Case: a dropshipper and the small business scheme

A dropshipper registered for the small business scheme and then bought advertising services from Google. The reverse-charged VAT had to be declared, but could no longer be deducted.

The situation

A dropshipper established in the Netherlands sells goods from Asia through its website. It (party B) receives an online order from a private buyer (party C), automatically buys the goods from the supplier in Asia (party A) and has them delivered directly by post or courier to the buyer's home address in the EU.

For VAT purposes there are two supplies: A to B and B to C. The place of both supplies is outside the EU, as the Dutch Tax Administration also accepts, so the dropshipper makes no supplies taxable in the Netherlands. Because its supplies fall outside the scope of EU VAT, it need not include them in its Dutch return. It does have a full right to deduct input VAT: it makes only supplies within the scope of VAT, even though they are not actually taxed in the Netherlands.

Probably reasoning that its sales did not have to go in the return anyway, the dropshipper registered for the small business scheme and stopped filing returns.

Where it goes wrong

It then buys advertising services from Google, giving its then still valid Dutch VAT number. Google's Irish entity charges no VAT but applies the reverse charge, and lists the dropshipper's VAT number in its recapitulative statement.

Because the dropshipper did not declare the reverse-charged VAT, the tax authorities see a mismatch. The inspector asks it to declare that VAT after all, and that is where the problem arises. Because of the registration for the small business scheme, its sales count as exempt supplies, so it has no right to deduct input VAT. It must therefore declare the reverse-charged VAT but may not deduct it. That VAT becomes a real cost.

Had it not registered for the scheme, it could have deducted the reverse-charged VAT in the same return, adding and subtracting. Leaving the scheme retrospectively is unfortunately not possible. This could easily have been avoided.

Why this matters in practice

Dropshippers buying advertising services from Google, for instance, would do better not to register for the small business scheme. The same applies where services are bought from suppliers established outside the EU.

There is another reason to think twice: without the scheme, the dropshipper can deduct in full the VAT on costs such as accountancy and premises. Under the scheme that right is lost.