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1 Jan 2021 will bring significant changes to the VAT treatment of goods and services supplied between the UK and the EU. Do you know what these changes are and are you and your clients prepared?
Transitional Period comes to an end on 31 December 2020
The transitional period under which the UK has effectively remained in the EU will end on 31 December 2020, after which there will be significant changes to the VAT and Duty rules that apply to trade between the UK and the EU, as the UK leaves the EU Single Market and EU Customs Union.
It has come as no surprise that the government has so far failed to agree a post-Brexit trade agreement with the EU, and because it is so late in the day, it is fair to say that whatever deal can be pulled out of the hat at this late stage is unlikely to have much of an impact on the significant changes that will be introduced on 1 January 2021. The best we can perhaps hope for is some form of trade agreement that minimises Customs Duty and quotas on trade with the EU.
There are a number of changes afoot, and we have summarised the key changes below.
The most significant impact is on the cross-border supply of goods, but some significant changes will also apply to the supply of services.
Most UK businesses will be affected by the changes to some extent, but those involved in cross border transactions with customers or suppliers in the EU (or Northern Ireland) will be the most affected.
The key changes are as follows:
Customs borders will reappear between the UK and the EU
The UK will leave the EU Single Market and Customs Union on 1 January 2021. This means that there will no longer be free movements of goods between the UK and the EU. The Customs borders that were removed in 1993 when the EU Single Market was formed will return, which means that all goods crossing a Customs border between the UK and the EU will potentially be subject to Customs clearance procedures. This means that Customs duty and VAT will be payable in most cases when goods cross a UK/EU border.
Until we know the outcome of the post-Brexit trade deal talks between the EU and the UK, we won’t know whether there will be tariff-free trade between the UK and the EU.
If, as it currently appears, we are heading towards a ‘no deal Brexit’ or something that is well short of a free-trade deal, Customs duty will be added to many products crossing the border between the EU and the UK. This will represent an additional cost because Customs duty is not recoverable. Import VAT will be fully recoverable in most cases although not if the importer isn’t VAT registered or uses the goods in relation to VAT exempt or non-business activities.
Another consequence of Customs borders returning between the UK and the EU is that UK business will need an EORI number if they are to trade with EU countries. An EORI (Economic Operator Registration and Identification) number is required by any business that imports or exports goods. The EORI is used to identify the importer/exporter through the Customs procedure and failure to obtain one may mean that a UK business faces issues when clearing goods into the UK, shipping to an EU country or from the UK to Northern Ireland (or vice versa).
EORIs are not required for the movement of goods between EU countries because no Customs procedures are required.
Many UK businesses already have a UK EORI for imports and export transactions with non-EU countries and for most businesses this will also be sufficient for imports and exports between the UK and EU countries from 1 Jan 2021.
But if a business has not done any (non-EU) import and export before (e.g. carried out EU only) they will need to obtain a UK EORI before 1 Jan 2021 if they are to import/export with EU countries. The process is straightforward and an EORI can normally be obtained within 5 days A UK EORI will also be required if a UK business is to move goods to or from Northern Ireland from 1 Jan 2021.
A UK business will only need to obtain an ‘EU EORI’ if it is required to make a customs declaration in an EU country from 1 Jan 2021. This will only normally be the case if it is the UK business that is responsible for paying Customs duty/VAT in the EU country to which the goods are shipped (rather than it being the responsibility of the customer, which it is in most cases). Also, if a UK business is required to make a Customs declaration in Northern Ireland, it will be required to obtain a Northern Ireland EORI (an ‘XI EORI’).
It is still not clear whether UK businesses registering for VAT in an EU country after 31 December 2020 will be required to appoint a fiscal representative to submit VAT returns. This has not been a requirement while the UK has been a member of the EU. Although we understand that France has indicated that this will not be necessary, other countries such as Belgium, Italy, the Netherlands and Poland have indicated that this will be necessary. The outcome of the post-Brexit trade deal negotiations is likely to have an impact on this.
Deferring Payment of Import VAT and Customs Duty
Along with import VAT and Customs Duty paid on imports from non-EU countries, UK importers will also be able to ease the cash flow burden of having to pay import VAT and Duty by taking advantage of deferment arrangements, particularly in the 6 months to 1 July 2021.
Also, in the first 6 months from 1 January 2021, the importation of non-controlled goods will be subject to deferred customs declarations, with full declarations only being required up to six months after the goods are imported. Controlled goods such as excise goods and certain drugs, will be subject to the usual Customs procedures.
From 1 January 2021, UK businesses will also be able to defer the payment of import VAT on imports from the EU until their VAT return is due. If the UK importer can fully recover the import VAT as input VAT, because this will be recoverable on the same VAT return as it is payable, there will be nil net VAT to pay.
This ‘postponed accounting’ does not require notification to or approval from HMRC, although UK importers using this process will need to maintain a monthly statement of import VAT that has been ‘postponed’.
Call-off stock in the EU
UK businesses can currently hold ‘call-off’ stock in other EU countries without the need for a VAT registration in the country the stock is held.
This will no longer apply to UK businesses after 31 December 2020, so any UK business that holds call off stock in an EU country should review its position, as it may need to register for VAT in the country in which the stock is located.
EU businesses with call off stock in the UK should also review their position as soon as possible.
Low value consignments
The current relief that enables consignments valued at £15 or less to be imported into the UK without VAT or Customs Duty is being abolished after 31 December 2020 (for all imports into the UK, not just those from the EU).
Instead, import consignments that have a value of £135 or less will no longer be subject to Customs Duty, although VAT will be due, payable to HMRC by the non-UK supplier where the goods are outside the UK at the point of sale. The non-UK supplier will have to register with HMRC under a special scheme to enable the VAT to be paid to HMRC.
Where the sale of such low value consignment goods is made through an online marketplace (OMP), the OMP is responsible for collecting and accounting for the VAT due (a similar rule will also be applied across the EU from 1 July 2021).
B2B supplies of such low value consignment goods will, under certain conditions, be subject to a VAT reverse charge by the UK importer.
All consignments valued over £135 will be subject to normal import rules and potentially subject to VAT and Customs Duty, payable by the importer.
EU distance selling rules
EU distance selling rules will no longer apply to B2C sales from the UK to customers in EU countries from 1 January 2021 (and each EU country’s distance selling threshold will be replaced by an EU-wide threshold of €10,000 from 1 July 2021). UK suppliers to EU consumers may be able to cancel VAT registrations they currently have in the EU if they were only liable to register in those countries under the EU distance selling rules.
The supply of goods from the UK to EU consumers from 1 January 2021 will be imports into the EU so either the EU customer will have to pay import VAT and Customs duty on receipt of the goods, or the UK supplier will have to register for VAT in the country to which the goods are shipped, act as importer (pay the import VAT and Duty) and charge local VAT on the supply to the consumer.
From 1 July 2021, in line with changes to all imports into the EU, the VAT and Customs Duty treatment will depend on the value of the consignment. There will be separate rules for consignments valued up to €150, and those valued over €150.
An ‘Import One Stop Shop (IOSS)’ scheme is being introduced for consignments up to €150, under which all VAT due sold to EU customers is declared on a single return, similar to the current MOSS (Mini One Stop Shop) for electronic services.
The rules applied will also depend on whether goods are sold through an OMP.
UK businesses selling goods into the EU, particularly low value goods, should carefully review their post-Brexit VAT compliance requirements, especially if they sell through an OMP.
Abolition of Retail Export Scheme
Visitors to the UK from outside the EU are currently able to reclaim VAT they pay in the UK on goods that they subsequently take back with them to a location outside the EU.
The scheme under which this is possible is the Retail Export Scheme, which was reviewed by HMRC to consider the impact on the scheme of the UK leaving the EU. HMRC decided the scheme should be scrapped in its entirety, so not only will it be unavailable to visitors from EU countries after 31 December 2020, it will no longer be available to any visitors to the UK.
Incoterms for movement of goods between the UK and the EU
From 1 January 2021, it will be especially important to carefully consider Incoterms for shipments between the UK and EU countries (and vice versa).
Because the supply of goods from the UK to an EU country will be an import in the country of destination, care should be taken to ensure that all parties understand who the importer of record is, as this will determine who is responsible for paying Import VAT and Customs Duty.
The Incoterms will typically determine this, so getting this right will potentially avoid an unnecessary requirement to register for VAT in the EU.
B2C Electronic Services
The VAT position regarding UK to EU services is likely to evolve, with further changes expected, but one change that will come in on 1 January 2021 will affect UK suppliers of electronic services who currently take advantage of the EU Mini One Stop Shop (MOSS) to account for VAT on their services.
From 1 January 2021, these suppliers will no longer be able to use the MOSS for EU businesses and will need to change to the non-EU MOSS if they wish to avoid VAT registration in each EU Member State to which they supply electronic services. It is likely that registration via the Irish MOSS portal may be a popular option for UK suppliers.
VAT Recovery for Financial and Insurance Supplies to EU customers
A more positive change will apply to UK suppliers of certain financial and insurance services that (when provided to non-EU customers) enable VAT recovery on related costs. This is being extended from 1 January 2021 to include services provided to customers based in the EU. Many financial and insurance service providers will therefore experience a higher rate of VAT recovery than they currently do.
Certain ‘intangible’ B2C UK to EU services are currently subject to UK VAT because the place of supply of intangible B2B EU to EU services is where the supplier belongs. However, because supplies by UK providers will not be EU to EU from 1 January 2021, they may no longer be subject to UK VAT. However, HMRC have yet to announce any detailed guidance on what services will be affected or whether current rules are to be changed or extended beyond 31 December 2020.
Services that are likely to be affected are services such as financial and insurance services, advertising services, consultants, engineers, lawyers, and accountants.
There are other changes that we have not covered here, and we’re sure there will be plenty more to come, including potential post-Brexit changes to UK VAT rules, so if you would like to discuss or have any questions, please get in touch with Keith Miller, our VAT specialist, or your usual ETC Tax contact.