The European Union (EU) withdrawal transition period has now ended and, with effect from 1 January 2021, the UK has left the EU’s customs union and VAT system.
Overnight, this brought major changes to many important long-standing VAT and customs rules, some of which were only agreed between the UK and the EU at the last minute, so businesses have had little time to fully understand and plan for the consequences. HMRC has also made hundreds of updates to its guidance on the gov.uk website, making it a major challenge for those affected to keep track of all the practical issues they must deal with.
We have rounded up the top ten headline changes for VAT and customs matters to help businesses get a broad picture of the changes and where to look next for information. Please note that different rules may apply in Northern Ireland (see item 10).
1. Customs – the ‘tariff free’ trade deal
Under the EU/UK Trade and Co-operation Agreement, there will be no customs duty payable on trade in goods between the UK and EU, provided those goods are of UK or EU origin. This is vital as a no-deal scenario would have seen the price of many goods inflated by tariffs as they crossed the border. However, traders must be able to demonstrate that their goods meet strict new rules of origin laid down in the agreement (see HMRC’s guidance for more information: Claiming preferential rates of duty between the UK and EU)
Goods that are not of UK or EU origin are potentially subject to customs duty when crossing the UK-EU border, under the UK Global Tariff for goods imported into the UK or the EU’s Common Customs tariff for goods exported to the EU. This means that importers that distribute non-UK/EU originating goods across Europe from a UK or EU hub risk a double duty liability – once when the goods arrive at the hub and again when they are shipped across the UK-EU border to customers. It is important to review your supply chain and consider using a customs procedure to mitigate against a double duty liability, such as customs warehousing.
2. Customs - declarations and border checks
The new trade agreement does not remove the need for border checks or for importers and exporters to make customs declarations when moving goods to or from the EU, and these are already proving to be considerable logistical and administrative burdens for businesses. Businesses exporting goods to the EU are already required to submit customs declarations at the time they enter the EU’s customs territory and many first-time importers in the EU are facing unexpected challenges as their VAT registration details are not set up for international trade, leading to significant delays.
Importers of non-controlled goods from the EU into the UK currently have the option of delaying submission of the customs declaration to HMRC for up to six months from the point of import. From 1 July 2021, businesses will face a further challenge when UK customs will require full customs entries to be submitted at the time of arrival of the goods.
See HMRC’s publication The Border Operating Model and our article on Grants to complete customs declarations after Brexit for more information.
3. VAT and customs - postponed accounting
Since 1 January 2021, postponed VAT accounting may now be used to account for UK import VAT due on goods arriving from the EU or the rest of the world. This allows the import VAT to be paid and recovered (subject to the normal rules) on the importer’s VAT return, instead of being paid upfront at the time of import, thus providing an important cashflow saving.
Importers must quote their economic operators’ registration and identification (EORI) number and positively opt to use postponed accounting on each customs declaration. This will generate an online monthly postponed import VAT statement that will be the evidence required to account for and recover the import VAT as input tax on their next VAT return.
See HMRC’s dedicated webpage - Check when you can account for import VAT on your VAT Return - for more information.
4. VAT and customs – low value packages
Overseas sellers of goods to customers in Great Britain must now register for VAT in the UK in order to account for UK VAT on the sale on consignments valued at £135 or less. Where the goods are sold via an online marketplace, such as Amazon or eBay, it is the online marketplace that must register. EU vendors that sell directly to UK customers are required to register in their own right.
Before 1 January 2021, the UK was part of the EU’s distance selling rules under which EU sellers were not obliged to register for VAT in the UK unless they sold more than £70,000 of goods to UK consumers per year. Now all vendors that make such sales to the UK independently of an online marketplace must register from their very first sale.
See HMRC’s guidance - Changes to VAT treatment of overseas goods sold to customers from 1 January 2021 for more information.
5. VAT – place of supply of B2C professional/intangible services
Until 1 January 2021, business to consumer (B2C) services of a professional, technical and intangible nature made to customers in the EU were subject to UK VAT. However, the law has now changed so all such services supplied to private customers who are usually resident outside the UK (in the EU or the rest of the world) are now outside the scope of UK VAT. Therefore, VAT will no longer be chargeable on fees for these services to individuals who are usually resident in the EU and receive them in a private capacity.
See section 12 of HMRC’s updated Guidance on the place of supply of services (VAT Notice 741A) for more information.
6. EU VAT refund claims
UK businesses seeking to recover VAT they paid in the EU and EU businesses seeking to recover VAT incurred in the UK before 1 January 2021 must submit their claims via the existing electronic portal for EU VAT refund claims by 31 March 2021. This is considerably earlier than the 30 September annual deadline claimants have been used to in the past, so businesses should take urgent action to identify VAT recoverable under this scheme and gather the evidence required to make their claim by the 31 March deadline.
For VAT incurred from 1 January 2021:
- businesses in the EU and rest of the world must claim UK VAT on form VAT65A.
- UK businesses claiming VAT incurred in the EU are required to submit hard copy 13th Directive claims to the relevant EU member state. At the time of writing, it is possible that some EU member states may not pay 13th Directive claims from UK applicants until they have confirmed a reciprocity agreement with the UK government.
See HMRC’s latest guidance for more information.
7. Financial services
Leaving the EU has changed the VAT status of supplies made in the financial services sector between UK and EU counterparties. Certain supplies of financial or insurance services or intermediary services made to EU counterparties now have the same VAT treatment as supplies to those in the rest of the world, resulting in a new opportunity to recover VAT incurred on those supplies to EU counterparties. Before 1 January 2021, this VAT was generally irrecoverable by UK financial services businesses.
Although this is good news, insurance and financial services providers must adapt their accounting systems so they can claim this VAT and may have to renegotiate existing partial exemption special methods with HMRC. HMRC has also stated that some input VAT incurred before the end of the EU withdrawal transition period cannot be recovered, even if it relates to supplies made on or after 1 January 2021.
For more information see our detailed article on Reviewing and optimising VAT recovery within the financial services sector, and HMRC’s new guidance on VAT EU Exit Transitional Provisions.
8. Mini one stop shop
From 1 January 2021, the UK (including Great Britain and Northern Ireland) is no longer part of the EU's mini one stop shop (MOSS) system, an optional regime for accounting for VAT on cross-border supplies of telecoms, broadcasting and electronically supplied services to private individuals. UK businesses, and any rest of the world businesses that were registered for MOSS in the UK, must re-register in an EU member state if they wish to continue using MOSS. Alternatively, they can consider registering for VAT in each EU member state where they supply these services to private consumers. It is also worth noting that the EU MOSS has a €10,000 threshold, which some smaller businesses may have used to avoid the obligation to register for this scheme; that threshold is no longer available.
9. Fiscal representation for UK businesses registered for VAT in the EU
Some EU member states require non-EU businesses that are registered for VAT in their jurisdiction to appoint a local fiscal representative to manage their VAT compliance and deal with the tax authority on their behalf. Fiscal representatives charge a fee for their services and, where that country’s rules hold them jointly and severally liable for any VAT debts of their non-EU client, also require businesses they act for to supply a deposit or financial guarantee to cover the tax at risk.
The UK’s departure from the EU means that UK businesses registered for VAT in the EU are now potentially required to appoint a fiscal representative in each member state where they are VAT registered. Some member states have not yet announced their post-Brexit position, so the full picture of precisely where a fiscal representative is required in the EU has yet to crystallise. For those that have confirmed their position, different countries apply different rules - for example, some member states have waived this requirement for UK businesses while others have gone as far as to cancel existing registrations and insist that UK businesses appoint a fiscal representative and re-apply for VAT registration. Businesses with a liability to register for VAT in the EU should urgently check the situation in the member states(s) in question.
10. VAT and customs - Northern Ireland
The Northern Ireland Protocol means that Northern Ireland operates under different VAT and customs rules from the rest of the UK in respect of goods. However, transactions involving services are not covered by the protocol, so existing VAT rules on services continue to apply in Northern Ireland.
Northern Ireland effectively remains part of the EU for supplies/movements of goods. This means that some customs formalities apply to goods moving between Northern Ireland and Great Britain. Simplified digital import declarations and digital safety and security information are required for goods arriving in Northern Ireland from Great Britain. However, customs duty is not payable unless the goods are deemed to be ‘at risk’ of moving into the EU or will be 'commercially processed'. Northern Irish traders are encouraged to sign up for HMRC’s Trader Support Service which can help with the paperwork needed to move goods across the Irish Sea.
As a result of Northern Ireland’s unusual status, postponed accounting for import VAT is only used on imports from the rest of the world. The VAT accounting for the movement of goods directly from or to Northern Ireland, to or from an EU Member State is the same as it was for intra-EU trade throughout the UK prior to 1 January 2021. Movements of goods directly from or to Northern Ireland, to or from an EU Member State, to a VAT registered customer will be a zero-rated dispatch by the seller and the customer must self-account for the acquisition tax on its VAT return. When the supply is to a non-VAT registered customer, the distance selling rules and thresholds continue to apply.
An important administrative change is that Northern Irish traders must now use the new ‘XI’ prefix to its existing VAT registration number for trade of goods with EU Member States, instead of the ‘GB’ prefix which was used by UK traders before 2021. This requires notification to HMRC so that the XI VAT registration number is included in VIES, the EU’s VAT information exchange (number verification) system.
The HMRC Trading and moving goods in and out of Northern Ireland guidance provides an overview of the new rules. However, the post EU withdrawal VAT and customs position of Northern Ireland is highly complex and likely to evolve further, so it is important to thoroughly review your position and take advice in areas of uncertainty.
What happens next?
There are, of course, many more important changes to VAT and customs rules that have come into effect as a result of Brexit, and it is vital all new rules and procedures are thoroughly reviewed with your individual business model in mind.
Also, the changes that took effect on 1 January are just the beginning. Now the UK has left the EU’s VAT system, it is no longer bound by the limits of EU VAT legislation and case law when considering reforms to the VAT legislation, so the pace of change seems likely to increase. Make sure your business watches the horizon for VAT changes, not just for cross border trade, but for domestic supplies too.