Starting a Dropshipping Business – what you need to know
The rise of e-commerce in recent years has resulted in various innovative business models- one of the most popular ones being Dropshipping. In this post we're going to provide guidance on starting a Dropshipping Business and what issues you need to be aware of.

This business model allows you to start your own online store without having to invest heavily in inventory or warehouse space. While Dropshipping offers many advantages, including low startup costs and flexibility, it also comes with unique tax implications, especially in the U.K. In this article, we'll explore how starting a dropshipping business works and delve into the UK tax considerations, including VAT issues.
How does the Dropshipping Business Model work?
Sourcing your suppliers
The first step in starting a dropshipping business is to select reputable suppliers or wholesalers who offer the products you want to sell. You can try marketplaces like AliExpress, Salehoo or Oberlo for suitable products. These sites offer access to a wide range of products and suppliers who will be responsible for storing and shipping the products directly to your customers.
Building your online store
Next, you need to set up an online store, which can be done through various e-commerce platforms like Shopify, WooCommerce, or Magento. These platforms provide templates, payment gateways, and inventory management tools. You will them need to list the products from your chosen suppliers on your website.
You'll then need to customise your store's design and layout using website builders like WordPress, Wix, or Squarespace. These platforms offer drag-and-drop functionality and templates to create a visually appealing website.
When building your site, you should also set up secure payment gateways like PayPal, Stripe, or Square to process your customer transactions securely. Ensure your chosen platform integrates with your e-commerce platform.
Finally, it's important to implement inventory management software in order to track your product availability and automate order processing. Making use of online tools like Eazystock, Ordoro, or Extensiv, can help streamline your business operations.
What about marketing strategies?
It's very important to choose a niche that aligns with your own interests and has significant market demand. You should also invest time in conducting market research to identify trends and competitive products.
If you can optimise your product listings and website for search engines this will improve your visibility. At the same time, you should use relevant keywords, high-quality images, and informative product descriptions.
Generally speaking, the most appropriate social media platforms for targeted advertising would be Facebook, Instagram, and Pinterest. If you can create engaging content and run the right ad campaigns this will attract potential customers.
You should start a blog and or create informative content that relates to your niche market. If you can share valuable insights, how-to guides, and product reviews this will help establish you as an authority and attract organic traffic.
Customer service
It's really important to respond to customer enquiries and concerns promptly. Excellent customer service should result in positive reviews and repeat business.
Encourage customers to leave reviews and feedback on your website or social media platforms. Positive reviews can boost your credibility and attract more customers.
If you can provide order tracking information to customers, this will enable them to monitor the status of their deliveries. Being transparent with your customers ultimately builds trust.
Should your customers not be happy with their product, then establish a clear and customer-friendly return policy. Make the return process as hassle-free as possible to encourage trust and repeat purchases.
Tax considerations relating to your Dropshipping Business
There are also tax issues you need to contemplate when starting a Dropshipping Business.
Notifying HMRC at the right time
You may have heard about HMRC's One to Many letter campaigns relating to correspondence sent to taxpayers who HMRC believes have been selling goods or services via an online market place.
Essentially HMRC will treat any website or mobile phone app that handles and enables the sale of goods and services from individuals and/or businesses to customers as an online marketplace. It may be a question of when your Dropshipping Business changed from being a hobby to a trade realising allowable losses or taxable profits.
The tests to determine when a business starts and thus makes taxable profits (or allowable losses) have been determined by tax case law. These tests may vary depending on what your activities are.
Put simply, if you start a Dropshipping business intending to make a profit and undertake a degree of financial risk, HMRC may regard this as the point your business commences.
For example this could be when you launch a new website, leave your day job, raise a sales invoice, pay a supplier, or incur other significant costs.
Choice of business structure
If you are operating a Dropshipping Business you can operate as a sole trader, partnership or limited company. Which structure is most appropriate for your business will depend on a number of factors, in particular the ability to shelter profits from higher rates of tax.
You should also be aware that in future trading profits for sole traders and partnerships will be allocated to tax years regardless of the business’ accounting period end date. The 2023-24 tax year is a transitional one with the new rules fully operative from April 2024.
Where your business has higher profits in the 2023-24 tax year due to the change in the basis period, an automatic five-year spreading rule will apply to the additional profits.
Taxable income
This will obviously be your product sales (and shipping costs where appropriate). However, taxable income may also include affiliate marketing commissions if other products/services are promoted via your website or there is sponsored content on your website.
Deductible expenses
We've set out below some of the expenditure you can claim for your Dropshipping Business, though we would stress this list is not exhaustive:
VAT matters
Last and by no means least when starting a dropshipping business, you'll also need to consider when and whether UK VAT needs to be charged on your sales.
Registering for VAT
Once your sales exceed the VAT registration threshold (currently £85,000 per year) you will need to registering your business for VAT. Once registered for VAT you must comply with the rules for Making Tax Digital.
Selling overseas.
If you are operating internationally you'll need to consider the place of supply rules to determine the correct VAT treatment. It might be necessary to register for VAT in other EU countries.
Online marketplaces can potentially be held jointly and severally liable for the UK VAT of an overseas business that is not established in the UK and which sells goods in the UK via your website.
Changes following Brexit
We covered these changes in a previous post, however put very simply if you're a UK business that is making supplies to the EU customers it may be necessary for you to register for EU VAT in the territory concerned.
VAT Flat Rate Scheme
Once you're VAT registered you might be able to take advantage of the VAT Flat Rate Scheme. Under this scheme a flat VAT percentage is paid on your VAT-inclusive turnover. If you're a Dropshipping Business you're likely to be regarded as a limited cost trader (this is because you don't carry stock) so the lowest rate would be 16.5%. However there is a 1% discount in the first year and so it may be worthwhile joining the scheme for one year as the rate will be 15.5%.
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.