The UK finally reached an agreement on the terms of departure from the EU at the eleventh hour, which became effective at GMT 11 pm (ironically) on 31st December 2020. But what does this mean for UK businesses in respect of the charging, reclaiming and reporting of VAT relating to EU trade?
With any legislative change, there is usually good news and bad news, and sometimes this depends on the nature of your business and whom you trade with. The agreement on tariffs has certainly been welcome news for the majority, but the implications for VAT after Brexit aren’t necessarily so straightforward.
The VAT changes discussed here are most relevant to GB VAT registered businesses that are importing and exporting to the remaining 27 member states. The guidance excludes Northern Ireland as separate arrangements are in place and are covered by the NI Protocol, which will remain in place until 2025. The impacts are grouped into the effects of importers, exporters, and the service sector.
The Fears Around Brexit
While Brexit is already affecting anyone living in the United Kingdom, companies have already faced an immediate adjustment necessity because free trade in both goods and services across the European Union, as well as freedom of movement, are expected to change.
For example, those in the tourism industry, fear they will be unable to hire EU workers, while freight forwarders are concerned about delays and disruptions at UK and EU ports after the end of the Brexit transition period that concludes on 31st December 2020.
Previous Brexit surveys have shown that companies have cited the need to know how the UK not being a member of the EU any more would have an effect on the performance of various things, including:
- Good movement
- Taxes and duty
- The movement of people
- Personal data
- Safety standards
We try to address some of these areas of concern by providing details of some of the expected changes UK businesses will be affected by after the end of the Brexit transition period.
Exporters VAT After Brexit
As of 1 January 2021, the rules for the export of goods are identical to those already used when exporting goods to countries that are not members of the EU. Again, you will need an EORI number that begins with GB.
For most firms, the major change would be a new obligation to make customs declarations. Again, in order to ease the regulatory requirement, you might opt to use a UK-based fast courier service, customs agent, or goods transportation provider. In addition, certain goods may require licences or certificates for export.
Alternatively, the simpler declaration process can be used for certain kinds of exported products, which means implies you do not need to have as many details as a complete statement upfront, and can utilize a pre-shipment advice statement instead. However, at a later date, customs export data will need to be included. You will need to be approved by HMRC and be enrolled to use the National Export System to be able to use simpler declarations.
Benefits of Brexit on VAT for Exporters
There are two clear Brexit VAT changes that will be a benefit to UK exporters:
- Business (B2B) sales of goods to EU countries from 1st January 2021 are treated in the same way as exports to anywhere else. For UK VAT purposes, the sale is zero-rated and VAT should not be charged.
- There is no longer a requirement to determine your customers’ VAT status for B2B sales (although you will need their EU EORI number) and the distance selling rules no longer apply to B2C sales.
Drawbacks of Brexit on VAT for Exporters
On the other hand, there are some drawbacks of Brexit VAT changes for exporters:
- Although consumer (B2C) sales are also zero-rated for UK VAT purposes, they will be subject to VAT in the country to which they are supplied. Unless you are registered for VAT in that country and deem yourself as the importer as well as the exporter, then the liability for payment of this VAT may sit with the consumer (subject to the incoterms used).
- For non-VAT registered customers, this, therefore, represents an increase in the price of the product you sell as they are unable to recover this (unlike B2B customers).
- There are further rules around the sale of goods from online marketplaces and for digital services. Various options exist in these instances, and further changes come into force on 1st July 2021. Please talk to Q Accountants for more specific advice in this area.
- No more EC sales lists.
- Businesses are no longer required to submit monthly returns detailing the supply of goods and services to VAT registered businesses in the EU.
Importers VAT After Brexit
In general terms, the method of importing goods from EU countries would be similar to the existing process of importing goods from countries that are not members of the European Union. However, the rules for sending by post vary.
To import goods, you will need an EORI number that begins with GB, and you will need to declare items once they enter Great Britain via an entry overview statement. This implies that the goods qualify for customs duty and import VAT. You will also have to find out applicable VAT rates and duties (including services VAT).
Up until 30 June 2021 (six months after the conclusion of the transition period), you have the option to make a supplementary statement for imported products from the European Union. This implies that you document the goods in your own bookkeeping, invoice for the VAT if you’re eligible, and make a statement up to six months after the goods have been imported.
Benefits of Brexit on VAT for Importers
The good news for VAT registered importers: postponed VAT accounting.
Prior to 1st January 2021, any goods imported into the UK from outside the EU were subject to an import VAT, which was payable at the point of entry into the UK.
For large purchases this often caused cashflow issues as the reclaim of the VAT could not be made until the next VAT return was due. The new regime allows for the VAT to be included on your VAT returns as both VAT on sales and VAT on purchases (as well as showing the net purchase value on the VAT return) and will apply to all imports, including those from the EU.
Postponed import VAT statements can be obtained from HMRC, but Q Accountants can help with this and obtain these for you to ensure VAT returns comply with the new regulations.
Delayed customs import declarations. For a six-month period until 30th June 2021 importers can delay customs declarations and hence the payment of customs duties, providing they are authorised to use simplified declarations.
Eventually No More Intrastat Reporting
The EU will no longer need to capture information on sales, weights, and commodity codes to track the movement of goods within the EU. However, the UK government is still keen to capture information on the value of goods being imported into the UK from the EU, so have decided to keep Intrastat reporting for imports only for 2021.
The Downside to No More Intrastat Reporting
Imports from EU countries are subject to import VAT on entry to the UK. The impact for non-VAT registered businesses in the UK is an increase in the cost of the product being imported, as the VAT cannot be recovered.
The Impact of Brexit on Service Businesses
The VAT treatment for providing and receiving services within the EU remain largely unchanged.
For B2B services, the rules are different to the supply of goods as the place of supply is deemed to be in the country of the customer and in such cases are outside the scope of UK VAT.
Benefits of Brexit on VAT for Service Businesses
The place of supply for services previously rendered to B2C customers in the EU was deemed to be in the UK. This has changed to be in line with B2B, and hence VAT is no longer chargeable. This represents a genuine potential saving to customers who were previously charged UK VAT but could not reclaim this.
By altering how the legislation is approached, Brexit instantly affects companies. The translation of existing EU law into UK law will be part of the process, and the judiciary will need to decide whether they will use decisions already taken by the European Court of Justice for guidance.
The amendments to the legal system of the United Kingdom can create headaches for companies as they strive to negotiate how the changes, impact their activities, including their staff and contracts. Decision-makers that have access to information in the relevant fields need to ensure they adequately address risks and are aware of future opportunities.
The impact of Brexit on VAT varies depending on the type of business you are. Although Brexit will affect businesses in the UK in many different ways, addressing the implications for businesses detailed above is a good starting point for businesses in the UK looking to prepare for life post-Brexit.