Brexit & VAT – what needs to be done

With so little of 2020 left we have to face up to the fact that we are knocking on the door of Brexit. Despite still having some significant Brexit unknowns, the fact remains that Brexit is happening and really cannot be ignored any longer.

In the space available this summary cannot hope to fully cover all Brexit related topics so specific consideration should be given case by case.  Trying to bring everything together in one short summary has been made especially difficult by the huge number of variables that come into play.  Of primary importance is that we have different rules applying to:

  1. Imports versus exports
  2. B2C -v-B2B
  3. Goods -v- services
  4. If goods, are they dutiable or 0% duty?
  5. If services, are they digital?
  6. B2C sales EU -v- non-EU
  7. Stockholding or duty-paid deliveries
  8. Goods moving to or from NI

Business selling B2C into the EU face probably the biggest changes. Distance selling and MOSS simplifications will both be removed from 1 January 2021 leaving UK sellers exposed to having to be VAT registered wherever they have a customer. Importantly without any registration threshold.

As if to make the B2C situation even harder, the rules in the EU will change again for UK businesses from July 2021. On sales into the EU from January until July, unless the customer is acting as the importer,  UK sellers face having multiple VAT registrations and appointing expensive fiscal representatives. From July 2021 for B2C consignments <€150 a UK business could set up a single EU VAT registration and account for VAT under the new Non-Union Import One Stop Shop (IOSS).  Instead of import VAT being due on the shipment, ‘supply VAT’ will be payable by the seller to the appropriate EU tax authority.  This supply VAT will need to be accounted for at the rate applicable in the customer’s EU state via an IOSS VAT return. This system enables VAT to be paid on all EU B2C sales <€150 via one return covering all of the different EU VAT rates.

Exports of digital services on a B2C basis within the EU will no longer fall under the MOSS system as the UK will cease to be eligible to use this provision. For sales from 1 January UK businesses will need to either register in one EU member state in order to be eligible to use the VAT MOSS or register for VAT in each member state where they have a customer.  Again appointment of a fiscal representative are likely to increase costs being incurred.

Importing digital services into the UK will require non-UK businesses to register for VAT and importantly this is without any turnover threshold applying to cushion low levels of trade.

Imports of goods from the EU will effectively be treated the same as those from the rest of the world (ROW). Depending on whether a deal is agreed with the EU at the 11th hour, potentially import duty, which cannot be reclaimed, will be payable in addition to import VAT. This applies on both goods coming into the UK and sales of goods in the EU.  Who will pay any such duty becomes a commercial issue and one where agreeing the Incoterms plays a vital part.

Import VAT will no longer have to be actually paid to HMRC when goods are imported into the UK from either the EU or ROW. Instead the same Postponed Accounting regime will apply to all imports. This is similar to current Acquisition Tax accounting used for goods coming in from the EU. Import VAT will be declared and recovered on the same VAT return rather than having to pay it upfront and recover it later. This system will largely render the current C79 system redundant.

Provided the goods are being imported for business purposes and the importer’s EORI prefixed with GB and UK VAT number are included on the Customs declaration, Postponed Accounting does not require prior authorisation and can be applied from 1 January 2021. The same procedure applies to goods released into free circulation from Customs special procedure such as Customs Warehousing; Inward or Outward Processing Reliefs and other duty suspension regimes.

Essential steps where importing goods:

      1. Agree incoterms and the commodity code with the supplier
      2. Establish who will be the importer
      3. Check if duty is payable and decide how to handle this – via the agent’s deferment account, bonded warehouse, etc
      4. Check for and obtain any licenses, etc
      5. Consider if quotas apply and manage timing of shipments to minimise costs
      6. If non-UK supplier is importer, is value <£135? Who will pay supply VAT, non-UK supplier or OMP?
      7. Ensure GB/XI EORI is declared on Customs declarations
      8. Declare Postponed Accounting and reconcile to monthly import statements
      9. Submit Intrastat declarations

Import Duty and commodity codes will become a major consideration.  Key to minimising possible duty costs will be making sure the correct commodity code is being applied. This task should not be left to the agents handling the shipment but addressed in advance by the business.

If there is no deal with the EU  post-Brexit the UK will apply its ‘UK Global Tariff’ which is already available on-line and indicates the duty rates applicable to each commodity code.  Importantly the UK duty rates that would apply to UK imports from the EU are not necessarily the same as the rates that would apply to those same goods being imported into the EU.

As each country decides on its own import tariff the duty rates and conditions vary country by country.  If an export is into a country where there is no trade deal the non-preferential tariff rate will apply.

It is possible to postpone the immediate payment of duty by holding the imported goods in a duty suspension regime such as a bonded warehouse. While the storage costs is at a premium it can improve cash flow where significant values of dutiable goods are being imported into stock.

Imports by non-UK businesses also hinge on who is the importer and whether the supply is B2C.  Incoterms dictating that ownership in the goods passes to the UK customer on arrival render the non-UK business as being the importer and therefore liable to register for UK VAT.  On B2C consignments of <£135 import VAT is not due and instead output VAT must be paid by the seller via a UK VAT registration (without any turnover threshold) or via any Online Market Place (OMP) handling the sale.

Exports – Any business selling goods into the EU will be obliged to complete the same paperwork as currently applies to UK exports to the ROW.  Issues arise from the Incoterms applied to the sale. Who is defined as being responsible for the import declaration and payment of import VAT and duty? If this is the seller, for example as would be the case with DDP shipments, there is then an obligation for the seller to register for VAT in the customer’s home EU state.

Using the correct commodity codes is not only important by dictating whether import duty is payable on an import either into the UK or into the EU, it also identifies if a license, permit or other such requirement applies to the goods.  Import quotas are also administered by following the commodity codes of the goods subject to restrictions.

License, certification, labelling, marketing and similar obligations must be met before the goods will be allowed to leave the UK.  Similarly departure of the goods from the UK will be delayed unless export declarations have been filed in advance of the goods arriving at the port.  While these declarations are usually handled by the handler or agent via the National Export Scheme, the accuracy of the declaration remains the responsibility of the exporter.

Essential steps before exporting goods:

      1. Check the customer will make the import declaration and pay import VAT & duty
      2. If the UK supplier acts as importer, a VAT registration will be required including in some non-EU destinations
      3. Agree the Incoterms and check against who will be importer
      4. Consider the correct commodity code
      5. Check and obtain any licenses quotas, etc in advance
      6. Check the tariff rules in the destination country
      7. From July 2021 if B2C EU sales and value is <€150 then IMOSS could be used
      8. Establish whether any trade deals apply
      9. Ensure that export declarations precede goods arriving at the port
      10. Obtain & retain export evidence

Retaining evidence of export in order to justify not charging UK VAT will continue to be an absolute requirement. If not met HMRC will remain entitled to treat the sale value as including VAT and demand 1/6th of the sale be paid over to them as output VAT.

Other issues

  1. Any trade involving Northern Ireland needs to be sheltered under the Trader Support Scheme (TSS), registration which will result in a new EORI number being allocated with a prefix of XI.
  2. Movements in either direction between the EU and Northern Ireland will be subject to Intrastat declarations until 2025. Intrastat declarations  for other UK movements will only continue to be needed during 2021 for arrivals from the EU if over £1.5m.
  3. Other EU-wide simplifications will also cease to apply to UK businesses including contracts involving installation and triangulated supplies. These situations, along with services treated as relating to land, are likely to create an obligation for the supplier to register for VAT where the supply is treated as taking place.

As ever with VAT, the devil is in the detail.  Covid-19 has undoubtedly caused a lot of businesses to take their eye off the Brexit ball.  The risks are numerous but of primary concern is being obliged to register for EU VAT; not being able to export goods without hitting delays and incurring additional costs on imports.

Although Brexit needs attention right now, please do not neglect to think about the two other big VAT changes happening on 1 March 2021.  The Domestic Reverse Charge and Phase II of MTD are both packed full of challenges so planning for how to deal with these should also be high on your ‘To Do’ list.

This article was first published for the ICPA.

Melanie Lord – Director of AVS VAT.  We solve all kinds of shapes and sizes of VAT and Customs problems so please call us on 01438 716176 if you need help.

Posted in Brexit etc, VAT Appeals.