In this section, we will look at how the VAT will be changing and learning about VAT on imports and exports.
How Will VAT Change After Brexit?
While the Domestic VAT rules remain the same following the end of the transition period, VAT rules for imports and exports to and from EU will change. The UK was a part of the EU VAT regime prior to Brexit and during the transition period. As a result, a UK business did not have to register for VAT in each EU country and was subject to a common set of rules un relation to VAT.
Additionally, UK businesses were able to use various VAT simplifications such as distance selling thresholds and online VAT refund process. However, after 1st January 2021, UK businesses will treat EU countries just like they treat countries outside the EU and the VAT terminology will change accordingly. Hence, trade with EU countries will cease to be called dispatches and acquisitions and will instead be referred to as imports and exports – like trade with non-EU countries.
Broadly speaking, VAT will be payable upon import, although the UK government has introduced the postponed VAT payment to avoid cash flow problems. This allows the goods to be released from customs without the need for VAT payment and lets businesses importing goods into the UK account for the VAT on their next VAT return. While nothing will effectively change from a cashflow viewpoint compared to before, there will be some new administrative expenses.
VAT on Imports
VAT-registered businesses applied VAT through the EU reverse charge on intra-community acquisitions before Brexit/end of the transition period. Businesses must account for import VAT for goods imported from anywhere in the world. And from 1st January 2021, this will include countries within the EU.
Please note that this only applies if the value exceeds £135.
For VAT on imports £135 or under, there is still a need to account for VAT, but you must use the new e-commerce rules as laid out in the section below. The VAT is applied at the point the goods are to enter free circulation which means that it should be considered the VAT tax point. This could be at the entry port or when the goods are released from customs warehousing, provided the customs special procedures are used. For your VAT records, however, you will need to collect evidence from HMRC regarding the point the goods entered free circulation. If you wish, the VAT can be paid at the tax point – in which case monthly C79 reports should be obtained from HMRC – as when importing from outside the EU.
However, most businesses are likely to make use of the postponed VAT accounting system. This is quite like the existing reverse charge mechanism whereby import VAT is not physically paid upfront and reclaimed on the subsequent VAT return. Instead, it is accounted for as input and output VAT in the same VAT Return. It may also need to be stressed that while postponed VAT accounting is optional, it is mandatory if you defer the submission of customs declarations. Additionally, the postponed VAT accounting can now be used for all imports outside of the EU too.
This is likely to provide a boost in cash flow for businesses importing from outside the EU and represents a stark change from how VAT was accounted for before the end of the transition period. As part of the postponed VAT accounting system, a new online monthly statement will be available. This will show the import VAT for the previous month on a transactional basis and when you should include it in your VAT Return i.e., the correct tax point.
Following Brexit/end of the transition period, as a general rule when it comes to VAT on services, sales of cross border purchases of services from one business to another (B2B) will remain subject to tax in the country of the customer – with some exceptions. Therefore, recipient of the service needs to account for the tax as reverse charged in the destination country.
VAT on imports £135 and under
The UK is introducing additional measures for overseas goods arriving at Great Britain from outside the UK with the end of transition period on 1st January 2021. Low Value Consignment Relief (LVCR) is being discontinued which previously exempted imports with a value below £135 from import VAT. Online Marketplaces (OMPs) will be responsible for collecting and accounting for the VAT where they are involved in facilitating the sale. For consignment value of £135 or under, VAT will be applied at the point of the sale rather than being applied as import VAT at customs.
This UK VAT will be charged and collected by the seller for B2C transactions. However, the VAT will be reverse charged to the customer for B2B transactions. This means that the foreign sellers sending goods into the UK will need to charge UK VAT and apply to be a part of the UK system when supplying goods with a value of £135 or under to end consumers i.e. non-VAT registered individuals.
Businesses receiving goods of £135 or under will need to account for the VAT as part of the reverse charge procedure and declare the VAT on their next VAT Return. Normal rules apply for the tax point, which means that it will usually be the invoice date. The recipient business will need to ensure that the seller knows their VAT number otherwise, the seller will have no choice and will have to treat it as a B2C sale and apply VAT.
In some respects, these UK measures mirror those due to be rolled out in the EU from July 2021 under the EU 2021 VAT e-Commerce Package.
VAT on Exports
The VAT situation also changes when it comes to exporting goods to EU countries as of 1st January 2021. As a result, exports to EU countries will be treated like the ones in non-EU countries – which essentially means that that they should be zero-rated for UK VAT. This will be the case regardless of whether you are exporting goods to a consumer (B2C) or to a business (B2B). In other words, you do not need to observe distance selling regulations or verify the VAT status of the recipient business.
Depending on the requirements of the countries in which sale is made, businesses selling to customers (B2C) in the EU will need to register for the EU VAT and appoint fiscal representatives. At the same time, it is crucial to understand what it means to zero-rate goods for VAT. It does not simply mean that you forget about VAT. Rather, it means that you apply a 0% VAT rate. While no VAT is payable, however, you should still include the exports as part of your VAT accounting.
When it comes to purchasing services, things will continue in the same way they did before 1st January 2021. B2B sales of services will continue to be subject to tax in the country of the customer and administered through reverse charge as per the place of supply rules – with some exceptions. B2C sales will continue to be subject to tax in the country of the seller – again with some exceptions. Furthermore, UK businesses using the Mini One Stop Shop (MOSS) system will need to register for the non-union MOSS. They will no longer benefit from a €10k threshold before having to apply the place of supply rules.
As a result, several businesses will be liable to VAT in the countries they sell digital services to and will need to register for non-union MOSS.
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