How you deliver your products to your customers is the most important consideration. In general, there are 3 ways you can sell to customers in Europe
- Delivery from outside the EU/UK direct to customer (“Drop shipping”)
- Local fulfilment from a warehouse located somewhere in the EU or UK
- Importing consolidated shipments into the EU/UK and subsequently delivering to each individual customer
From a VAT perspective, there is no distinction between options 2 and 3 – if you store your goods in a local warehouse and then subsequently deliver them to customers or if you import a shipment due for multiple customers in one consolidated batch and then split them, both will fall into the same category that we will call Local Fulfilment. The opposite of Local Fulfilment from a VAT perspective will be drop shipping.
Let’s clarify again what we mean by drop shipping: the traditional definition refers to a three-party model, where the customer orders on a website or platform, but the order is fulfilled by a third party. Drop shipping has grown hugely in the past five years with the help of ecommerce platforms such as Etsy and AliExpress.
The simplest way to consider it is: do I send products from outside the region directly to individual customers or do I have consolidated inventory in the region, which I subsequently split and deliver to individual customers?
When it comes to VAT in Europe, drop shipping does not only refer to an online store selling products it purchases from a third party – but instead represents all online sales that are shipped directly to a customer from outside Europe.
A simple VAT hack can be used: if you fulfil from a country in Europe, you MUST be VAT registered in that country. If you don’t use local fulfilment and instead “drop ship”, it is unlikely that you will have VAT obligations, but there are serious disadvantages to the customer experience. For this reason, the EU and the UK have introduced simplified measures in 2021 to offer drop shippers an efficient way of fulfilling orders to customers based anywhere in Europe.
Once you have decided on your fulfilment model into Europe, it is quite simple to ensure you are VAT compliant and can focus on simply growing your business without worrying about taxes.