You've built a store, found a supplier, and the first orders are landing. Then the questions start. Do you charge VAT? Who pays the import duty when your supplier ships straight from overseas? And what exactly do you tell HMRC at the end of the year?
Dropshipping looks simple on the surface, but the tax sits in an awkward spot. You never touch the stock, yet HMRC still treats you as the seller. That one fact drives almost everything else.
This guide explains how dropshipping tax works in the UK for 2025/26: when you have to register for VAT, how the £135 import rule and customs duty apply, and how to report your profit so you don't overpay or get caught short. It's written for UK-based sole traders and small companies running a dropshipping store.
Are you actually running a business for tax?
Yes, almost certainly. If you're buying and reselling goods to make a profit, HMRC treats that as a trade. It doesn't matter that the stock ships directly from a supplier and never reaches you.
As a sole trader, you must tell HMRC and file a Self Assessment return once your gross trading income for a tax year goes over the £1,000 trading allowance. "Gross" means total sales before you take off any costs, so it's easy to cross that line in your first busy month.
If you've set up a limited company instead, the company pays Corporation Tax on its profits and you report your own income (salary or dividends) separately. The VAT and import rules below apply either way.
How does VAT work for UK dropshippers?
Here's the part that trips people up. In a dropshipping sale, you are the seller to the customer, even though the supplier posts the parcel. So for VAT, the value that matters is what your customer pays you, not your margin.
If a customer pays you £40 and you pay your supplier £25, HMRC sees a £40 sale from you. Your VAT-taxable turnover counts the full £40, not the £15 you kept.
Once you're VAT-registered, your sales to UK customers normally carry VAT at the standard rate of 20% for 2025/26 (some goods are reduced-rated at 5% or zero-rated, so check the category of what you sell). You charge that VAT, collect it, and pay it to HMRC, while reclaiming VAT you've been charged on genuine business costs.
If you're not yet registered, you don't charge VAT and you can't reclaim it. The trigger for registration is turnover, which we'll cover next.
When do you have to register for VAT?
You must register for VAT if your VAT-taxable turnover goes over the registration threshold of £90,000 in any rolling 12-month period, or if you expect to pass it in the next 30 days alone. This threshold has applied since 1 April 2024.
Two things catch dropshippers out.
First, that £90,000 is measured on your full sales, not your profit. A store doing £8,000 a month in sales is already near the line even if margins are thin.
Second, the rules are different if your business is based overseas. An overseas seller making sales to UK customers generally has to register for UK VAT regardless of turnover. This guide assumes you're UK-established; if you operate through a company or address outside the UK, get specific advice, because there's no threshold to hide behind.
You can also register voluntarily below £90,000. That can make sense if you sell mostly to VAT-registered businesses or want to reclaim VAT on stock and import costs, but it adds admin. Our tax advisory team can help you weigh it up.
What is the £135 import rule and how does it affect you?
This is the rule that matters most when your supplier ships directly from outside the UK to your UK customer.
Since 1 January 2021, for goods sold to UK customers in consignments with an intrinsic value of £135 or less, UK supply VAT is charged at the point of sale rather than import VAT at the border. In plain terms: for low-value parcels, VAT is meant to be collected when the customer buys, not when the parcel lands.
A few details from HMRC's guidance:
- The £135 limit applies to the value of the whole consignment, not each individual item inside it.
- "Intrinsic value" is the price the goods were sold for, excluding transport, insurance, and any other identifiable taxes and charges, unless those are already built into the displayed price.
- For a business-to-business sale where your customer gives you their UK VAT number, you can apply the reverse charge instead, and the customer accounts for the VAT.
If a consignment is above £135, normal import VAT and customs rules apply at the border instead. The point-of-sale rule no longer covers it.
The practical risk for dropshippers: if you're not VAT-registered, you can't account for that point-of-sale VAT properly, yet HMRC's framework still expects it on direct-to-customer imports. Many stores run for months assuming "the supplier handles it" when, for a UK-facing sale, the obligation usually sits with the seller or the marketplace. If you're shipping low-value goods from abroad to UK buyers, treat VAT as your problem to get right, not an afterthought.
When does import duty apply to dropshipped goods?
Customs duty is separate from VAT, and it doesn't apply to every parcel.
For most non-excise goods sent from outside the UK, no customs duty is charged when the consignment is worth £135 or less. Above £135, customs duty can apply, and the rate depends on what the goods are and where they come from. You check the rate using HMRC's Trade Tariff.
Two extra points:
- Excise goods, such as alcohol and tobacco, can attract duty at any value, so they're a different game entirely.
- When a parcel is above £135 and duty or import VAT falls due at the border, whoever is named as the importer of record is liable. If that's your business, the bill is yours.
So for a typical dropshipper selling everyday consumer goods under £135 a parcel, customs duty often won't bite, but VAT still does. For higher-value items, both can apply, and you need to know who the importer of record is on every shipment before the orders start flowing.
How do you report dropshipping profit to HMRC?
Whatever your VAT position, you also pay tax on the profit you make.
As a sole trader, you report through Self Assessment. You declare your turnover (total sales), deduct your allowable business expenses, and HMRC taxes the profit that's left. For a dropshipper, allowable costs typically include:
- the amount you pay your suppliers for goods sold
- platform and store fees (for example your ecommerce subscription and payment processing)
- advertising and marketing
- software and apps you use to run the store
- a reasonable proportion of home-office and phone costs
Your profit is then added to your other income. For 2025/26 the personal allowance is £12,570, the basic rate is 20% on the next slice of income (taxable income up to £37,700 above the allowance), and the higher rate is 40% on income between £50,271 and £125,140.
You'll also pay Class 4 National Insurance on self-employed profits: 6% on profits between the Lower Profits Limit of £12,570 and the Upper Profits Limit of £50,270 for 2025/26, then 2% above that.
Good bookkeeping is what makes this painless. Match every payout from your store to its costs as you go, rather than reconstructing a year of orders in January. It also means your numbers are ready if and when you cross the VAT line.
Illustrative example: a sole trader dropshipper's tax bill
Illustrative example. Sam is a UK sole trader running a homeware dropshipping store in 2025/26. The figures below are made up to show the method.
| Item | Amount |
|---|---|
| Sales to customers (turnover) | £60,000 |
| Less: paid to suppliers for goods | (£36,000) |
| Less: store, ads, software and fees | (£9,000) |
| Taxable profit | £15,000 |
Sam's turnover is £60,000, which is below the £90,000 VAT registration threshold, so Sam isn't required to register for VAT yet (though it's worth watching, as a strong few months could push the rolling total over).
On a £15,000 profit, with no other income:
- Income Tax: the first £12,570 is covered by the personal allowance. The remaining £2,430 is taxed at 20% = £486.
- Class 4 NIC: profit above the £12,570 Lower Profits Limit is £2,430, taxed at 6% = £145.80.
- Total due: £486 + £145.80 = £631.80.
The lesson isn't the exact number. It's that Sam pays tax on the £15,000 profit, not the £60,000 of sales, which is why tracking supplier costs and fees properly is what protects your margin. You can sanity-check your own figures with our self-employed tax calculator.
Dropshipping tax responsibilities at a glance
| Question | Short answer (2025/26) |
|---|---|
| Do I count gross sales or my margin? | Gross sales. You're the seller, so the full price the customer pays counts. |
| When must I register for VAT? | Turnover over £90,000 in a rolling 12 months, or expected within 30 days. |
| What about the £135 import rule? | Consignments of £135 or less sold to UK customers: VAT due at point of sale, not the border. |
| When does customs duty apply? | Generally on non-excise goods only when a consignment is over £135. |
| How is profit taxed? | Sole traders: Income Tax and Class 4 NIC on profit via Self Assessment. |
Want help getting your dropshipping store's tax right from the start? Whether it's VAT registration, the £135 import rules, or keeping your books clean for Self Assessment, talk to a Zmartly accountant. Book a free 20-minute call and we'll map out exactly what you need to do. We work with ecommerce sellers and Shopify store owners every day.
Frequently asked questions
Do I pay tax on dropshipping turnover or profit?
For Income Tax you pay on profit, which is your sales minus allowable business costs such as what you pay suppliers, fees, and advertising. For VAT, though, registration is measured on your turnover, meaning your full sales, not your margin. The two tests look at different numbers, which is why dropshippers often get caught out.
Do I have to register for VAT to run a dropshipping store?
Not unless your VAT-taxable turnover goes over £90,000 in a rolling 12-month period (or you expect to pass it within the next 30 days), which is the threshold from 1 April 2024. Below that you can register voluntarily, but you don't have to. The position is different if your business is based overseas, where registration can be required from the first UK sale.
Who pays import VAT and duty when my supplier ships from abroad?
It depends on the parcel's value. For consignments of £135 or less sold to UK customers, UK VAT is due at the point of sale rather than at the border. Above £135, normal import VAT and customs duty apply at importation, and whoever is the importer of record is liable. Confirm who that is before you start selling higher-value items.
Does customs duty apply to every dropshipped order?
No. For most non-excise goods, customs duty only applies when a consignment is worth more than £135. Below that there's usually no duty, though VAT can still be due. Excise goods like alcohol and tobacco can attract duty at any value.
How do I report my dropshipping income to HMRC?
As a sole trader you report through Self Assessment once your gross trading income passes the £1,000 trading allowance. You declare your turnover and allowable expenses, and HMRC taxes the resulting profit through Income Tax and Class 4 National Insurance. A limited company reports profits through a Corporation Tax return instead.
