Dropshipping in the UK: VAT, Legalities & Compliance Tips

Dropshipping has a very tempting pitch: you set up a store, a customer orders, your supplier ships straight to them, and you keep the difference. No pallets, no storage unit, no packing tape under your nails.

From HMRC’s point of view, though, it’s still just selling goods to customers – and the usual rules on VAT, consumer law and reporting all still bite. In some ways, the fact the goods are skipping around different countries and platforms makes life more complicated, not less.

This guide walks through what that actually means if you’re in the UK and running a dropshipping business: when VAT registration kicks in, who’s meant to charge VAT on which sales, how the £135 import rules and online marketplaces change the picture, and what other legal bits quietly sit in the background.

Note: This is general information only and not personal tax advice. If you’d like specific help with your VAT or overall tax position, it’s a good idea to chat with a qualified tax adviser or accountant.

1. What dropshipping looks like to HMRC

From your side, the flow is simple. A customer in the UK places an order on your website or your store on an online marketplace. You pass the order to your supplier. They send the goods directly to the customer. You never touch the product.

HMRC isn’t interested in whether the box goes through your hands. It’s interested in three questions instead:

• Who, in law, is supplying the goods to the customer?
  
• Where are the goods when that sale happens – already in the UK, or still abroad?
  
• Is there an online marketplace in the mix that the rules treat as the supplier for VAT?
  

Current HMRC guidance makes a big distinction between UK sellers, overseas sellers and online marketplaces that are treated as “deemed suppliers” in some situations. That framework decides whether you have to add VAT, whether your overseas supplier is on the hook, or whether a marketplace like Amazon is supposed to collect and pay it.

So even if your business model feels like “I just take a cut for facilitating the sale”, the law may well see you as the actual retailer.

2. VAT 101 for UK dropshippers

Let’s park the internet for a second and start with the boring baseline: the UK VAT registration threshold.

Right now, you must register for VAT if your VAT-taxable turnover goes over £90,000 in any rolling 12-month period, and that £90,000 threshold is set to hold at least until March 2026. You also have to register if you expect your taxable turnover to go over £90,000 in the next 30 days alone. You can choose to register earlier, but once you cross either of those tests, registration stops being optional.

For a typical UK dropshipper, your “taxable turnover” is what your customers pay you for the goods, not just your margin. If a customer pays you £40 for a gadget and you pay your supplier £25, HMRC usually sees a £40 sale from you to the customer, not a £15 service fee.

Once you’re registered, all the usual VAT admin applies:

• you charge VAT at the right rate on qualifying UK sales,
  
• you keep proper digital VAT records and file returns under Making Tax Digital, and
  
• you deal with import VAT and customs where you’re the importer of record.
  

If you’re sourcing from UK wholesalers and selling to UK customers from UK-held stock, that pattern is quite straightforward. It’s when goods and customers sit in different countries – and when marketplaces and the £135 import rules appear – that the VAT story starts to twist.

3. Why “where the goods are” matters

For dropshippers, the single most important factual detail is often: where are the goods at the moment the customer buys them?

Goods already in the UK

If the goods are in the UK when the sale happens and the customer is in the UK, UK VAT is normally due on that sale.

If you’re selling through your own website, you’re usually the one who has to charge and account for VAT once you’re registered, because you’re the seller of record.

If you’re selling via an online marketplace, the rules can shift. For some sales involving overseas sellers, the marketplace is treated as if it bought the goods from the seller and sold them on to the customer. In those cases, the marketplace – not the underlying seller – is responsible for the VAT, even though the customer never sees that legal fiction.

Recent HMRC guidance has gone further for certain overseas sellers using UK-located stock, making marketplaces fully liable for VAT on those sales, regardless of consignment value. For UK-based sellers using UK stock, marketplaces will usually still expect you to handle your own VAT on most sales – the deemed-supplier rules are mainly aimed at overseas sellers and specific low-value consignments.

Goods still overseas (imports into the UK)

Where your supplier is outside the UK and ships straight to a UK customer, you’re into the overseas goods rules.

HMRC uses a £135 consignment value line in the sand. For consignments worth £135 or less (per consignment, not per item), UK VAT is usually charged at the point of sale rather than as import VAT at the border, with either the marketplace or the seller responsible for collecting it depending on how the sale is structured.

For consignments over £135, import VAT and customs procedures come back into play. A key question then is: who is named as importer of record? If that’s you or your UK entity, you’re stepping into extra VAT and customs responsibilities even if the goods never physically pass through your hands.

In other words: the “I never touch the stock” line is not a magic shield. The combination of where the goods sit, how much each shipment is worth and who appears on the paperwork decides who HMRC expects to see on the VAT return.

4. Other legal bits dropshippers quietly pick up

VAT is only half the story. If you’re the name on the website, you also inherit a bunch of “normal” business obligations, even if your supplier is on the other side of the world.

Customers buying from your store are protected by UK consumer law, including the Consumer Rights Act and the rules for online and distance sales. That means clear information before checkout, fair terms and conditions, proper returns and refund rights, and honest descriptions of what you’re selling. If something arrives late, faulty or not as described, the customer’s contract is with you.

If you brand or present yourself as the supplier, you also need to think about product safety and labelling – especially for things like toys, electronics, cosmetics or anything that goes in or on someone’s body. If trading standards asks questions, “my supplier said it was fine” won’t get you very far.

On top of that, running an online store means you’re collecting personal data – names, addresses, emails, payment details, behaviour data – which pulls you into the UK GDPR and data protection world: privacy notices, cookies, lawful bases for processing, data-sharing arrangements with suppliers and platforms, and basic security.

Finally, it’s worth knowing that digital platforms now report seller information to HMRC. Under the Platform Operators (Due Diligence and Reporting Requirements) Regulations 2023, platforms must collect details about sellers and send annual reports, starting with the year to 31 December 2024 (first reports due by 31 January 2025). This doesn’t create new tax bills by itself, but it does mean HMRC has a much clearer view of what people are earning on marketplaces like eBay, Vinted and others.

5. How things can go wrong in practice

On paper, none of these rules are impossible. In real life, a lot of dropshippers run into the same traps.

One common story: a store takes off faster than expected. Sales come in via Stripe and PayPal, money is reinvested into ads, and no one is really tracking total rolling 12-month turnover. By the time someone mentions VAT, the business has sailed past £90,000 and HMRC can backdate registration, expecting VAT that should have been charged, plus interest and possibly penalties.

Another scenario: a UK dropshipper assumes their “turnover” is just the £15 difference between what the customer pays and what the supplier charges, when in fact HMRC sees a £40 sale from the UK business to the UK customer. The numbers on the VAT return – and the registration test – are based on the bigger figure.

You also see people relying on very loose supplier assurances: “We handle customs and taxes” or “Don’t worry, VAT is included”. That might be true for some consignments and some arrangements, but it doesn’t replace sitting down and working out, for each flow of goods, who is legally the supplier, who is the importer, and who is meant to charge VAT.

Then there’s the assumption that “the marketplace just sorts VAT”, which is only partially true. Marketplaces may be deemed suppliers in some cross-border scenarios and for some sellers; if you also sell through your own site, or the facts don’t match the conditions, HMRC will be looking at you instead.

By the time a payment provider freezes funds, a platform asks awkward questions, or HMRC sends a “nudge” letter, it’s usually much harder to unwind than if you’d mapped things out properly at the start.

6. Getting ahead of VAT and legal compliance

The best way to look at dropshipping is as a normal retail business with a slightly odd logistics setup, not as a special category that sits outside the rules.

A good first step is simply to draw your business on a sheet of paper: where you are, where your customers are, where the stock is, which platforms you use and who you contract with. For each leg of that picture, ask:

• Who is selling to whom,
  
• Where the goods are at that point, and
  
• Who HMRC would expect to see charging VAT.
  

Once you’ve done that, check your numbers against the £90,000 VAT threshold and think about whether you need to register or will reach it soon. Make sure your website and policies actually reflect how your business works – delivery times, returns, who’s responsible if something goes wrong – rather than just copying whatever template came with your theme.

It’s worth seeking the help of a legal expert rather than hoping you’ve guessed right. Fixing a messy VAT position or a string of non-compliant terms after the fact usually costs more than getting it set up properly.

Key takeaways

• Dropshipping is still “normal” retail for VAT. If your UK-taxable turnover goes over £90,000 in a rolling 12-month period or you expect to exceed that in the next 30 days, you must register for VAT – and turnover usually means the full sale price, not just your margin.
  
• Location and platforms drive the VAT rules. Whether goods are in the UK or overseas at the point of sale – and whether a marketplace is a deemed supplier – decides who HMRC expects to collect VAT.
  
• Consumer, product and data laws still apply. Customers see you as the seller, so you carry the can for returns, quality, safety and privacy, even if the goods ship from somewhere else.
  
• Platforms now talk to HMRC. Digital platforms must report seller income to HMRC under the Platform Operators reporting rules, so under-reporting dropshipping income is much riskier than it used to be.

If you would like a consultation on dropshipping legal compliance, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.