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.
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.
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.