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Don’t Let VAT Sink Your UK Expansion

There are huge opportunities for U.S. businesses to expand into Europe, with the potential for double-digit growth. Don’t let poor regulatory planning derail your success—prepare carefully to seize the incredible growth potential waiting in the European market.

How Joe nearly lost $88 000 expanding his supplement business to the UK despite having stellar sales

“Joe”, a niche supplement brand founder, had experienced four successful years of growth in the U.S. market and reached a market penetration level where additional advertising was not resulting in the same massive growth rate as the previous years. 

There was nothing to complain about, but he felt he would like to keep growing at 30% to 50% per year until he reached $50 million in total revenue.

Eight months ago, Joe started selling directly to clients in the UK via his Shopify store (shipping from his USA warehouse). He was pleased with the results and sold over $1 million of products to new customers in the United Kingdom.

Joe messed up. He ignored VAT

Joe, however, messed up. He did not consider UK VAT requirements. He thought he was just testing the market. He happily sold to customers in the UK while shipping from the USA. His average order value was below £135, so he thought he was fine.

His sales, however, skyrocketed, and he scrambled to keep up with the order volume. As the orders were below £135, Joe initially did not consider the VAT thresholds. However, since 2021, the UK has required VAT on low-value goods sold into the UK from outside the country. This meant Joe should have charged VAT on all sales under £135 and filed VAT returns with HMRC to pay the amount owed.

How Joe went from a $150 000 profit to a $88 000 loss

Joe had never charged his customers VAT, so now he had to calculate the VAT out of the revenue and profits he had already charged his clients. This is how the numbers panned out:

  • In the past eight months, Joe had sold $1 million, or £755,000, in the UK.
  • Joe had a healthy 15% net profit margin, so he was expecting to turn a net profit of $150 000
  • But instead of charging £40 plus 20% VAT, making a total of £48 (with £8 belonging to the UK government), he had only charged £40.
  • Now, he had to calculate the VAT from his profits: £40 x 20/120 equals £6.67, which he was required to pay to the tax authorities.
  • As a result, the VAT, which he could no longer charge back to his customers, had to be calculated from his profits. This came to £755,000 x 20/120, equaling £125,833 in VAT.
  • On top of that, he faced interest and penalties for late payment, bringing the total amount owed to $238,000 when converted back to USD.
  • So Joe went from thinking he made $150 000 net profit to making a $88 000 loss because he did not consider the VAT implications of selling into the UK

What should Joe have done?

If Joe had planned to test the UK market while shipping products from the USA, and knowing his average order value would be under £135, he should have registered for UK VAT through the simplified One Stop Shop (OSS) scheme, a simplified VAT reporting approach available since 2021.

He would then have set up his Shopify store to automatically add 20% VAT to all UK orders at checkout. This way, on £755,000 worth of sales, an additional £151,000 in VAT would have been collected and paid to HMRC, ensuring compliance and maintaining profit margins without unexpected tax liabilities.

Does this sound like a lot of admin and cost to setup if you are just testing?

If Joe had been smart, he would have done one of the following:

Option 1) Use Shopify Managed Markets

Testing a new market can be challenging, especially with the added complexity of VAT and regulatory requirements. Joe could have set up Shopify Managed Markets, which would have eliminated compliance risks for selling into the UK. This service, provided by Shopify in partnership with Global-e, manages VAT OSS filing and reporting, acts as the importer of record, and ensures that the correct taxes are applied in the Shopify store.

However, since Joe sells supplements—a category that Global-e often restricts due to high compliance requirements—this option may not have been available. In that case, Joe could have pursued an alternative plan to ensure compliance.

Option 2) Partner with a service provider

Joe could also have partnered with a service provider that sets up UK operations under a separate legal entity. These partners are experts in local compliance and logistics, adding value to the sales process with their knowledge of marketplaces like Amazon and even wholesale clients. A great example is Atlantic Access.

This option might have been even more beneficial for Joe, as it allows his brand to remain intact while a local partner manages the operations. This turnkey solution would have freed up Joe’s time and resources to explore other growth opportunities, such as new sales channels or products, while still expanding into the UK and EU markets with stronger results.

If Joe had used such a partner, the partner would have acted as the “buyer” in a wholesale relationship, becoming the importer of record. They would have handled all VAT obligations and, for orders exceeding £135, any customs duties—taking care of all compliance and cost management, leaving Joe without the hassle or expense.

How did we help Joe get out of the mess?

So for Joe, his testing had exceptional results and therefore, there was already showing a business with critical mass.

We helped him set up his UK VAT registration NOT under OSS but under the full UK VAT registration as he was well above the UK VAT threshold of £85,000 in taxable turnover over a 12-month period. Joe set up an agreement with a 3PL and moved large amounts of inventory into the UK in two warehouses, so he now had physical inventory inside the country to speed up delivery times.

How is Joe doing now?

Joe now imports products in large quantities, paying customs duties and a portion of import VAT based on the cost price of his products—some of which he is able to claim back.

His Shopify store is configured to automatically charge 20% VAT on all UK sales, and we assist him in managing the import VAT deductions. Additionally, we help him claim VAT deductions on other expenses such as local agency fees, 3PL services, and advertising, effectively minimizing his overall VAT liability.

Joe now files quarterly VAT returns, and we provide him with monthly updates on his liability to ensure he stays informed. To manage his VAT obligations effectively, we set up a separate bank account where the collected VAT is set aside, as it does not belong to him. This VAT is charged at checkout on top of his product’s selling price for all UK customers, ensuring proper compliance and financial management.

We also engaged with the HMRC on his behalf The HMRC waived penalties on the back taxes and provided a 24-month payment plan for the previous inferred VAT amounts that were not collected. 

This still hurts, and Joe still regrets not having gotten a good finance and accounting team earlier, but this is all part of the learning journey and is nothing other than school fees. 

He is now planning a second expansion to the European markets, but VAT and tax compliance are things he is starting with as part of this plan. Lessons learned, risks managed, and back to focussing on growth.