MTD for Shopify Store Owners & Dropshippers —
Sales, Ad Spend and Your Threshold
Use sales before product cost, ad spend, fees and postage. Dropshipping sales count in full even when the supplier ships the goods.
- Your threshold is tested on sales, not profit. A store taking £74,000 and keeping £12,000 after product cost and ads is still over £50,000.
- Dropshipping sales are yours in full, even though the supplier ships the item. What you pay the supplier is a cost of sales, not a reduction of turnover.
- Processor payouts from Shopify Payments, PayPal and Klarna are net of fees and refunds, so recording the payout alone understates your sales.
A Shopify store or dropshipping business can look small on profit and large on sales: £74,000 of orders, £41,000 of supplier invoices, £16,500 of ads and a profit of a few thousand. Making Tax Digital looks at the sales figure, so the business can be in scope while the margin is thin. This guide covers what counts for an online store, how refunds and chargebacks are treated, and how to keep ad spend and processing fees from muddying your records.
Are Shopify and Dropshipping Sellers in MTD?
Yes, if you are a sole trader and your sales (together with any property or other self-employed income) are over the threshold for the relevant tax year. The first line was £50,000, tested on your 2024–25 return:
| Tax Year Tested | Gross Income Over | MTD Start Date |
|---|---|---|
| 2024–25 | £50,000 | 6 April 2026. Live now |
| 2025–26 | £30,000 | 6 April 2027 |
| 2026–27 | £20,000 | 6 April 2028 |
A store run through a limited company is outside Making Tax Digital for Income Tax. A side store run in your own name, alongside a job or another business, counts, and its sales add to your other self-employed income. See sole trader vs limited company.
What Counts as Store Income
| Item | Counts towards the threshold? |
|---|---|
| Sales through your own Shopify, WooCommerce or similar store | Yes, sales after refunds |
| Dropshipped orders shipped by your supplier | Yes, the full customer price |
| Marketplace sales (TikTok Shop, Amazon, eBay, Etsy) | Yes |
| Shipping charged to customers | Yes |
| Rental income from property | Yes, added to the total |
| VAT you charge customers | No |
| Supplier cost, ad spend and processing fees | Expenses, not deducted from sales |
Overseas customers count too. Convert each sale to pounds on the day you receive the money, or use the rate your processor shows, and keep the rate you used consistent across the year.
Processor Payouts Are Not Your Sales
Pull the sales report and the payout report for each period, and record three things separately: gross sales, refunds and chargebacks, and processing fees. Your bank statement then shows a payout that reconciles to those three lines. This matters for MTD, because the threshold uses your sales figure, not the amount that reached the bank.
Dropshipping adds a fourth item, the supplier invoice. Record each supplier payment as the cost of the goods you sold, and match it to the customer order where you can. That is how you know your real margin per product.
Ad Spend, Apps and What Stores Can Claim
| Cost | Notes |
|---|---|
| Product and supplier costs | AliExpress, CJ, Spocket and wholesale suppliers; keep invoices |
| Advertising | Meta, TikTok and Google Ads, influencer fees and email tools |
| Platform and app subscriptions | Shopify plan, themes, apps and a domain name |
| Payment processing fees | Shopify Payments, PayPal and Klarna fees |
| Postage and packaging | Carrier charges and branded packaging for stock you hold |
| Contractors and VAs | Designers, copywriters and customer service help |
| Software and home office | Accounting, analytics tools and a share of home costs |
Ad accounts are charged in many small payments, often to a card. Download the monthly ad invoices rather than relying on bank lines, so each spend is categorised and supported by a document.
Quarterly Updates for an Online Store
If your store software feeds sales into your accounting package, a quarterly update is mostly a check. The common reasons for a messy quarter are late-posted refunds, chargebacks that arrive weeks later, and ad spend that was never categorised.
| Update | Period (standard) | Deadline | 2026–27 |
|---|---|---|---|
| Q1 | 6 Apr – 5 Jul 2026 | 7 Aug 2026 | No points if late |
| Q2 | 6 Jul – 5 Oct 2026 | 7 Nov 2026 | No points if late |
| Q3 | 6 Oct 2026 – 5 Jan 2027 | 7 Feb 2027 | No points if late |
| Q4 | 6 Jan – 5 Apr 2027 | 7 May 2027 | No points if late |
You will not collect points for a late quarterly update in 2026–27, but the points system starts on 6 April 2027 (four points means £200). HMRC began signing up customers who should already be in MTD in September 2026, so registering yourself is the better route. See the registration guide and the software comparison.
Worked Example
Leo, running a Shopify dropshipping store as a sole trader
Leo’s profit after supplier costs, ads and fees is only about £17,000, but his threshold figure is the £79,400 of sales. He has been in MTD since April 2026, and his product and ad costs reduce his profit, not his threshold figure.
Frequently Asked Questions
Do dropshippers have to use Making Tax Digital?
If you are a sole trader and your gross sales plus any other self-employed or property income were over £50,000 in 2024–25, yes, from 6 April 2026. Over £30,000 in 2025–26 means April 2027, and over £20,000 in 2026–27 means April 2028.
Is the threshold based on profit or sales?
Sales, before product cost, ad spend and fees. A store with £74,000 of sales and £12,000 of profit is tested on the £74,000.
Do I count sales when the supplier ships the item?
Yes. The customer pays you, so the full sale price is your income. What you pay the supplier is a cost of sales that reduces profit, not turnover.
How are refunds and chargebacks treated?
Refunds generally reduce your sales for the period they are made. Record refunds and chargebacks separately from sales, and keep the processor report, so your figures reconcile.
Do I count VAT in my sales?
No. If you are VAT-registered, use your sales figure excluding the VAT you charge. VAT registration becomes compulsory once taxable turnover goes over £90,000.
I run the store through a limited company. Am I in MTD?
Not for Income Tax. Limited companies are outside Making Tax Digital for Income Tax at present, and dividends are not qualifying income. Your company still has its own tax and VAT duties.
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