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UK Brexit killed dropshipping?

  • Apr 20, 2021 | Richard Asquith

Are the new VAT and customs obligations of Brexit choking the dropshipping e-commerce model?  The complexity of import VAT, customs duties, product checks and customs declarations are not eating into the already razor-fine margins of the model, which had been looking dated in recent times.

The demise of dropshipping has been called out on numerous occasions  – citing shrinking profitability and poor customer experience. But has Brexit added costs killed it on UK to EU trade?

What is dropping shipping?

Dropshipping is an online retail fulfilment model that allows merchants to promote and sell online third parties’ (the ‘dropshipper’ or ‘dropship supplier’) goods as their own. When the merchant then sells a product, it purchases the item from the third party who delivers it to the customer on the merchant’s behalf.

The model enables merchants to follow a low-cash start-up to go global model quickly, and has been an explosive growth sector in the past five years around the world on the back of platforms such as Etsy and AliExpress.

Brexit import frictions hit dropshipper merchants

The UK leaving the EU VAT regime and its Customs Union has imposed a range burdens on sellers supplying goods between the EU and UK. These include:

  • Import VAT – is now payable on all sales to UK consumers if the goods are imported from overseas and the consignment does not exceed £135. This is part of the UK e-commerce VAT reforms introduced on 1 January 2021. This will require overseas merchants to be VAT registered in the UK if the dropshipment delivery start from outside of the UK. The EU will introduce the same reforms, with a €150 threshold, from 1 July 2021.
  • Customs declarations – all online shopping shipments between the UK and EU must be accompanied by a CN22 or CN23 customs declarations. Since the merchant is not responsible for the fulfilment, they are reliant on the dropship supplier doing this properly to avoid delays and unfulfilled orders. It will also add the dropshipper’s fees to the merchant.
  • Goods checks – as the UK also left the EU Single Market, a range of goods checks are being phased in by the UK between now and 2022. The EU has already implemented these from 1 January 2021. Again, the merchant is dependent on the dropshipper following these, and will have to pay the additional charged.
  • Tariffs – the UK-EU  Trade and Cooperation Agreement on 24 December 2020 set a preferential tariff regime on goods flowing between the two countries. However, this requires close observance of the Rules of Origin checks. This adds further compliance requirements to the shipper, who will pass associated costs through to the merchant.

The rise of dropshipping

Dropshipping has grown hugely in the past five years with the help of ecommerce platforms such as Etsy and AliExpress. The advantages of it include:

  • The seller does not have to invest cash in holding stocks;
  • It enables to seller to massively extend their own categories or items of stock, and offer a better range of products to attract and retain more shoppers; and
  • Can reduce transport costs and border clearance issues for the merchant if they can identify dropship suppliers closer to their target consumers.

Dropping shipping already in trouble before Brexit?

However the maturity and demise of the dropping shipping online model has called many times. As e-commerce has matured, many negative features of drop shipping have been exposed:

  • Tight margins on reselling goods;
  • Poor quality control on the dropshippers’ goods;
  • Lack of customer support; and
  • Problems with refunds.

VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is VP Global Indirect Tax at Avalara, helping businesses understand their compliance obligations as they grow globally. He is part of the European leadership team which won International Tax Review's 2020 Tax Technology Firm of the Year. Richard trained as an accountant with KPMG in the UK, and went on to work in Hungary, Russia and France with EY.
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