Brexit is done, and the effects are being felt in a wide variety of ways. VAT and taxation are prompting questions from all business sectors. Here we answer some of the key questions.
The following questions are answered on this page:
Answered 24 Feb 21
The Act meant the UK is no longer a Member State of EU or part of the customs union. But the Northern Ireland (NI) Protocol to the Withdrawal Agreement means that NI remains subject to EU VAT rules, in relation to the supply of goods.
The terms are not interchangeable, and their differences are important. Here, we use Great Britain as a geographic term referring to the main island, and a political term that includes England, Scotland and Wales (and their outlying islands). We use UK as a political term, to cover the whole of Great Britain and Northern Ireland as well.
VAT is imposed on imports of goods from the EU to GB. VAT generally must be paid at the point goods enter the UK (although it can be deferred) and it can be recovered later, once a VAT return is submitted.
Postponed VAT accounting began for imports from 1 January 2021 to enable VAT-registered businesses to account for and recover VAT in a similar way to how ‘acquisition tax’ operated for all imports (both EU and non-EU).
There are special obligations for online marketplaces facilitating sales, which will be covered later.
Import VAT is not due on consignments of goods that are:
Instead, the seller is required to charge and collect UK VAT at the time of sale.
Some old rules no longer apply, including:
Some processes have changed; for example, UK businesses will not have access to the EU portal from 1 April 2021 and if a UK business incurred EU VAT on or before 31 December 2020, it must submit refund claim by 31 March 2021.
UK businesses that incur EU VAT on or after 1 January 2021 must use existing processes for non-EU businesses. (Unfortunately, as processes vary across each member state, it may be necessary to appoint a VAT representative in certain member states.)
No UK VAT is charged on exports of goods from GB to the EU and the distance selling rules no longer apply.
Distance sales from GB to the EU are exports from the UK and imports into EU member states. This means that UK suppliers previously benefitting from distance selling thresholds may need to become VAT registered in EU member states. Where the business is not VAT registered in the EU, there is no longer a requirement to submit EC sales lists although Intrastat returns are required until 31 December 2021.
There are consequential changes for services not covered by the general place of supply rule. For example:
Businesses supplying digital services can now register for non-union mini one-stop shop (MOSS) status from 1 January 2021 or register for VAT in each member state in which they make supplies (see below for detail, including reforms in July 2021).
Those that make supplies subject to the MOSS scheme are able to register, account for and make adjustments to supplies made up to the end of the implementation period for a limited period after the end of the implementation period, as set out in the Withdrawal Agreement.
Businesses can reclaim VAT incurred on specified supplies of exempt financial services made to customers in the EU from 1 January 2021 (to bring such supplies in line with supplies to the customers in the rest of the world). Partial exemption special methods agreed before the implementation period completion day must be interpreted in accordance with this.
The fund management exemption is amended to remove management of recognised collective investment schemes constituted in an EEA state that are not umbrella schemes, of sub-funds of any other recognised collective investment scheme constituted in an EEA state, and to exclude funds established in EU Member States from the definition of qualifying pension schemes.
The EU is in the process of changing to a single VAT system. According to the European Commission, the aim is to simplify VAT obligations for companies carrying out cross-border sales of goods or services (mainly online) to final consumers and to ensure VAT on such supplies is paid correctly to the member state in which the supply takes place, as well as being in line with the taxation principles in the destination member state.
The first measures came into force in 2015 and covered only telecommunications, broadcasting and electronic services to consumers. A mini MOSS was created, as a simplified system to declare and pay VAT on business-to-consumer (B2C) supplies, in the EU, of telecommunications, broadcasting and electronic (TBE) services.
A second set of measures was adopted by the Council in December 2017, referred to as ‘the VAT e-commerce package’ and are set to apply from 1 July 2021. They extend the above simplification to distance sales of goods and any type of cross-border service supplied to final customers taking place in the EU.
The new rules include:
The OSS will mean that;
Where the import scheme is used, the seller will charge and collect the VAT at the point of sale to EU customers and declare and pay that VAT globally to the member state of identification in the OSS. These goods will then benefit from a VAT exemption on importation, allowing a fast release at customs.
The introduction of the import scheme goes hand in hand with the abolition of the current VAT exemption for goods in small consignment of a value of up to EUR 22, and is in line with the commitment to apply the destination principle for VAT.
Where the import OSS is not used, a second simplification mechanism will be available for imports. Import VAT will be collected from customers by the customs declarant (postal operator, courier firm, customs agents etc), which will pay it to the customs authorities via a monthly payment.
The Commission believes that businesses will benefit from a substantial reduction in cross-border VAT compliance costs, promoting greater cross-border trade, and that EU Businesses will be able to compete on equal footing with non-EU businesses that are not charging VAT.
The main implication for these changes is that after July 2021, UK businesses will be able to close their foreign VAT registrations and instead complete a quarterly OSS return for their home country’s tax authority in respect of a broad range of cross-border services and certain goods.
But UK businesses will require at least one regular VAT registration in one EU member state to use this service. The OSS will list sales by EU country, VAT % used and VAT due; this VAT must be paid to the home country’s tax office.
An example of what an OSS return will look like from July 2021:
No UK VAT is charged on exports of goods from GB to the EU.
You must make sure that the goods are exported, and you get the evidence within three months from the time of sale. (This can be longer for goods needing processing before export and for thoroughbred racehorses.)
The time of sale is the earlier of the day you send the goods to your customer or get full payment for them. You need documentary evidence of goods leaving either the UK from Great Britain or the UK and EU from Northern Ireland.
If you do not get evidence in time, you must account for the VAT on your return. If you use the National Export System, you will automatically get an electronic Goods Departed Message when the goods leave the UK, as acceptable official evidence.
In addition to evidence that the goods have physically left, you need to hold supplementary evidence, for example, within your accounting system, to show that a transaction has taken place.
You must keep evidence for six years. HMRC can ask to see it and if they think it is unsatisfactory you may have to pay VAT on the goods or services you sold. If you cannot get this evidence in time you must account for VAT on your return.
You will need to keep several records for VAT on exports:
Sales are noted in Box 6 on the VAT return.
From the exporter’s point of view, a Delivered at Place (DAP) may be the better incoterm for zero-rated exports in situations where you do not have the required evidence and would need to account for VAT. This is because your customer will be responsible for import VAT and duty.
By contrast, if you are delivering Delivery Duty Paid (DDP) you will be responsible for any import VAT and duty in the country of destination.
The EU has standard rules on VAT. Each member country is responsible for setting its own rates, depending on the product or service; each has a standard rate which applies to the supply of most goods and services that cannot be less than 15% and one or two reduced rates of not less than 5% may be applied to supply of specific goods and services (based on the list in Annex III of the VAT Directive), but in most cases not to electronically supplied services.
There are also special rates which were set according to VAT rates implemented in EU countries before they joined the EU:
The Commission has a published table of rates on its website.
You may need to register for VAT in the EU country you are selling to and the registration information for each member state can be accessed via the Commission’s website. At present, if your business supplies digital services to consumers in EU countries, you need to register for either:
If you do not want to set up VAT accounts in each country, you can use the non-union VAT MOSS scheme for certain digital services. The government has published guidance on how to use the non-union scheme.
If you are not able to do this, you will need to wait until 1 July 2021 for the reform described above, which will create an OSS for other kinds of services and certain goods. This means only one VAT registration will be needed.
You can use the DPP incoterm, although there will also be special provisions applying to online market places which might make you a deemed supplier and liable to pay (see above).
For temporary imports (i.e. you intend to re-export them within two years), you can use temporary importation to obtain total or partial relief from import duties.
If you import goods temporarily but then choose to put them into free circulation in the UK, you have to pay duty, import VAT, and compensatory interest for certain types of goods. A wide range of goods can be stored using a customs warehouse.
An alternative is to move the goods across the UK under a transit procedure.
The government has published guidance on applying for temporary imports.
Some services associated with goods held in tax warehouses can be relieved from VAT at the time they are supplied. In certain circumstances, VAT will become due on such services when the goods concerned are subsequently removed from the regime.
The services eligible for zero rating are restricted to those physical services that take place in the warehouse and are directly associated with the goods held in the warehouse.
If goods are removed from a tax warehouse, you will not have to pay the VAT normally due on removal if they are removed from Great Britain to a destination outside the UK or Northern Ireland to a destination outside the UK and EU.
In such circumstances, either the person making the final supply in warehouse, or the person removing the goods, can zero rate that transaction as an export, as long as certain conditions are met.
Liability to meet the zero-rating conditions must be clearly established before the goods are delivered to avoid any doubt as to where responsibility lies.
You must lodge a customs declaration and declare the value of the goods in box 6 of the VAT return.
On the other hand, the transfer of own goods is not deemed to be a supply for VAT purposes and there is no requirement to declare the value of such goods as an output in box 6 of your VAT return.
Nevertheless, if you are the owner of goods in warehouse and you are removing those goods for export to a destination outside the UK and EU, proof of export must be retained to show that the goods have been transferred.
From 1 January 2021, you can only apply for a multi-state authorisation that covers sites in Northern Ireland and the EU if you are established in Northern Ireland. Multi-state authorisation has a different application process.
Geographical patterns of trade have already begun to change. Research on geographical patterns of trade was recently published by the House of Commons Library and provides statistics on the extent of the trading relationship between the UK and the EU.
In 2019 the EU accounted for:
The figures may be distorted by the ‘Rotterdam Effect’, the theory that the UK’s trade with the Netherlands is artificially inflated by goods being dispatched to or arriving from the sea port of Rotterdam, irrespective of the original source or destination of the goods. The scale of this effect is not known.
The government published UK Port Freight Statistics in 12 August 2020 that show:
Regarding air freight, the Freight Transport Association reports:
Since 1 January 2021, the UK has had discretion to use its own approach to goods imported to GB from the EU.
The UK decided to implement full border controls on imports coming into GB from the EU.
From January 2021:
Traders importing standard goods (everything from clothes to electronics) need to prepare for basic customs requirements, such as keeping sufficient records of imported goods, and have up to six months to complete customs declarations.
While tariffs need to be paid on all imports, payments can be deferred until the customs declaration has been made. There will be checks on controlled goods, like alcohol and tobacco.
Businesses also need to consider how they account for VAT on imported goods. There will also be physical checks at the point of destination or other approved premises on high risk live animals and plants.
From April 2021:
All products of animal origin (POAO) (meat, pet food, honey, milk, egg products etc) and all regulated plants and plant products will also require pre-notification and the relevant health documentation.
From 1 July 2021
There are more requirements:
This approach is for GB/EU trade and does not apply to the flow of trade between Northern Ireland and Ireland or Northern Ireland and GB, which is covered by the Withdrawal Agreement.
The Government is actively building new border facilities in GB for carrying out required checks, including customs compliance, transit and Sanitary and Phytosanitary (SPS) checks. It is also providing targeted support to ports to build new infrastructure. Where there is no space at ports for new infrastructure, there are plans to build new inland sites where these checks and other activities will take place.