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What does Drop Shipping mean from a VAT perspective?

“All commercial goods imported into the EU, regardless of their value, are subject to VAT as of 1 July 2021.” That’s a line from recent official guidance on the new EU e-commerce rules. It’s a sentence drop shipping businesses will need to pay close attention to. 

In practice, here’s what it means. From 1 July 2021, the VAT exemption on goods valued under €22 will be scrapped. Therefore any item shipped into the EU will be subject to VAT. 

E-commerce retailers that drop ship goods to customers in the EU need to pay close attention to the new VAT regulations. But here’s the good news. The new e-commerce rules are, in many ways, actually very useful for drop shipping. That’s because EU officials are introducing a simplified VAT compliance procedure to streamline VAT compliance and import procedures for low value goods, the Import One Stop Shop (IOSS).

What is drop shipping, anyway?

Deliveries are considered drop shipments (or consignment sales) if no local fulfilment centre is used and there is no consolidation of stock in the EU. 

Rather, the item is imported from outside the EU and delivered directly to the customer in an EU country.

The complexities of drop shipping and VAT

In order to appreciate the advantages of the IOSS, we need to consider the alternatives.

As stated above, all commercial goods imported into the EU will now be subject to VAT. If you ship goods directly to EU customers, and those goods are outside of the EU at the point of sale, you will need to account for VAT.

That raises a number of complications. As the seller, you will be obliged to ensure the applicable VAT is accounted for. Sellers must collect and declare applicable VAT. And they need to manage all relevant customs procedures.

Practically speaking, that means that you potentially need to register for VAT in multiple EU states. And finally, your customers will be faced with additional (often unexpected) charges upon delivery. Specifically, the courier will require that the customer pays the outstanding VAT before they can take receipt of their goods. Moreover, couriers frequently charge an additional handling fee for the extra trouble. 

In short, without recourse to the IOSS, drop shipping  it’s a hassle for you, it risks delays on delivery, and it results in a very poor customer experience.

Simplified VAT compliance for drop shipping 

The IOSS simplifies the collection and declaration of VAT for drop shippers.

The IOSS specifically applies to goods valued at no more €150. Using the IOSS, sellers can register for the IOSS in one EU member state and account for VAT on sales throughout the EU in a single VAT return.

In terms of the IOSS, sellers must collect VAT at the point of sale. That is, when an e-commerce retailer sells an applicable item, VAT will be included in the price.

This obviously greatly simplified VAT collection (and reduces the possibility of VAT evasion). Moreover, it also provides a better customer experience. 

Once the customer has purchased the item at the VAT-inclusive price, there should be no additional fees or surprise costs. 

Moreover, as VAT has been accounted for already, the applicable goods should be eligible for special quick importation procedures (provided the correct customs procedures, including the provision of a valid IOSS number, are adhered to). 

Simplify your global VAT compliance

Vatglobal is on hand to provide the latest VAT insight and expertise. We’ll ensure your business is always ahead of new VAT regulations. Plus, our expert team can manage your VAT compliance obligations for you. Get in touch with Vatglobal for a one-stop solution that ensures you take advantage of the IOSS or enhance your overall VAT compliance processes. 

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