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We published an article in December in which we highlighted the key changes that were to take effect on 1 Jan 2021 after the Brexit transitional period expired.
At the time of the article, the UK and the EU had still to agree a Brexit ‘trade deal’, which was eventually reached on 24 December.
It came as no surprise that the government left it to the eleventh hour to agree a trade deal with the EU and although, as anticipated, the deal has removed the prospect of Customs Duty being applied to most transactions between the UK and the EU, this is only where certain conditions around the origin of goods are met, and most other changes that had been anticipated ahead of the trade deal broadly remain in place.
We have summarised again below the key changes, updated with things we have learned since December where relevant and also added some further detail on some (non-Brexit) changes that will take effect from 1 July 2021 for supplies to EU (retail) consumers.
The expiry of the Brexit transitional period has resulted in significant changes to the VAT and Duty rules that apply to trade between the UK and the EU, because the UK is no longer part of the EU Single Market and EU Customs Union.
Although the most significant impact is on the cross-border supply of goods, there are still some significant changes applying 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.
Further (non-Brexit) changes will also be introduced on 1 July 2021 that will impact businesses supplying EU consumers. The July 2021 measures remove the VAT Distance Selling rules that apply to EU businesses selling goods to other EU countries, but they will also apply to UK (and other non-EU) businesses that supply consumer products to EU customers.
The key changes are as follows:
Customs borders have reappeared between the UK and the EU
The UK left the EU Single Market and Customs Union on 1 January 2021. This means that there is no longer free movement of goods between the UK and the EU. The Customs borders that were removed in 1993 when the EU Single Market have returned, 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 VAT will be payable in most cases when goods cross a UK/EU border, and although there will be no Customs Duty in many cases, ‘duty free’ status will apply only if certain conditions regarding the origin of the products being imported can be met.
The tariff-free trade deal trumpeted by the government is not quite what it seems and has already caused alarm in some quarters because the ‘rules of origin’ requirements can be complex and businesses who rely on suppliers in China and other non-UK/EU territories are more likely to be affected.
To benefit from preferential tariffs (i.e. no Customs Duty) goods must predominately originate from where they are exported from (i.e. the UK for exports to the EU, or the EU for exports to the UK).
The rules on where goods originate from can be complex because there are different conditions for different types of goods and factors such as the processing and assembly of goods can also have an impact.
Exporters/importers must be able to prove the origin of goods to enable tariff-free trade, and although there is a 12-month transitional period (to 31 December 2021) in which requirements are less stringent, it is still important to ensure that proof of origin requirements can be met.
Consignments valued at €500 or less are exempt from the rules of origin requirements (€1,200 for goods imported in personal luggage) but origin documentation becomes more stringent the higher the value of the consignment, especially consignments valued at €6,000 or more.
Another consequence of Customs borders returning between the UK and the EU is that UK business now 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 post-Brexit imports and exports between the UK and EU countries.
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 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 now be required if a UK business is to move goods to or from Northern Ireland.
A UK business will only need to obtain an ‘EU EORI’ if it is required to make a customs declaration in an EU country. This will only normally be the case if it is the UK business that is responsible for paying VAT/Duty 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 will be required to appoint a fiscal representative to submit VAT returns. This was not a requirement while the UK was a member of the EU, and while 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 it will.
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 where payable) 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 is 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.
UK businesses are also now 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, there will be nil net VAT to pay because this will be recoverable on the same VAT return as it is payable.
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
Pre-Brexit, UK businesses could hold ‘call-off’ stock in other EU countries without the need for a VAT registration in the country the stock is held.
This no longer applies, 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 relief that enabled consignments valued at £15 or less to be imported into the UK without VAT or Customs Duty was abolished on 1 Jan 2021 (for all imports into the UK, not just those from the EU).
Instead, import consignments that have a value of £135 or less are no longer subject to Customs Duty, although VAT is 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 to pay the VAT due.
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 continue to 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 no longer apply to B2C sales from the UK to customers in EU countries. Some UK suppliers may therefore 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, although issues around export/imports will now need to be considered of course.
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 EU VAT on the supply to the consumer.
Currently, where products are shipped from a supplier in one EU country to a non-business consumer in another EU country, VAT is payable in the supplier’s country unless the ‘distance selling’ threshold in the destination country is breached.
From 1 July 2021, distance selling thresholds will no longer apply and all consumer sales will be subject to VAT in the destination country. However, rather than having a separate VAT registration in each country sales are made to, it will be possible for the supplier to submit a simplified One Stop Shop (‘OSS’) EU VAT return alongside its regular VAT return. Although VAT will need to be charged at the rate in the destination country, the VAT due in all EU countries will be declared and paid on the single OSS VAT return.
The only businesses that can continue to charge local VAT on EU cross-border B2C supplies from 1 July 2021 will be businesses generating less than €10,000 B2C sales per annum to customers in other EU countries.
Therefore, from 1 July 2021 the VAT rate applied to EU B2C sales will be the same whichever EU country the goods are shipped from.
Also 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.
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 were previously able to reclaim VAT they pay in the UK on goods that they subsequently took back with them to a location outside the EU.
The scheme under which this was 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 is it no longer available to visitors from EU countries, it is no longer available to any visitors to the UK.
Incoterms for movement of goods between the UK and the EU
It is now 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 is now an import into the EU, 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 came in on 1 January 2021 affects UK suppliers of electronic services who previously took advantage of the EU Mini One Stop Shop (MOSS) to account for VAT on their services.
Post-Brexit, these suppliers a no longer able to use the MOSS for EU businesses and 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 applies to UK suppliers of certain financial and insurance services that (when provided to non-EU customers) enable VAT recovery on related costs. This has been 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 previously did.
Certain ‘intangible’ B2C UK to EU services were previously subject to UK VAT because the place of supply of intangible B2C EU to EU services is where the supplier belongs. However, because UK service providers are no longer EU suppliers, their services may no longer be subject to UK VAT, although HMRC have yet to announce any detailed guidance on what services will be affected or whether the previous rules are to be changed as expected.
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 domestic 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.