UK Sole trader vat registered or ltd vat registered?

[Donatien]

Hello everyone,
even if I'm already a full time employee I'm thinking of opening an e-commerce, to be exact an online sex shop in dropshipping in triangulation, I live in London, my supplier would be in Spain and at least at the beginning the products will be shipped and sold in Italy.
The initial idea was obviously to register as a sole trader as it would make everything easier but the supplier asks me for a VAT number.
Opening an LTD would imply a more complex bureaucracy and more expensive accountant services, I am at a crossroads because of course as everyone would like to save money, I am not even sure that my e-commerce will be able to invoice, it is a new experience for which I will have to study a lot and being employed full time I will not even be able to dedicate a lot of time to her.
Do you think it would be better to start as a sole trader with a VAT number or as an LTD with a VAT number?
What exactly would be the differences between sole trader without VAT and sole trader with VAT?
Is it worth registering as a sole trader with a VAT number?
Any advice is welcome, thank you very much!

 

[Werner Reisacher]

To be honest, running a drop-shipment e-commerce business between third party EU countries by remote control from London will keep you busy and will require some traveling - irrespective of the volume of the transactions. And yes, you will need an EU VAT # and register in the countries in which you collect VAT. Whether you can do that as an individual or as a legal entity will depend on the laws of the countries involved. VAT Rates between EU countries are not harmonized like duties. What are the payment terms you offer? Who pays the freight. What do you do with returns? If you are a UK resident, your worldwide income is taxable in the UK. How will Brexit affect your plans? Who handles multi-lingual customer service?
Unless you and/or one of your friends is experienced in cross border VAT, tax accounting, logistics, and order fulfillment, I would go easy on the project.

 

[Donatien]

To be honest, running a drop-shipment e-commerce business between third party EU countries by remote control from London will keep you busy and will require some traveling - irrespective of the volume of the transactions. And yes, you will need an EU VAT # and register in the countries in which you collect VAT. Whether you can do that as an individual or as a legal entity will depend on the laws of the countries involved. VAT Rates between EU countries are not harmonized like duties. What are the payment terms you offer? Who pays the freight. What do you do with returns? If you are a UK resident, your worldwide income is taxable in the UK. How will Brexit affect your plans? Who handles multi-lingual customer service?
Unless you and/or one of your friends is experienced in cross border VAT, tax accounting, logistics, and order fulfillment, I would go easy on the project.

I thank you for the answer.
Taxation would be dealt with by an accountant, shipments and returns are part of the work of the supplier, the payments on the website would be common through PayPal and credit card, at most I would add the cash on delivery.
Shipping costs can be managed in many ways, you can charge them to the customer or offer a free shipping.
The website would initially be in Italian because it is dedicated to the Italian market, if the turnover arrives then I can evaluate making the website bilingual, but these would be distant problems.
The cross border VAT is the biggest concern, especially because of Brexit.
Why do you thing it will require some traveling?
Dropshipping is quite different from wholesale, I don't have a warehouse, I don't necessarily need to go to the supplier.
I have to take care of the website, the marketing, the choice of products.
The customer buys a product on my website, pays, I turn over the order and payment to the supplier (withholding my earnings) and the supplier ships the product.
I know it's complicated and maybe even risky, that's why I'm thinking of abandoning the dropshipping idea, I could evaluate the idea of opening an e-commerce and working with the affiliate market, maybe it would be simpler.
Thanks for your help.

Andrea.

 

[Fidget]

With VAT, currently if your taxable turnover goes over £85k, then you have to register for VAT anyway, so it doesn't matter if you're a sole trader or an LTD.

Sole Trader/Ltd, are not linked either for VAT purposes. LTD has the obvious advantage of you only being liable for your investment in it, whereas, as a sole trader, you could lose everything - car, house and whatnot if you got into financial difficulty. So it can be wise to set up as an LTD. But then there's the bureaucracy of filing accounts as an LTD.

Voluntary registration for VAT whether as a sole trader or LTD does have the advantage of making it look like your business is bigger than it actually is to customers/suppliers. Ltd has the added advantage of "Ltd", so you're searchable on Companies House as a 'real' business, but again, the drawback of filing accounts.

But before you go down the route of voluntary registration, you need to do your homework on what you can/can't claim VAT back on to make sure that you're not going to end up in the position of where your input VAT on your purchases exceeds the output VAT that you can claim back from your sales.

Another drawback of voluntary registration for VAT is that you have to then charge it on to your customers.

Another thing to consider is that the UK will be formally out of the EU by Dec - discussions permitting, I suppose. At the moment though, I'm pretty sure that the chargeable VAT rate within EU countries is the rate of the country of origin of the sale/purchase within the EU. But that will undoubtedly change.

 

[Werner Reisacher]

1. Great contribution Fidget. And as you point out, the pivotal point when people have to decide between Sole Trading vs a legal entity such as an LTD is the liability protection under the corporate umbrella, followed by tax considerations, access to funds, and issues related to estate planning.
2. The VAT computation-, assessment-, procedural systems, and a minimum VAT rate are harmonized between EU countries. But these rates are minimum guidelines only and each country is applying its own VAT rates. This can become tricky for e-commerce countries selling EU wide when it comes to fixing their door to door landed cost sales prices. When Andreas goods arrive from Spain into Italy addressed to an end consumer (who is not VAT registered as a business) VAT will become payable at the border crossing. If he is using a logistics company, that company will take care of it. If he ships via the Postal System, the VAT will become payable by the customer when the shipment arrives. That's why most small "mee too" companies, including two of the major Chinese e-commerce shippers come into the EU under the radar. Low value, shipments with no commercial value.
3. From a marketing point of view, I suggest that Andrea figures out whether his website will attract enough customers compared to being able to offer his products on one of the established leading e-commerce companies. Another balancing act is whether the increased volume vs. justifies the lower profit on each shipment.
4. Last but not least, when it comes to money, you will not get around to establishing personal contacts. Establishing a VAT representation in Italy, dealing with quality issues, etc. can be handled virtually, as long as you have established sometimes in the process a personal contact that allows you to make a judgment call. Talking to a person vs. seeing that person in the environment she/he lives and operates is often a different story.
5. I would appreciate any comments and/or corrections. It is a while ago that I have been involved in this topic in the EU.

 

[Donatien]

Many thanks to everyone, it is apparently too complicated for now as a project, especially considering that UK will soon be leaving Europe for good.
I am considering a simpler option, that is to use my website / blog for affiliate marketing.
It would always be something very small because I have another full time job, what I understood from my research is that however small the proceeds from my website is still considered a trading so I have to declare and pay taxes to the HMRC, but despite a lot of research I can not understand if I can declare these revenues and pay the taxes simply by registering through the government site and following the right procedures or I am still obliged to register as a sole trader, which would involve more expenses and probably the intervention of a business consultant.
Thanks.

And sorry my english is not perfect.

 

[Werner Reisacher]

Alexandra, don't worry about your English. English is my 3rd language. I lived all my life in multilingual and multicultural environments. Languages are methods to communicate our messages. The content of your message is much more important than the way you speak or write it. And I like your enthusiasm for your new project.

The following URL might give you some further help. They allow you to download an interesting e-book on VAT for free.

https://www.avalara.com/eu/en/learn/whitepapers/international-vat-for-dummies.html