Summary
- Dropshipping businesses in the UK must comply with consumer protection laws, including offering refunds within 14 days of purchase.
- VAT obligations can be complex, particularly when using overseas suppliers or selling to international customers.
- All online businesses must comply with GDPR, including maintaining a Privacy Policy and Cookie Policy.
- This article is a plain-English guide to the key legal obligations for UK business owners operating a dropshipping business, prepared by LegalVision, a commercial law firm.
- LegalVision specialises in advising clients on e-commerce law, including consumer protection, VAT compliance, and data protection.
Tips for Businesses
Before launching a dropshipping store, put a written supplier agreement in place covering orders, delivery, risk, and quality standards. Register for VAT if required and ensure your website includes a Privacy Policy and Cookie Policy. Understand your obligations under consumer protection laws, including refund rights.
Dropshipping is a relatively new way of doing business, but it is fast becoming popular. This is because there is a relatively low barrier to entry to dropshipping. Indeed, you only need to set up a website, find a supplier for the goods you want to sell, and start operating. However, there are a few ways to run into problems, meaning that your business may cause you to lose money instead of making it. This article will explain how dropshipping works and the key points you need to consider before setting up your dropshipping store.
What is Dropshipping?
Put simply, dropshipping is a retail fulfilment method where you sell goods, but someone else delivers them to your customer. A customer visits your website and purchases an item from you. You then ask your third-party supplier to send that item to your customer, providing them with their delivery details. Your profit is the difference between what the customer pays you and what your supplier charges you to fulfil the order.
Advantages of Dropshipping
Dropshipping can be an excellent way to start an online store because you can set up the business easily and avoid investing in or storing large amounts of stock. You also do not need to deal with actually shipping your goods. Effectively, you make a website offering your chosen products for sale, but hand off dealing with stock and shipping of orders to your supplier.
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What to Consider Before Starting Your Dropshipping Business
Although there are definite advantages to the dropshipping business, there are a few legal issues that you need to be aware of, particularly if you set up a dropshipping business in the UK.
1. VAT Issues
However, if you plan to sell to customers outside the UK and use suppliers based outside the UK, the tax position can become very complicated for you. In these cases, you should get specific tax and legal advice. For example, if you get a supplier in China to send goods to a UK customer, you need to collect VAT on these goods and register for VAT. If that Chinese supplier sells goods to a customer in France, you would need to collect the appropriate VAT that the customer would usually pay for the goods. You would also need to register for VAT in one EU state so that you can submit an EU tax return via the government’s One Stop Shop VAT return.
The actual VAT rate also changes depending on what goods you sell, which adds further complications. In the UK, the standard VAT rate currently applies at 20% to most goods, while the law applies a reduced rate of 5% to some goods and a zero rate to others. Goods taxed at the reduced 5% rate include children’s car seats and home energy, while the law applies the zero rate to most food. As indicated above, those rates change depending on your EU customers’ countries. For example, the standard rate in France is currently 20%, but they have two reduced rates for some goods. The usual rate in Ireland is currently 23%. Again, to avoid uncertainty, you should seek legal help if you plan to sell to overseas customers and use overseas suppliers.
2. Consumer Protection Rules
As well as navigating complex VAT rules, you must also abide by laws put in place to protect consumers’ rights. These consumer protection rules give your customers rights if your supplier sends them goods that are faulty or the product quality is otherwise poor. While you can take up any issues with your supplier, you will be the person responsible for making things good with your customer at the end of the day. Similarly, distance selling regulations give your customers 14 days to decide they do not want their goods after all, and they do not have to provide you with a reason. You will still have to give your customer a refund, and it may cost more for you to send the goods back to the supplier than the goods are worth.
3. Dealing with GDPR
One final thing you must be aware of is that your online business must be GDPR compliant. GDPR stands for the General Data Protection Regulation, implemented in the EU and UK in 2018. As a dropshipping business owner in the UK, the GDPR will apply to you, and it is a legal requirement that your business is fully GDPR compliant. You must tell your customers certain information about your business and how you use their personal data. You should usually contain this information in a Privacy Policy and Cookie Policy.
A company is one of the most commonly used business structures in the UK. It exists as a separate legal entity with its own legal personality, distinct from its shareholders and directors. As a result, the law limits your personal liability to the amount you invest or agree to contribute, usually the value of your shares or any guarantees you give. However, running a company involves more extensive legal and administrative obligations than some other structures. These include duties such as maintaining company registers, filing annual accounts and confirmation statements with Companies House, and complying with directors’ duties and responsibilities under the Companies Act 2006.
4. Intellectual Property Considerations
When you run a dropshipping business, you are responsible for the products listed on your website. If your supplier sends counterfeit or trademark-infringing goods, you could face legal action, even if you did not know the goods were fake.
Before listing any product, check that your supplier has the right to sell it. Avoid using a brand’s logo or product images without permission. Using them without consent can breach copyright or trademark law under the Trade Marks Act 1994 and the Copyright, Designs and Patents Act 1988.
If a brand owner contacts you with a cease and desist notice, take it seriously. Remove the listing immediately and seek legal advice. Acting quickly can limit your exposure.
Your supplier agreement should also include a warranty that all goods are genuine and do not infringe third-party intellectual property rights. This gives you a contractual remedy if a supplier causes an IP problem.
5. Key Commercial Considerations
The commercial relationship between you and your dropshipping supplier is critical to the success of your business. Before you start trading, you should have a clear written agreement in place that sets out how the arrangement will work in practice.
Your contract should specify how and when you place orders, whether automatically through an integrated system or manually, and who will take responsibility if someone misses or processes an order incorrectly. You should also agree on delivery timeframes, acceptable shipping methods, and the type of packaging your team will use, as delays or poor presentation can directly affect customer satisfaction and your reputation.
The key issues of delivery and risk should also be addressed. Any agreement should clearly identify who is responsible for delivery and the cost of delivery, as well as at what point the risk in the goods passes.
Other key terms include pricing, payment terms, stock availability updates, quality control standards, data protection obligations, and termination rights if the supplier’s performance falls below agreed standards. Getting these commercial terms right at the outset can significantly reduce risk and protect your margins as your business grows.
Starting an online business in the UK is complex. This free guide helps you navigate the legal steps with confidence.
Key Takeaways
Although many consider dropshipping an ideal way to enter the online selling arena since it requires little in start-up costs, you should be aware of several key points before starting your dropshipping business, notably:
- the need to abide by consumer protection laws;
- VAT issues specific to UK dropshippers; and
- compliance with GDPR is necessary.
LegalVision provides ongoing legal support for online businesses through our fixed-fee legal membership. Our experienced ecommerce lawyers help businesses in the e-commerce industry manage contracts, employment law, disputes, intellectual property and more, with unlimited access to specialist lawyers for a fixed monthly fee. To learn more about LegalVision’s legal membership, call 0808 196 8584 or visit our membership page.
Frequently Asked Questions
The dropshipping model is where you sell goods to customers but pass off the actual fulfilment of an order to a supplier. With an online marketplace, you act as the person who introduces the purchaser to the supplier, and the purchaser transacts directly with the supplier, not with you.
Dropshipping is entirely legal in the UK; it is treated no differently to any other kind of e-commerce store. That does mean that you must abide by all applicable sales and consumer protection laws and GDPR
Dropshipping allows you to start an online store without the need to invest in or store inventory. It also eliminates the need to handle shipping logistics, as your supplier takes care of it.
If you sell goods in the UK, you must collect VAT. For international sales, the VAT rules can be complex, and you may need to register for VAT in multiple jurisdictions. It is advisable to seek specific tax and legal advice for international transactions.
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