Complex E-commerce VAT Query

Hello. Please consider the following scenario: There is a limited company registered in Hong Kong and this company operates it’s own e-commerce website that sells its products to a global customer base. It does not make use of any online marketplaces. The company has one director who is also the only shareholder. They are a permanent UK resident and citizen. When sales are made to UK customers via the website, orders are fulfilled in one of two ways: 1. Dropshipping: the manufacturer of the goods fulfils the order and sends it to customer in the UK directly. 2. The HK company makes use of a UK warehouse where a small amount of stock is kept in order to quickly fulfil orders to UK customers. Please advise the VAT liability for the HK company in each of the two instances explained above. If there is a VAT liability: Has the director created a fixed establishment in the UK for the purposes of VAT? Does the 85K threshold apply to the HK company as a result? Does the company report its UK sales only for the purposes of VAT Please provide as much detailed information as possible, citing the two scenarios Thank you so much for your help

Hi.
For VAT purposes it is important to establish whether the business is established in the UK or whether it is a non established business.
Please see the guidance below:
Non-established-taxable-persons (NETPs) — basic information
In scenario 1 the manufacturer will be selling the goods to the limited company who then will sell the goods to the customer in the UK even if the limited company don't actually see those goods at any time.
This will mean that taxable supplies are being made and so if the limited company are non established then they would need to register immediately and if they are established in the UK then they will consider the 85K threshold before registering.
In scenario 2 the goods are physically in the UK when the goods are delivered to the customer and so the same principlies will apply ie if the company is non established then they will register for VAT straight away and if they are established then they will consider the 85K threshold.

To be clear, because the entity making the sales is Hong Kong based, it is not a UK established company, therefore the VAT registration threshold is Nil, so any sales of any value would trigger UK VAT registration. If it were a UK entity/UK limited company, then the VAT threshold would be £85,000.

That you so very much for the helpful insight. I would like to further my question with the following information: We have confirmed the business is established in the UK and in accordance with your advice, the 85K VAT registration threshold will be considered. My next question is to discover sales that will contribute towards this 85K annual threshold. Let us pretend that annual global sales for the Hong Kong company is as follows: 1. £20 000 to UK customers 2. 35,000 EUR to customers in the EU 3. $70,000 USD to customers in the United States Which of these annual sales amounts will count towards the 85K VAT registration threshold in the UK .. if 1. All stock is imported from China to UK and then distributed from the UK to customers globally. 2. Stock is Drop shipped from China Kindly consider options 1 & 2 above separately and let me have your advice Thanks once again for your time and consideration

Please also note that all goods imported into the UK are subject to import VAT. Depending on the goods and their value and origin they will also be subject to import duty. This will apply whether the import is direct to your customer or to the warehouse location.

Dear Jason, Thanks for your comment but it does not make sense to me. Please read my original post and then visit the link posted by HMRC. Clearly, both these points apply to me and I do not understand your basis for ignoring it. Perhaps you could explain your thoughts? I have pasted an important extract from text (link) for expedience. 9.2 UK establishment: definition A UK establishment exists if either the: place where essential management decisions are made and the business’s central administration is carried out is in the UK business has a permanent physical presence with the human and technical resources to make or receive taxable supplies in the UK

I do hope that HMRC have seen my follow up query above regarding local UK stock and are able to respond.

Hi Solomon,

If the goods are being sent out from the UK to UK consumers, EU customers and customers outside the UK then they will all go towards the turnover as they are all taxable
supplies, the UK ones will be 20% and the other two will be exports and be Zero rated.
If the goods are drop shipped from China directly to the customer then it will depend who the importer of the goods is.
If the customer is the importer of the goods in to the UK and they pay the import VAT then there would be no effective supply in the UK between you and the customer.
However if you are the importer of the goods in to the UK then you are making a UK supply to the customer and so this would go towards your taxable turnover

Thank you.

Thank you. I would like to paraphrase your response to ensure I understand it. All stock the HK company imports to the UK and then proceeds to sell, regardless of the location of the customer (and final destination of the stock), be it a UK customer or one in the USA, will count towards the 85K VAT registration threshold. Please confirm if this statement is correct ? Next … If stock is not imported to the UK, but sent directly to a the customer from China, then it would only count towards the 85K VAT registration threshold if both of these points are true: 1. If the HK company is the importer 2. The customer is in the UK This means that if the customer is in the USA and the stock is drop shipped directly to them from China by the HK company (never imported to the UK), the sale would not count towards the VAT registration threshold. Please confirm if this statement is correct ? Questions: 1. Considering the UK customer buys the product from the website of the HK company, but the manufacturer of the product fulfills the order and sends it to the customer .. who is the importer in this dropshipping model ?

Hi.
The first two statements are correct.
I would not know who the importer of the goods is as this will be stated on the import declaration.
The important point about who the importer is  that the importer of the goods is the person who owns the goods when the goods come in to the UK.
If the UK customer owns the goods in the UK then you are not making a UK supply to them as you don't own the goods in the UK.
If you are the importer then you own the goods in the UK and so there is a supply from you to the final customer in the UK even though you might not physically ever have the goods at your disposal.
 

Considering my drop shipping model, the UK consumer owns the goods when they come into the UK. I would not take ownership at all. I now understand that I would own the goods if I warehoused these and then distributed. Thank you once again. Your assistance is greatly appreciated. I cannot applaud this service enough.

Hello dear HMRC Admins, are these statements still correct in 2024? Have the regulations evolved or are they still the same?

Hi,

The regulations are still the same.

Thank you.

Hi there,
In the below scenario, could you please confirm if VAT is not needed at POS?
If a Dubai based company sells to a UK consumer and the product is supplied by a third company (in China), and the customer is the importer on record (also stated on the Dubai company website).
This company has already received an official except for VAT in Europe by using the import scheme alternative (customer is the importer on record).
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Also, this company has a UK LLP for a bank account (only for transactional, receiving payments and forwarding purposes). Currently tax free, but due to new rules on tax free LLP's this will change in 2025, if the businesses using these LLP's have taxable income and charge VAT in the UK.
In the previously mentioned scenario with no UK VAT can you confirm that this means that there's still no UK taxable income for the LLP?
Thank you.

Hi red112
Unfortunately you have provided insufficient information to enable HMRC to provide an answer.
Can you confirm if the value of the goods being sent to the UK consumer is below or over £135?
Thank you

Hi there, The goods are below £135 with the consumer being the importer on record. I have asked the question in this topic as it is similar to the topic starter (Solomon) in terms of shipment . And one of the responses from HMRC is the following: "If the customer is the importer of the goods in to the UK and they pay the import VAT then there would be no effective supply in the UK between you and the customer." This above statement is similar to EU import scheme rules regarding sales and VAT. So I just want to double confirm if this statement is correct?

Hi red112.
If the goods are over £135 then the importer is responsible for paying any VAT charged at import.
However if the goods are imported in to the UK of a value below £135 then the consumer is not reposnsible for paying the VAT.the overseas seller is responsible for charging it.
If the consumer is the importer in to the UK then you will own the goods overseas and so there will be a responsibility for your business to account for the UK VAT.
Please see the guidance below:
Changes to VAT treatment of overseas goods sold to customers from 1 January 2021.
Thank you.