VAT changes for UK businesses selling to EU consumers from 1 July

As of 1 July 2021, new EU VAT rules for business to consumer (B2C) sales will be introduced. These new rules will affect UK suppliers selling goods to EU consumers online.

Why are new rules being introduced?

The new rules are being introduced to facilitate with EU cross-border trade, to ensure a fair competition for EU suppliers and to ensure that VAT is charged based on where the customer is located. The changes are also designed to combat VAT fraud.

What’s new?

The major changes from 1 July 2021 include:

  1. Withdrawal of distance selling rules and new single return for ecommerce sales;
  2. Removing import VAT exemption and new VAT scheme for imported goods – IOSS; and
  3. Online market places responsible for EU VAT.

1. Withdrawal of distance selling rules & new single return for ecommerce sales

Firstly, the existing ‘Distance Selling Thresholds’ for EU sales will be withdrawn from 1 July 2021.

Instead, cross-border sellers will have to charge the VAT rate of the customer’s country of residence at point of sale. This is to be accompanied by the roll-out of a single One Stop Shop (OSS) EU Return. This new OSS return will avoid the requirement to register for VAT in each applicable EU country. This is an extension of the MOSS which is currently used for accounting for VAT for digital supplies. Local businesses will be registered in their home country, and non-EU businesses can choose any member state to act as their VAT identification country. All pan-EU sales will then be included in a single OSS return.

The Union scheme which applies to EU businesses will extend to include the supplies of all types of B2C services, intra-EU online sales of goods and specific domestic supplies sold through digital marketplaces.

2. Removing import VAT exemption and new VAT scheme for imported goods – IOSS

This VAT change also affects imported goods into the EU so will have an impact on businesses who wish to sell goods to EU consumers that are based outside the EU, including the UK.

The EU is introducing a new imports scheme called Import OSS (IOSS) for goods worth less than €150. Non-EU businesses will have the option to register for this scheme in a member state of the EU.

In addition, from 1 July 2021, the VAT exemption for goods imported into the EU in small consignment of a value of up to €22 will be withdrawn. This is intended to level the playing field for EU businesses that are always charged VAT.

The options for non-EU UK sellers are therefore:

a) Use the new IOSS scheme

If using the IOSS, businesses will be required to register for the scheme in one EU country, and charge and collect VAT at the point of sale on products below €150 when selling to EU customers.  The applicable VAT rate will be the customer’s local rate. Each month, the business must then declare and remit the total applicable EU VAT through an IOSS return. These sales will then benefit from a VAT exemption upon importation, allowing a fast release at Customs. Businesses will also have to consider their pricing structure as rates of VAT vary in the EU from 17% to 27%.

b) Alternative to IOSS

Where the Import OSS is not used, a second simplification mechanism will be available for sales to EU consumers worth less than €150. Import VAT will be collected from customers by the customs declarant (e.g. postal operator, courier firm, customs agents) which will pay it to the customs authorities via a monthly payment. This means that the customer will have to pay a fee to accept their package.

3. Online marketplaces responsible for EU VAT

After July 2021, online marketplaces will become responsible for charging and collecting VAT on deemed supplier transactions. For imports not exceeding €150, instead of import VAT the marketplace will charge the customer VAT at the point of sale and declare it instead of the seller. Both EU and non-EU sellers will benefit from reduced VAT obligations and may be able to deregister in some EU states.

How can we help?

At Chiene + Tait we are in a unique position to help you navigate these changes and help you to understand how the above changes will impact you and your business on a day-to-day practical level.

If you are concerned about expanding your business into EU markets, or how your current business with the EU might be affected, we can assist you by undertaking a review into your business and recommending to you the best course of action. Whether it be sales to EU consumers and businesses, importing goods from the UK, exporting goods to the EU and further afield, Customs Duties & Tariffs, we will help you find the ideal solution for you and your business.

Chiene + Tait is also part of a worldwide association of firms, including members in the EU, with whom we can communicate on your behalf or put you in touch with directly so that you can understand from professionals across the EU how the rule changes will affect you from start to finish.

Grant Funding Available

The UK government has confirmed that that there will be grant funding available of up to £2,000 for SMEs to receive advice and training on how changes brought about because of Brexit can affect your business. We can guide you through the grant funding process to ensure you get the best value and piece of mind.

We would recommend that any business that wishes to sell goods to EU consumers acts now to be in a position to be ready for these changes.

Contact our VAT and Indirect Taxes team at vat@chiene.co.uk, or 0131 558 5800 for help, advice or to arrange a review.

HMRC announces new Brexit Support Fund for SMEs involved in imports or exports

HMRC has recently announced an SME Brexit Support Fund which can provide funds of up to £2,000 to assist with professional advice and/or training for the business.

To qualify for this grant the business must:

  • Have up to 500 employees
  • Have no more than £100 million in annual turnover
  • Be established in the UK
  • Have been established in the UK for at least 12 months, or hold a valid AEO status
  • Be involved in imports and/or exports between UK and the EU or Northern Ireland.

The potential VAT and Customs issues surrounding Brexit, particularly following the trade agreement announced in December 2020, is having an impact on many businesses and it is not too late to seek advice to get to grips with this.

If you would be interested in learning more about the grant funding available to you, and having a review undertaken of the potential VAT & Customs implications on your businesses, we would be happy to provide you with a quote for this work and discuss this further with you.

Please contact our VAT Department for more information.

HMRC announces grant support for SMEs requiring VAT & customs assistance

HMRC has announced that it has set up an SME Brexit Support Fund which can fund up to £2,000 to help with training or professional advice, if your business has up to 500 employees and no more than £100 million annual turnover.

The grant can be used for training on:

  • How to complete customs declarations
  • how to manage customs processes and use customs software and systems
  • specific import and export related aspects including VAT, excise and rules of origin

It can be used to help you get professional advice so businesses can meet customs, excise, import VAT or safety and security declaration requirements.

In order to qualify the business must:

  • be established in the UK
  • have been established in the UK for at least 12 months before submitting the application, or currently hold Authorised Economic Operator status
  • not have previously failed to meet its tax or customs obligations
  • have no more than 500 employees
  • have no more than £100 million turnover
  • import or export goods between Great Britain and the EU, or move goods between Great Britain and Northern Ireland

The business must also either:

  • complete (or intend to complete) import or export declarations internally for its own goods
  • use someone else to complete import or export declarations but requires additional capability internally to effectively import or export (such as advice on rules of origin or advice on dealing with a supply chain)

If you are interested in obtaining VAT and Customs advice in relation to Brexit and qualify based on the above conditions, please contact VAT Director Iain Masterton via email or 0131 558 5800.

New Trade Agreement reached between the EU and UK: VAT and imports

A new “Trade and Cooperation Agreement” was reached in principle between the UK and EU on 24 December 2020. The deal will cover the future UK-EU relationship, with the two parties aiming to implement it in time for the end of the Brexit transition period on 31 December.

What impact does this have on the previously foreseen changes from a VAT perspective?

The UK will still leave the EU Single Market and Customs Union on 1 January 2021. This will end the free movement of persons, goods, services and capital with the EU. From a VAT perspective the intracommunity rules for supplies of goods and services will no longer apply and all previously foreseen changes will still apply.

The free movement of goods will end, and customs checks and controls will apply to all UK exports entering the EU and vice versa. A key feature of the agreement includes a free trade agreement ensuring no tariffs or quotas on trade in goods between the UK and EU. It provides for zero tariffs and zero quotas on all goods that comply with the appropriate rules of origin.

The UK and EU have agreed a rules of origin Chapter which contains modern and appropriate rules of origin ensuring that only ‘originating’ goods are able to benefit from free trade agreement. This means that goods must not only be produced in the EU but also consist in majority of raw materials that originate in the EU or the UK to benefit from zero tariffs and quotas. For goods imported into the UK/EU on which duties have been paid, the onward sale to the EU/UK may trigger customs duties again, as these imported goods do not meet the rules of origin.

It is important to remember that regardless of the trade deal, the UK will still be a non-EU member and therefore additional import/export paperwork will still be required to move goods between the UK and EU. It is therefore important to be aware of the new rules that will apply from 1 January 2021. Also, it is important to note that there are proposed new EU rules for online B2C trade which are planned to come into force from 1 July 2021 which will change the VAT rules significantly.

Tour Operator Margin Scheme (TOMS) VAT update

We understand that HMRC has confirmed that once the Brexit transition period ends on 1 January 2021, the VAT charged on package tours and holidays through the Tour Operator Margin Scheme (TOMS) on travel outside of the UK will be zero rated.

The announcement comes after discussions between ABTA and HMRC and removes a crucial area of uncertainty for many travel businesses.

Through TOMS, UK tour operators only account for VAT on their profit margin (ie the difference between the amount they receive from customers and the amount they pay suppliers).

It has been agreed by HMRC on the assumption of a possible no deal with the EU on TOMS. In the event of a no deal Brexit scenario, a new UK TOMS scheme will be introduced which will require payment of TOMS VAT only on UK holidays but not on package holidays outside the UK.

Do you import goods? Do you need to sign up for CDS?

It has recently been announced by the UK Government that businesses importing goods into the UK from anywhere outside of the UK from 1 January 2021 will have to register for access to the new Customs Declaration Service (CDS).

The CD, initially introduced in 2018, is due to be the long-term replacement for the current Customs Handling Imports and Export Freight (CHIEF) system.

You will need to request access to use the CDS so that your business can:

  • Make Customs declarations (for which you will also need compatible software for the CDS).
  • Get Import VAT statements and certificates to assist you in completing your VAT returns.
  • Get Duty Deferment Statements.

Access to the CDS can be requested through your existing government gateway account using your user ID and password that you already use for your business or organisation, using the following link: https://www.gov.uk/guidance/get-access-to-the-customs-declaration-service.

You will also need to provide HMRC with the following:

  • Your business’ EORI number (if you do not have one already – please get in touch).
  • Organisation’s Unique Tax Reference Number (UTR).
  • Registered business address for Customs records
  • National Insurance number (if you are registering as an individual).
  • The date on which you started your business.

We understand that the application process will take 5-10 minutes and you can receive access either immediately, or within 5 working days.

We recommend that you get access now to make sure you are ready to get your first import VAT statement when applicable.

Brexit: EORI Numbers – not one but two!

If your business will be selling goods to consumers between the UK and EU from 1 January 2021, it will need to ensure it has the appropriate EORI numbers to avoid goods being held by customs in the UK or EU.

What is an EORI?

EORI stands for “Economic Operators Registration and Identification Number”

Businesses and people wishing to trade must use the EORI number as an identification number in all customs procedures when exchanging information with Customs administrations. An EORI number is formed of the ISO country code (EU member state) and a maximum of 15 digits. Generally speaking, in the UK, a VAT registered company’s EORI number will consist of the prefix ‘GB’ followed by the company VAT number and suffixed with ‘000.’ Despite being based on the traders VAT number, the EORI isn’t automatically generated. Businesses should therefore check if they have an EORI and if not apply to be activated.

Why is an EORI required?

From 1 January 2021 businesses will need an EORI number to move goods between the UK and the EU. When a business imports into the UK or EU, it will have to include its EORI number on declarations for customs to check. If you do not have one, you may have increased costs and delays.

I need more than one EORI?

Yes, prior to Brexit, UK EORI numbers were accepted by the EU and vice versa. This will however stop from 1 January 2021. Businesses will need an EU EORI number if it will be making customs declarations or getting a customs decision in the EU. Businesses will therefore need a UK EORI number to export or import goods. And an EU EORI for the opposite leg of the same goods movement.

How do I register for an EORI?

If your businesses does not currently have an EORI number don’t worry it really is quite a straightforward (and relatively quick!) process. It was announced that EORI numbers would be automatically issued to certain businesses so it would be worth checking first. If required, businesses will be required to complete a simple form with HMRC. HMRC will then email confirmation of the UK EORI.

Procedures for issuing EU EORI numbers differ across the remaining 27 Member States. The European Commission has indicated that all customs authorities across the Member States are accepting applications for authorisations and registration.

These EU EORI numbers will activate upon the UK leaving the EU. So UK businesses trading with the EU should (if they do not already have one) apply for a UK EORI number from HMRC, to ensure they can still move their goods into and out of the UK post-Brexit, and (whether or not they have a UK EORI number) apply for an EU EORI number from the Customs authorities in whichever EU state they deal with the most, to ensure they can still move their goods into and out of the EU.

Similarly, EU businesses intending to continue trading with the UK will need to apply for a UK EORI number post-Brexit. If you have a question about Brexit or an EORI number, please contact a member of our VAT team today.

Brexit: Digital Supplies & MOSS

The end of the Brexit transition period on 1 January 2021 will bring new changes that will impact any business that currently trades with the EU.

Digital Supplies & MOSS

Brexit will have a major impact on digital businesses both in the UK and outside, particularly when it comes to accounting for and reporting VAT. This will impact both UK businesses supplying digital services to EU consumers and non-UK businesses supplying digital services to UK consumers.

The Mini-One-Stop-Shop (MOSS) service was introduced back in 2015 when the EU amended the rules on how cross border digital supplies to consumers were to be taxed in the member state of consumption. The MOSS service allows businesses to submit one return including its supplies to all consumers in the different EU member states.

1. Digital businesses registered with UK VAT MOSS

As the UK will be a non-EU member state from 1 January 2021 digital businesses will not be able to use the UK’s VAT MOSS service to declare the VAT due on its sales to consumers located in the EU. The final return period for the UK’s VAT MOSS system will be the period ending 31 December 2020.

From 1 January 2021, to continue to use VAT MOSS digital businesses will need to register for the VAT MOSS scheme in an EU member state, by the 10th day of the month following your first sale to an EU customer. For example, if a business makes its first sale on 12 January 2021, then it must register by 10 February 2021. Effectively businesses need to change their MOSS identification country.

If a business does not want to use VAT MOSS from 1 January 2021, it must register for VAT in each EU member state where it sells digital services to consumers. We therefore recommend any business with a UK VAT MOSS registration to consider and apply for a MOSS registration number in an EU member state, for example Ireland. This will then allow the business to report quarterly sales to the remaining EU member states under the non-Union MOSS scheme.

2. Digital businesses selling into the UK

Any digital business that sells digital services into the UK will also be unable to use their MOSS registration to report sales to UK consumers from 1 January 2021. In this case, these businesses will be required to apply for a regular UK VAT number to report any digital sales to UK customers. Please note, there is no threshold for this. All UK sales will be required to be immediately reported to HMRC from 1 January 2021. This will therefore apply to all EU based digital businesses making supplies to UK consumers

BusinessCurrent PositionFrom 1 January 2021
UK BasedRegistered for Union MOSS Scheme in UK
  • Will need register for MOSS in an EU member state under Non-Union scheme.
  • We would recommend Ireland.
  • Registration would need to be made by 10 February 2021 if sales made to EU consumers in January 2021.
EU Based (Not UK)Registered for Union MOSS
scheme in EU member state
  • If makes digital supplies to UK consumers, will need to register for UK VAT with effect from 1 January 2021.
Non-EU BusinessRegistered for Non-Union MOSS
Scheme in UK
  • Will need to register for MOSS in a different EU member state under Non-Union scheme.
  • We would recommend Ireland.
  • Registration would need to be made by 10 February 2021 if sales made to EU consumers in January 2021.
  • If makes digital supplies to UK consumers, will need to register for UK VAT with effect from 1 January 2021.

Post Brexit: New trade rules

With the end of the transition period nearing, businesses need to consider the new rules that will come into force from 1 January 2021 in relation to trade with EU countries.

From 1 January 2021, there will be changes in the way indirect taxes are accounted for when importing into the UK. New processes for administering imports and exports will be implemented and taxpayers may need to obtain additional information about their goods for crossing the UK border, and they may require the services of a customs agent.

Imports

From 1 January 2021, purchases of goods from EU suppliers will be regarded as imports. The process for importing goods from the EU will change. Businesses in the UK will need to complete the following actions to continue importing from EU countries from 1 January 2021:

a. How to declare goods – A customs declaration will need to be made when importing goods from the EU. These rules currently apply to importing goods from the rest of the world, including Switzerland, Norway, Iceland and Liechtenstein. This declaration can be made by the business or the business could engage someone else such as a courier, freight forwarder or customs agent to do it on its behalf.

b. EORI Number – An EORI number will be required to import goods from 1 January 2021.

c. Check the rate of tax and duty – Businesses will need to pay import VAT and Customs duty, if applicable, on all imports.

Import VAT

From 1 January 2021, UK VAT registered businesses will be able to account for import VAT on its VAT Return for goods imported from anywhere in the world. This means businesses will be able to declare and recover import VAT on the same VAT Return, rather than having to pay it upfront and recover it later which is a huge cash flow saving. Businesses do not need to be authorised to account for import VAT on its VAT Return and can automatically start using this procedure from 1 January 2021. This is the case if: + the goods imported are for a business use; + the business’ EORI number, which starts ‘GB’ is used on the customs declaration; and + the business’ VAT registration number is included on the customs declaration, where needed. Businesses will therefore be able to use this way of accounting for import VAT moving forward from 1 January 2021, which will assist with cashflow.

How to complete your VAT return

Due to postponed VAT accounting, there will be changes to the way VAT returns are completed. An online monthly statement will be available to download and keep for business records. It will show the total import VAT postponed for the previous month which businesses should include in the VAT Return. The boxes on the VAT Return will be as follows:

Box 1Include the VAT due in this period
on imports accounted for through
postponed VAT accounting
Box 4Include the VAT reclaimed in this period
on imports accounted for through
postponed VAT accounting
Box 7Include the total value of all imports of
goods included on the online monthly
statement, excluding any VAT

Customs Duty

The UK’s new Global Tariff will replace the EU’s Common External Tariff on 1 January 2021 at the end of the Transition Period. The new tariff is tailored to the needs of the UK economy supporting the economy by making it easier and cheaper for businesses to import goods from overseas. HMRC state that it is a simpler, easier to use and lower tariff regime than the EU’s Common External Tariff (EU CET). Therefore, after 1 January 2021, when any purchases of goods from outside the UK will be classified as imports, they will be liable to duty calculated based on the UK Global Tariff rate. Customs Duty is not recoverable so any applicable duty would be an additional cost to any UK business. To use the UK Global Tariff, you need either the commodity code or description of the product. The UK Global Tariff can be found using this link.

If you consider your business will be impacted by the updated rules for importing goods to the UK, please get in touch and the VAT team can ensure your business is fully equipped for the new rules from 1 January 2021.

Brexit – Are you Ready?

The UK left the European Union on 31 January 2020. A transitional period for Brexit is now in place which will last until at least the 31 December 2020 where existing EU VAT Regulations and Directives will continue to apply, including those relating to VAT and Customs.

Up until the onset of the COVID-19 crisis, the UK Government and the EU has been negotiating a trade deal during the transitional period and one of the things that will be determined will be the extent to which Customs tariffs will apply to goods moving between the UK and EU.

With COVID-19 affecting every country in the world including the UK and EU it remains to be seen whether the transition period will be extended. Alternatively, if no agreement is reached (“no deal”) Customs tariffs will apply to goods moving in and out of the UK and the UK will not benefit from any preferential tariffs applying to the EU for goods being exported to other countries.

We have outlined some of the main changes that can be expected, however this may be subject to change depending on developments in the next few months. In summary:

  • The UK will continue to have a VAT as VAT is the second-biggest tax revenue earner for the Government (after Income Tax)
  • The VAT rules relating to UK domestic transactions will continue to apply to businesses as they do now
  • VAT procedures will continue as they are now, however there will be some key changes, particularly in relation to trade with EU customers and suppliers.

Businesses buying goods from EU

In what is possibly the biggest potential impact to UK businesses, the current rules for imports from non-EU countries will also apply to imports from the EU. Import VAT is paid to HMRC when goods enter the country, which can lead to cashflow delays as the VAT cannot be recovered until the business submits its next VAT return. In a normal VAT return cycle this could lead to delays of up to 3 months to recover an import VAT depending on when the goods were imported. Imports also require additional paperwork which also adds to the cost of bringing goods into the country.

One area which has not been decided yet is whether Customs Duty or tariffs will apply to goods coming into the UK. A lot will depend on whether the UK Government and the EU reach a trade agreement before 31 December 2020. If a deal is reached it is likely that tariffs will not apply to the majority of goods coming into the UK from the EU, but formal Customs procedures will still need to be undertaken.

During 2019, the Government announced that in the event of a “no deal” it would introduce postponed accounting for import VAT on goods brought into the UK which meant that UK VAT-registered businesses importing goods to the UK would be able to account for import VAT on their VAT return, rather than paying import VAT on or soon after goods arriving at the UK border. This will apply to imports from both current EU and non-EU countries. If a deal is reached with the EU during 2020 this simplification measure will not apply (unless this is announced by the Government this year, which would be welcomed).

For businesses not familiar with importing, there are measures that can be adopted to alleviate some of these issues such as duty deferment accounts, customs warehousing and inward processing relief.

We would recommend any businesses not familiar with importing procedures to get advice on this as soon as possible to plan for the changes in 2021.

Sales of goods to EU businesses and consumers

VAT registered UK businesses will continue to be able to zero-rate sales of goods to EU businesses but will not be required to complete EC sales lists or EU Intrastat declarations. As is the position now, VAT will not be charged by UK businesses exporting goods to EU businesses after Brexit and evidence will need to be kept that the goods have left the UK to support the zero-rating of the supply. Most businesses already maintain this evidence as part of current processes, and the required evidence will be similar in nature to that currently required for exports to non-EU countries. Any changes will be communicated by HMRC in due course.

Current EU rules mean that EU member states will treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries. Import VAT and (potentially) Customs Duties will be due when goods arrive into the EU. Individual EU member states may have different rules for import VAT from the UK and import VAT payments may be due at the border. UK businesses should check the relevant import VAT rules in the EU member states where they have customers.

For businesses selling goods to EU consumers, after 2021 distance selling arrangements will no longer apply so UK businesses will be able to zero-rate sales of goods to EU consumers as “exports”. EU rules mean that EU member states will treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries, with associated import VAT and customs duties due when the goods arrive into the EU. Any businesses affected by this will have to be mindful that consumers in EU countries will have to bear these additional charges, so this may have to be communicated up front at the points of sale and on websites.

Businesses could also adopt customs measures where the duty and VAT can be paid up front, however this will require discussions with customs agents in advance and be clear at the point of sale on websites.

Businesses selling digital services to EU consumers

Businesses that sell digital services to consumers in the EU will be able to register for the non-EU MOSS scheme. There is currently an EU scheme so most providers will already be registered for this. The non-EU scheme is similar but will require UK businesses to register in one EU country. MOSS is an online service that allows EU businesses that sell digital services to consumers in other EU member states to report and pay VAT via a single return and payment in their home Member State. Non-EU businesses can also use the system by registering in an EU Member State.

We would urge affected businesses to prepare for this now. Alternatively, a business can register in each EU Member State where sales are made.

Other issues

There are of course other issues which will be impacted such as the EU VAT refund system which will not be available after 2021, although subject to the EU negotiations it should still be possible for UK businesses to make VAT claims where employees have incurred VAT on business trips to the EU. One other area affected will be tour operators who offer holiday packages in the EU. Currently the Tour Operator Margin Scheme (“TOMS”) is used to simplify the VAT calculation. HMRC has not provided a lot of information on what will happen, but tour operators should contact their advisers.

Recommendations

We would hope that by the Summer, businesses can start to get back to some form of normality and it would be useful to get clarity at that point from the Government on what we should expect after 31 December. If possible, we recommend that any business affected by these changes undertakes a review as soon as possible to prepare for the changes that Brexit will bring. Chiene + Tait has been working with its clients over the past 12 months to undertake these reviews and we are happy to discuss this with any affected businesses Our bespoke reviews look at the impact of the changes on relevant business income and expenditure streams and point to potential solutions which will alleviate any potential administration, cashflow or cost on the business. We also offer a helpline service to businesses to deal with ad-hoc Brexit-related enquiries.

Post Brexit: Trading in Goods

From 1 January 2021, there will be major changes once the Brexit transitional period ends.  New VAT procedures will apply to goods imported into the UK.  The new procedures differ according to whether the value of the goods arriving in the UK exceed £135. Find out more here about how trading in goods post Brexit may impact you.

Less than £135

Goods that arrive in the UK from 1 January 2021 that have a value of less than £135 will be subject to ‘sales VAT’ rather than ‘import VAT’ if they are being imported by an overseas seller.

How does this work?

The overseas supplier is required to register for VAT in the UK.  This supplier will then be required to charge UK VAT on all shipments into the UK which are less than £135 in value (final selling price charged to UK customer).

The supplier will be required to include a sales invoice with the shipment to ensure that all required Customs checks can be undertaken and evidence is held that VAT has been appropriately charged.   No Customs Duty will be liable as £135 is the threshold for Customs Duty relief however a Customs declaration is still required.

What if the customer is registered for VAT?

If the UK customer is registered for VAT, the overseas supplier is no longer required to charge 20% UK VAT on the shipment if it is less than £135.  Instead, if the customer provides a UK VAT number to the supplier, the customer in the UK will account for the VAT on its own VAT return by doing a reverse charge calculation.

More than £135

Goods that arrive in the UK from 1 January 2021 that have a value in excess of £135 will be subject import VAT and Customs Duty.

Import VAT in these cases should be accounted for by using postponed VAT accounting, which results in declaring and recovering import VAT on the same VAT return, rather than having to pay it upfront and recover it later, subject to normal VAT recovery rules.

Customs Duty may be applicable depending on the actual commodity code of the goods imported.  The new UK Global Tariff will be effective from 1 January 2021 and can be found using the following link: https://www.check-future-uk-trade-tariffs.service.gov.uk/tariff.

Post Brexit: Customs Special Procedures

After 1 January 2021 when the Brexit transition period ends, UK business should consider a number of Customs Special procedures and other import facilitation measures when goods come into the UK.

Not all of these reliefs are necessary and will depend on the type of business involved.

Businesses can use Customs Special Procedures to suspend, reduce or claim relief on the payment of customs duties and VAT under specified conditions. Special procedures include:

Customs Warehousing

  • Allows for goods not in free circulation to be stored without payment of customs duty, and where appropriate excise duty or import VAT, in a customs warehouse.

Inward Processing Relief (“IPR”)

  • Allows for the payment of customs duties, import VAT and excise duties to be suspended on imported goods whilst processing is taking place.

Outward Processing Relief (“OPR”)

  • Allows for the temporary export of goods for processing or repair, and to re-import the processed products whilst retaining domestic status or with partial relief from import duties.

Temporary Admission

  • Allows for businesses and individuals who are established outside of the UK to be authorised to import goods with total or partial relief from customs duties and other charges because of the specific use to which the goods will be put.

Authorised Use

  • Allows for reduced or nil rates of Customs duty on certain imported goods, provided they are put to a prescribed end use.

In the past these procedures required a Customs Comprehensive Guarantee.  Businesses will be able to apply to be fully authorised to operate special procedures without the need to provide a Customs Comprehensive Guarantee unless one is specifically required as a condition of authorisation by HMRC, for example because a trade presents a payment risk.

Other import facilitations

Temporary Storage facilities that are not part of an existing inventory-linked community will be able to temporarily operate without an inventory linked system in place until 1 July 2021. They will still be required to have control over their facility and keep effective records.

Authorised parcel operators will be able to submit a bulked customs declaration for non-controlled goods with a value not exceeding £135.

Duty Deferment Accounts (DDAs) will be required for traders making delayed declarations (non-controlled goods) because delaying a customs declaration also means deferring the duty payable. A DDA belonging to either the trader or their agent must be in place at the point of submitting the supplementary declaration (which can be deferred up to six months from point of import). Traders importing controlled goods will need access to a DDA at point of import if they are using simplified declaration procedures. HMRC are introducing new rules that will allow most businesses to use duty deferment without needing to obtain a Customs Comprehensive Guarantee.

Businesses with Authorised Economic Operator (C) status will automatically be able to use duty deferment without providing a guarantee. Other compliant and solvent businesses will be able to defer customs duty, import VAT and/or excise duty up to £10,000 per month without needing to provide a guarantee. They will be able to obtain approval to defer amounts above this monthly limit if they have sufficient financial resources for the amount they’re seeking to defer. Duty deferment limits agreed with HMRC will not need to cover amounts included in delayed supplementary declarations. A new application process for duty deferment accounts has been available from early November 2020. Businesses who don’t meet these criteria will still be able to set up a DDA if they provide a guarantee.

Authorised Economic Operator (AEO) Status

Traders can apply for AEO status for moving goods between the UK and the EU. AEO status is an internationally recognised quality mark that shows a business’s role in the international supply chain is secure and has customs control procedures that meet UK and EU standards.

From 1 January 2021 to 30 June 2021, goods with pre-lodged temporary storage declarations may be imported via GB border locations without existing customs control systems and transported to a temporary storage facility (TSF) in GB provided they meet specific requirements. More information on the requirements for TSF operators and Community Systems Providers wishing to offer this service is available here. For GB border locations with existing customs control systems, movements in temporary storage will continue to be permitted under current requirements.

The ability to delay customs declarations in the period 1 January 2021 to 30 June 2021 only applies to non-controlled goods which have been in free circulation in the EU immediately prior to import. All rejected exports that haven’t entered free circulation in the EU cannot meet this condition and therefore must submit a customs declarations on their return to the UK.

Returned / Rejected Goods

From January 2021, businesses that export goods from GB to another country, (including the EU), may need to have those exported goods returned to the UK, or may have their goods rejected upon import to the EU.

In order to return such goods to GB, there are differing requirements depending on:

  • Whether the goods have been in free circulation in the UK prior to being exported,
  • Whether the goods were in free circulation in the EU prior to being returned,
  • Whether the goods have been rejected upon import to the EU,
  • And/or whether the goods are subject to additional requirements before they can be imported to GB, for example those goods featured in 1.2 additional requirements

Returned goods – Customs requirements

Customs import duty and VAT

Traders returning goods will be able to claim Returned Goods Relief (RGR) from customs import duty for goods that are exported from the UK and re-imported within three years of export, subject to certain conditions similar to those set out in existing guidance here. VAT relief will also apply, providing that any VAT due has previously been paid in the UK, and the importer/exporter is the same person. VAT relief will also be available from the 1 January 2021 for goods that are in free circulation in the UK on the 31 December 2020, providing that EU VAT has been paid. Such goods will be treated as domestic goods for customs purposes.

Businesses would normally apply for RGR in the same way as they do currently which means filling out a full Customs Declaration. In order to identify the goods as returning, the RGR Procedure Code should be used. This declaration should also reference the export declaration, and where the export declaration is not available, HMRC will consider alternative evidence which proves the goods were previously within the UK.

Delayed declarations and returned goods

During the period 1 January 2021 to 30 June 2021, traders have the ability to delay customs declarations if they are returning non-controlled goods that have been in free circulation in the EU immediately prior to their return. For those goods, traders can use delayed declarations procedures as detailed in delayed declarations and claim Returned Goods Relief from customs import duty (and VAT relief, if applicable) by completing their Entry in Declarants Records and subsequently submitting the supplementary declaration.

Controlled goods and goods rejected upon import into the EU Controlled goods (as listed in Annex C) and any rejected exports that have not entered free circulation in the EU cannot use delayed declarations

The trader must submit a full Customs Declaration on returning these goods to the UK. They will also need to meet any additional requirements as detailed below.

Returned / Rejected goods – Additional requirements

Some commodities are subject to additional regulatory requirements, such as those listed in additional requirements, and/or those goods that are included on the controlled goods list as detailed in Annex C. To return these goods to GB, a full customs declaration will be required on their return, and the relevant additional requirements will need to be met.

If you have a query about Brexit, please contact our team today at VAT@chiene.co.uk or visit our dedicated Brexit page for more information on how we can help you.

What businesses should focus on ahead of Brexit

The UK Government is pressing ahead with its post-Brexit planning, with the release of a Border Operating Model following engagement with businesses. The 206 page document is designed to give guidance to industries on how border issues will work after the transition period ends on 31 December and the actions that traders, hauliers, ports and carriers need to take.

On December 31st 2020 the transition period with the EU will end, and the UK will operate a full, external customs border with the EU and the rest of the world. This means that controls will be placed on the movement of goods between Great Britain (GB) and the EU for the first time.

The Government has broken this down into 3 phases up until 1 July 2021 to assist businesses in planning and preparation.

The key messages which we urge businesses to focus on as 31 December approaches are as follows:

  • Get a customs intermediary. Intermediaries can help traders find the information needed to complete formalities and submit the required declarations, for example customs information to HMRC systems. This simplifies the declaration processes for traders. If you decide not to use an intermediary, you will need to make declarations yourself.
  • Apply for a duty deferment account. Traders who import goods regularly, may benefit from having a duty deferment account. This enables customs charges including customs duty, excise duty, and import VAT to be paid once a month through Direct Debit instead of being paid on individual consignments.
  • Prepare to pay or account for VAT on imported goods.
  • Ensure you have International Driving Permits if you have vehicles travelling outside the UK.
  • Apply for a GB Economic Operator Registration and Identification (EORI) number. This is required for all businesses moving goods into or out of the UK.

The link to the document is contained here – https://www.gov.uk/government/publications/the-border-operating-model?utm_source=43c65c94-3755-427b-a052-15742071d45e&utm_medium=email&utm_campaign=govuk-notifications&utm_content=immediate

We will continue to produce guidance to assist businesses with Brexit planning and are available for consultations on what action needs to be taken by businesses. Find out more about our VAT and Brexit Review service here.

For further information and advice please contact Iain Masterton in our VAT team.

Farmers and consumers need post-Brexit protection

The UK Agriculture Bill had its second reading in the House of Lords last week, with growing concerns raised about the lack of amendments to protect UK farmers and producers from lower quality imports in post-Brexit Britain.

The Bill will replace the EU subsidy system where an average of £2.88 billion was paid out annually to British farmers under the Common Agricultural Policy. While much of this new legislation will be relevant only to England, key measures including those on food security and fair dealing in the supply chain will apply here in Scotland.

The new Bill matters to everyone as it will shape the future of farming and food production across the UK and determine the quality standards available to consumers.

The volume of home-produced food consumed in the UK has fallen significantly in recent years, from 67 per cent in 1988 to around 53 per cent, increasing our reliance on imports. While such imports have been governed by high EU food standards, the Agriculture Bill currently contains no provision to safeguard future food safety, environmental, or animal welfare standards once the UK leaves the single market.

Opposition politicians and campaign groups such as Sustain, say this omission could force down the quality of food that is allowed to be sold in the UK as new trade deals are made with other countries, including the US, which do not share the same standards. Nearly 1 million people have signed a petition supported by the  NFUS which calls on the Westminster Government to amend the Bill to ensure imported foods will meet the same standards as those produced in the UK.

We are all aware of the much-publicised concerns about American chlorine-washed chicken and hormone-fed beef, but these could prove to be just the tip of the iceberg if a suitable food standards structure is not put into place for the UK following Brexit.

At a time when UK farmers are feeling the impact of Covid-19 and facing the growing prospect of a No Deal Brexit, the Scottish and UK Governments need to step up to support the industry and ensure consumers are protected.

Innovative measures to help farmers and food producers could include incentives to encourage shorter food chains, which would also support a green recovery. This will promote a higher level of buying and sourcing from local producers. With the Covid-19 pandemic exposing significant vulnerabilities to food supply chains, this will also help protect the high provenance level of Scotland’s food and drink offering.

Meanwhile the Scottish Government could review procurement regulation for public sector food contracts for schools and hospitals. This could allow a wide range of smaller suppliers, who lack the resources of some of their bigger competitors, to secure a foothold or greater share of this market while also ensuring high food quality standards.

Any gap in standards between UK produced foods and imports provides an additional opportunity for governments to support farmers by continued funding of a high profile ‘Buy Local’ campaign  highlighting  the high quality of home-grown produce. The NFUS proposed country of origin labelling programme, particularly within the catering and food processing industries, would also be a positive measure to reassure consumers.

The Agriculture Bill now goes to committee stage for more detailed examination and further discussion. Let’s hope suitable amendments will be taken on board that will improve the resilience of the UK’s food system and prioritise consumer safety.

European VAT ‘Quick Fixes’ for EU Cross-Border Trade from 2020

The UK’s departure date from the EU is still to be decided and it is likely that there will be a transition period for at least 12 months once this is finalised.

It is therefore important to highlight the fact that EU VAT laws will still apply to UK businesses trading with the EU during this process.

Simplification procedures will be introduced for EU sales of goods from 1 January 2020 which will apply to UK and EU businesses from this date.

The EU has created a selection of VAT simplification measures, or ‘Quick Fixes’, with the aim of simplifying and harmonising EU VAT rules regarding intra-EU supplies of goods. Over the years different Member States applied some provisions differently so these changes have the effect of making the provisions more uniform across the EU.

The Quick Fixes can be summarised as:

  • Call Off Stock Simplification
  • Chain Transactions
  • Proof of Intra-EU Supplies
  • VAT Number (EORI) Requirement

Call Off Stock Simplification

Current

This simplification measure will have an impact on situations in which one EU supplier supplies goods to a warehouse or storage facility in another EU member state. Under current EU VAT rules, if the goods are sent to a warehouse or storage facility that is under the control of the EU-based customer, then it is considered that the supplier has made a deemed intra-community supply in its own member state and a deemed intra-community acquisition in the EU member state of destination. When the customer takes the goods out of the call-off stock, the supplier would be considered to perform a domestic supply in the EU member state, and this will likely trigger a VAT registration for the UK-based supplier in the EU member state of destination. There is also the possibility that the seller will have to start completing Intrastat reports.

The change

The purpose of the new Call-Off stock Quick Fix is to harmonise the legislation across the EU Member States. Under the new rules, the transfer of goods to a warehouse or premises controlled by a customer in an EU member state will no longer qualify as a deemed-intra community supply and a deemed intra-community acquisition. Call-Off stock arrangements do not generally require the seller to VAT register in the EU member state as a non-resident trader.

For EU VAT purposes, any eventual sale is treated as an intra-community VAT supply. This means the sale is recorded under the seller’s domestic VAT number and return, and there is nil VAT charged. The customer only has to register the sale as an acquisition in its local VAT return. Reporting under Intrastat and EC Sales Listing may still be required and both supplier and customer will be required to keep a ‘call off’ stock register.

Chain Transactions

Intra-EU chain transactions refer to a situation where:

  • The same goods are supplied successively; and
  • Those goods are dispatched or transported from one Member State to another Member State directly from the first supplier to the last customer in the chain

Current

Currently the VAT treatment of intra-EU chain transactions is based on case law established by the CJEU. However, where a middle party in the chain arranges for transportation, there is still uncertainty and a lack of harmonization as to which supply the cross-border movement of the goods should be allocated to.

The change

The revised VAT Directive will include a specific regulation for chain transactions. Notably, the Quick Fix will only deal with the scenario of a middle party in the chain arranging for the transportation (referred to as “intermediary operator”):

  • As a rule, the dispatch or transport shall be ascribed only to the supply made to the intermediary operator
  • By way of derogation from the above, the dispatch or transport shall be ascribed only to the supply of goods by the intermediary operator where he has communicated to his supplier the VAT identification number issued to him by the Member State from which the goods are dispatched or transported

Proof of Intra-EU supplies

Current

Generally, under EU VAT rules, to apply the 0% VAT rate on an intra-EU supply a supplier should be able to provide suitable evidence that the goods were dispatched from one EU member state to another. However, currently there are no specific rules at EU level on what pieces of evidence qualify as suitable proof of intra-EU transport of goods. This has led to some uncertainty and inconsistency within the EU as there have been different requirements across the member states. This in turn has led to uncertainty for businesses who often trade across the EU.

The change

Under the new VAT rules from 1 January 2020, for VAT purposes it will be presumed that goods were imported to another EU member state from another if the supplier can readily provide at least two independent, non-contradictory documents that show evidence of the transport of the goods. Examples of types of evidence that can be used for this purpose across the EU are outlined in the table below.

Nature of documentParticulars / examples
Documents relating to transport or dispatch of the goodsSigned CMR document or note/Bill of lading/airfreight invoice/carrier invoice
Insurance policyWith regard to the dispatch or transport of goods
Bank documentsBank documents proving payment for dispatch or transport of goods
Official documents issued by public authority e.g. notaryConfirming the arrival of the goods in the EU member state of destination
Receipt confirming the storage of goodsIssued by a warehouse keeper in the Member State of destination, confirming the storage of the goods in that Member state
Written statement from the buyerRequired where the buyer arranges the transport

VAT Number (EORI) Requirement

Current

Obtaining a customer’s valid VAT number is a formal requirement for applying the 0% VAT rate to intra-EU supplies of goods. However, recent European case law provides that a taxable person only has to comply with the material conditions in order to apply the 0% VAT rate. Therefore, the 0% VAT rate cannot formally be refused due to the fact that a taxable person did not receive a valid VAT number from its customer.

The change

Under the new rules, obtaining a valid VAT number that the customer provides to the supplier will be regarded as a material requirement for applying the 0% VAT rate. If the supplier fails to include the customer’s VAT number on invoices, it should not be possible to apply the 0 % VAT rate.

Zero rating will also be dependent on the supply of the goods being included in the supplier’s EC Sales List.

What Can C+T Do for You?

If you are interested in finding out more about the above EU Quick Fixes and feel that either one of these, or a combination, would be of benefit to you and your business, get in touch with our specialist VAT Team to find out more at 0131 558 5800.

How to plan for the future in turbulent times

Moira McMillan, Chiene + Tait Tax Director, writes about how to plan for the future in turbulent times.

When the news is dominated by turbulent events, it becomes harder to plan for the future.

I remember writing an article for Connect newsletter just before the Scottish independence referendum in September 2014 which mentioned the famous Donald Rumsfeld quote about the known knowns, the known unknowns and the unknown unknowns. With the ongoing political uncertainties, I could have called on this again but I have turned instead to a quote that is said to be an ancient Chinese curse. ‘May you live in interesting times’ somehow seems appropriate.

Brexit remains the key issue tripping off many a tongue. The snap General Election has failed to provide clarity on anything much, so we know that it will be some time before the Brexit process is complete – and, indeed, whether the UK will remain in the single market, the Customs Union, the European Court of Justice or myriad other Europe-wide institutions. This provides uncertainty for many: for businesses, which will find themselves in a different situation once the UK has left the Single Market, and for individuals, who may find themselves affected by new, harder borders.

Meanwhile, the possibility of another independence referendum seems to have diminished for now but it remains the policy of Scotland’s largest political party and we cannot rule anything out in these days of interest: who would have thought a year ago that Donald Trump would be President of the USA?

There are interesting times ahead too for the accountancy profession with the Government’s ‘Making Tax Digital’ (MTD) programme looming on the horizon (see pg 10 of our Summer 2017 Connect newsletter). This will radically and permanently change the way tax submissions are made to HMRC and will be the biggest change to the tax system since the introduction of Self-Assessment. Certain elements of MTD have been delayed but VAT compliance in 2018 is still necessary, and HMRC is pressing ahead with a bigger roll-out in subsequent years. This is despite ‘glitches’ in the HMRC software for the 2016/17 tax returns which will mean that some individuals will be forced to file paper returns this year. A cynic might wonder if the HMRC systems will be robust enough to cope with MTD.

Technological developments are an unavoidable feature of this interesting age. New systems and processes bring amazing benefits but also new challenges. The NHS, in common with many other organisations worldwide, recently suffered a phishing attack – basically, a criminal implanting a virus on their computers in an attempt to extort money or gather sellable data (see pg 5 of our Summer 2017 Connect newsletter). This sort of attack is ever more common, and will become increasingly difficult for organisations to prevent. Meanwhile, British Airways had a catastrophic collapse of its IT systems over one weekend that cost the company tens of millions of pounds. The new EU data protection legislation, the General Data Protection Regulations, or GDPR – to which the UK will still be subject when it is launched in May 2018 (see pg 8 of our Summer 2017 Connect newsletter) – is doubtless intended to add a layer of protection but it also adds a burden to businesses to ensure that they comply.

The way we shop and the way we travel has already been changed thanks to technology. What will be next? Driverless cars could threaten professional drivers – of taxis, lorries, delivery vans, buses – within 10 years. Even human interaction can be replaced by technology, so we can’t rely on the common fall-back defence that customers prefer face-to face service: Amazon’s size and growth shows that this isn’t always the case. It’s a big question: in 10, 20, 30 years, what jobs will have been automated?

 

What can you do?

The framework of the world will continue to be shaped by politicians and tech entrepreneurs. There will continue to be unpredictable events, uncertainties, debates, annoyances and hold-ups. The world will also continue to turn. The only battle you can’t win is the one against change. Fighting against change is a waste of energy: the best you can do is to understand change, help make it better, and have a plan.

The sensible course of action is to take control of your own destiny, as far as possible. It’s impossible to mitigate every risk but it’s sensible to take care. Making sure you have IT protection to ward off fraudsters is a good practical example; other problems might require more careful, thoughtful and tailored planning to address – ensuring flexibility in your skills as job roles are re-defined, for instance, is a longer and trickier project.

At Chiene + Tait we believe that our clients see us as their trusted advisers who can be relied upon to provide the right advice in turbulent times. We believe that we have the expertise across our various sectors to ensure that we can continue in this role during the interesting times ahead.

Our Guide to Brexit

We have produced a variety of Brexit briefing notes to help our clients understand the fundamental changes the country will go through and what they will mean for them.

Our first briefing note, issued by our Chairman, discusses the possible routes the UK could take moving forward and what businesses can be doing at this stage.
Read the full briefing note here.

In our second briefing note, Iain Masterton from the VAT team discusses some of the potential risks that may arise for VAT registered organisations.
Read the full briefing note here.

David Philp highlights some initial thoughts on key areas for technology start-ups that may be affected by Brexit in our third briefing note.
Read the full briefing note here.

Our fourth briefing note illustrates the potential options available to the UK regarding its position within Europe.
Read the full briefing note here.

Our most recent briefing note looks at the rural sector, and what Brexit could mean for farmers and the rural sector.
Read the full briefing note here.

If you have any questions regarding our briefing notes please contact us on 0131 558 5800.

Brexit, tax and its effect on technology start-ups

Following the EU referendum, there is significant uncertainty surrounding its effect on future tax reliefs, incentives and funding for start-up companies. Obviously it is impossible to cover every issue here, however, below are initial thoughts on key areas for technology start-ups that may be affected by Brexit.

Don’t panic…yet

Firstly, nothing has changed since the vote to leave the EU. The same legislation and same tax reliefs will apply at least until Article 50 has been invoked. Thereafter, there will be a 2-year grace period before the UK has officially left the EU. With the recent political manoeuvrings of both major UK political parties, it would not be beyond the realms of possibility for Article 50 not to be invoked at all.

Regardless of Article 50, the main objective for the new UK Government is to steady the ship and provide confidence to the markets. It is therefore unlikely that any major negative changes to tax reliefs and incentives would be applied in the short-to-medium term, as any cuts would put the UK at a disadvantage for retaining and attracting business at a time when other EU countries are desperate to capitalise on Brexit, in particular the technology sector (see http://www.bbc.co.uk/news/business-36642560).

Tax reliefs and incentives currently available

The UK is currently one of the best locations for technology start-ups. Companies that undertake technological innovation and advancement are eligible for a number of incentives, including Research & Development (R&D) tax relief.

R&D tax relief (further info can be found here) is one of the most generous corporation tax breaks available, designed to encourage innovation and increase spending on R&D activities. It provides vital funds to technology start-ups in the early years of development. The R&D tax relief was, however, designed to comply with EU law and changed numerous times after objections from EU members who believed the relief was too generous.

The most generous of these is the SME Scheme, which is classified as notified state aid. Under EU law, a company can only receive one form of notified state aid. This means that if a company has already received state aid in relation to an R&D project, the company would be unable to claim for an R&D tax relief under the SME Scheme for the same project.

By leaving the EU, these restrictions would be removed, opening up the possibility for further relief being provided by the UK Government, in order to attract and retain UK-based technology businesses. This means that the already generous incentive could theoretically be enhanced further.

Although there is a possibility for further incentives in this area, this should be taken with a pinch of salt; it’s likely that this topic will be on the table for any EU negotiations.

Grants and funding – for universities and companies

There are worrying reports of EU universities pulling back on research collaborations with UK academics (http://www.bbc.co.uk/news/uk-politics-uk-leaves-the-eu-36719923) which may have an adverse effect for university spin-outs. The UK technology sector is underpinned by our strong academia, from research that becomes IPs for spin-out companies, to academics that inspire the entrepreneurs of the future. The UK has some of the best universities in the world and it is imperative that this continues through collaborations with other educational establishments. Hopefully these reports are just a shock reaction to Brexit and, once everything has settled, collaborations will continue.

Brexit also calls into question the availability of certain grants and funding for companies. Although Innovate UK funding is likely to continue, the availability of Horizon 2020 funding may be an area for discussion in future. Currently several countries outside the EU, such as Norway, are eligible to claim Horizon 2020 funding, suggesting access will likely be used as a bargaining chip at the EU negotiation table. This could lead to more companies fighting over lower levels of grant funding.

Entrepreneurial spirit

Although this briefing is fairly gloomy regarding the future, it is important to be reminded that the best minds will always excel in difficult situations, turning weaknesses into strengths. The current level of uncertainty could be an opportunity for budding entrepreneurs. The technology sector is founded on entrepreneurial spirit and has historically had closer ties with the US compared to the EU. It may be the case that the sector is better placed than others to adjust to Brexit. Only time will tell.

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VAT Brexit Briefing Note

The recent referendum in favour of the UK leaving the EU will mean that UK VAT registered organisations may face greater VAT compliance.

This briefing note highlights some of the potential issues that may arise for VAT registered organisations, should the UK follow the referendum result and implement Article 50 of the Lisbon Treaty. Once this is triggered, the process to leave the EU could take up to two years. This time will be taken up by negotiations between the UK and the remaining 27 members of the EU.

VAT is an EU tax

The UK has its current VAT system by virtue of being an EU Member State. Given that VAT accounts for around 22% of the tax raised by the UK Treasury – and contributed approximately £115bn in 2014/15 – it is unlikely that VAT will be abolished and we do not expect major changes.

However, a post-Brexit UK Government will be free to amend the VAT system without the current EU VAT Directive restrictions. This may lead to additional compliance requirements and greater complexity, particularly importing and exporting with EU suppliers and customers. It will also be possible for the UK Government to abolish VAT and introduce a goods and services tax instead.

Change in the relevant legislation

As a Member State, the UK currently follows EU legal precedence via the EU VAT Directive as well as judgements of the Court of Justice of the European Communities (CJEC). Following exit from the EU, VAT law will be governed by the Value Added Tax Act 1994; this Act will need to be amended to deal with elements that will no longer be dealt with by the EU VAT Directive and CJEC decisions.

In terms of legal precedence, the CJEC will no longer be the highest Court for VAT decisions, although it is likely that EU judgements will still be referred to in legal actions.

Possible changes to VAT rules

At present, within the EU, the standard rate of UK VAT has to be a minimum of 15% (there are also two other additional rates that have a minimum of 5%). After leaving the EU, the UK will be free to set rates as it chooses. For example, the restaurant and tourism industry has consistently lobbied for lower VAT rates and the referendum campaign suggested that the VAT rate on domestic energy bills would be reduced and the VAT rate on sanitary products would be reduced to nil.

Additional Customs costs

UK businesses currently have Intra-Community Trading Status, whereby they can sell products and services VAT-free to business in other EU states. This will no longer be the case after Brexit; such sales will be treated as imports in the destination country and subject to VAT in that state. The costs of going through these additional Customs procedures are likely to be borne by UK traders; we have seen one estimate that these costs will amount to approximately £3 billion. There will be similar costs for EU businesses exporting to the UK.

This will have an impact on accounting systems, though these should already be equipped to deal with imports and exports to third-party countries.

Less efficient EU VAT recovery

UK businesses currently benefit from an online system for ‘8th Directive Reclaims’ – VAT refunds from other EU member states in which the businesses are not VAT registered.

After Brexit, it is expected that UK businesses will have to file paper claims in the same way as other non-EU businesses, assuming there are agreed reciprocal tax refund systems. These are much slower than the online system, and more easily challenged.

VAT registration throughout the EU

Currently, UK businesses that sell goods online do not have to register for VAT in each EU state in which they have customers thanks to ‘distance selling thresholds’. Following Brexit, UK businesses may have to register in multiple EU member states in order to carry on trading with EU customers.

Customs issues

The EU is a customs union so Customs Duty applies to all goods entering the EU. Norway and Switzerland are part of the EU Customs Union (through EEA and EFTA respectively) despite the fact that they are not part of the EU; it is possible that the UK will assume similar status however it is unclear at this stage which route the UK will take. It is hoped that the UK will have such an arrangement; otherwise a customs tariff will mean that there will be additional costs for UK businesses importing goods from the EU and vice versa.

If you have a query about the VAT impact of Brexit, please get in touch with Iain Masterton at iain.masterton@chiene.co.uk or call 0131 558 5800.

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Brexit Briefing Note

Over the coming months, we will issue on our website regular briefing notes to help our clients understand the fundamental changes the country will go through and what they will mean for them.

The Political Hokey Cokey

Businesses like stability and a degree of certainty, and a secure economic and fiscal regime. It allows them to plan ahead, assess risks, make decisions accordingly and then get on with running their businesses. It is hard to envisage what else could be thrown into the mix to make the next two years more uncertain. For those previously involved in the Scottish independence referendum, it feels like businesses have performed the hokey cokey: “in, out, in, out, shake it all about”. It now appears that there are three possible routes:

  • Stay in the EU – this seems unlikely but with such political turmoil, it is not impossible that there would be a general election and a second referendum which might reverse the result declared last week.

 

  • The UK leaves the EU – this seems the much more likely outcome and there will be many aspects for businesses to consider. Staff recruitment and retention will be an issue for many businesses and employers may wish to reassure employees who do not hold British passports. For businesses importing from and exporting to the EU, they will have to start learning about import/export tariffs and procedures. We do not, of course, know how these will work but some guidance can be obtained from current rules that apply to imports and exports from outside the single market. See our commentary VAT Brexit Briefing note.

 

  • Scotland leaves the rest of the UK and remains in the EU – this is almost as likely as the second scenario of leaving the EU. In this event, businesses will have to consider import/export tariffs and rules for cross border trading north and south of Hadrian’s Wall. There may also be the question of having to trade in different currencies if under the terms of Scotland remaining in the EU, it is required to adopt the Euro.

What can you do?

At this stage, it is premature to offer many comments. However, we suggest the following:

  • Build up reserves – it is quite possible that inflation will pick up and the economy will cool down as this period of uncertainty unfolds. Businesses with strong balance sheets will be in a better position to weather this period and work through to better times.
  • Manage your bank debt – if your business is able to fix its debt at a low rate of interest for a reasonable period, that will help to give a degree of certainty to your trading position and help your business work through this period of uncertainty.
  • Flexible structures – depending on how matters turn out, businesses based in Scotland may require to have a base in England and vice versa. Similarly, businesses may wish to have a base on the continent. Businesses should build flexibility into their structures and consider where would be the most beneficial place to conduct their business, bearing in mind any particular regulatory regime which is applicable to them. Businesses will also need to consider where they want to be domiciled.
  • Contractual terms – when entering into new business contracts, businesses should try to bring in as much flexibility as possible; such as the ability to transact in a different currency, tariff and tax provisions and exit clause triggers in the event of the UK breaking up.
  • HR considerations – this will be an unsettling time for employees and your HR strategy should ensure you retain your key employees in your key geographic locations.

If you have a query about how Brexit may affect you or your business, please get in touch with your usual Chiene + Tait contact.

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