever is the importer under the delivery terms |
The details are in VAT on low-value imports. Delivery terms (who is the importer of record) must be clear, otherwise customers are surprised by import charges and VAT is paid twice or not at all.
When the marketplace is the deemed supplier
An online marketplace is treated as making the sale to the customer, and must account for the UK VAT, in two main cases:
- goods of £135 or less imported in a consignment and sold through the marketplace;
- goods already in the UK sold through the marketplace by a seller not established in the UK.
UK-established sellers selling UK stock through a marketplace remain responsible for their own VAT. Marketplaces also have to check that sellers are VAT registered where required and can become jointly liable for unpaid VAT of sellers they host.
Using marketplace VAT reports
Marketplaces provide transaction and VAT reports that show, order by order, where VAT was collected by the marketplace and where the seller is responsible. Use them to:
- separate marketplace-collected sales (which the seller records without output VAT, as a zero-rated or outside-scope supply to the marketplace) from sales on which the seller owes VAT;
- support the box 6 figure, so turnover in the accounts reconciles to the return;
- identify refunds, which reduce output VAT only on sales where the seller accounted for it.
Download the reports for every VAT period and keep them with the return. Settlement reports alone mix sales, fees and refunds, and are not enough to split the VAT.
Common mistakes
- Charging VAT again on sales where the marketplace already collected it.
- Treating overseas supplier invoices as if they carried reclaimable UK VAT.
- Forgetting VAT on marketplace fees; see VAT on marketplace and payment fees.
HMRC sets out marketplace obligations in VAT and overseas goods sold directly to customers in the UK.