Indirect taxes post Brexit – the changes
The news, just before we paused work to enjoy a Christmas lockdown, was that the UK had agreed a deal with the EU which meant that there would be no import taxes, a zero tariff and zero quota deal. Those businesses that had taken the view that there was little point in preparing for the UK leaving the EU until it was clear whether or not there would be a deal, breathed a sigh of relief and settled down for a quiet Christmas in the knowledge that all would return to normal and they could carry on doing business as before.
But were they right and has the deal – that is the “Trade and Cooperation Agreement” (or TCA) – really brought normality back to the UK and zero import taxes?
The simple answer to each of those questions is no. There have been some significant changes, which are already catching out the unprepared. We will highlight some of the issues below in this article. But the reality is that there are in fact import taxes. Import VAT is due in the EU and in the UK on goods valued over £135. Duty is due too in situations where the preferential zero tariff does not apply because the origin of the goods or their materials is outside the UK and EU.
Imports and exports – what this means for businesses
The major change for movements of goods between the UK and EU or vice versa is that these will be subject to customs border controls. There is no longer the ability to move goods freely and for a customer, if it is in business and VAT registered, to self-account for acquisition VAT on its VAT returns. Customs export and import declarations are required and import VAT (if not duty) needs to be paid, or accounted for via VAT returns, if that EU country operates a similar import VAT accounting system to the UK’s new “Postponed VAT Accounting” (“PVA”).
Accounting for import VAT
PVA means that rather than a UK VAT registered importer paying the VAT at the port, it can, if it elects on its import declaration, pay and at the same time recover the VAT via its VAT returns (the VAT recovery being subject to the normal rules). The good news is that PVA applies to all imports into the UK, not just from the EU, and so it has helped many businesses that previously imported from outside the EU with their cashflow.
Deferral of import declarations
The UK has allowed importers into the UK (except for controlled goods) the option of delaying declarations for goods arriving between 1 January and 30 June 2021 by between three and six months. This will allow importers that have applied for simplified declaration authorisation to get used to import rules before having to file their (supplementary) declarations and to pay any import taxes, which will still be needed. A deferment account may be required. Being an importer into the EU from the UK, however, does not allow for any simplified procedure and so you have to be able to hit the ground running from the first shipment to the EU in 2021.
Incoterms are important
The shipping terms, or Incoterms, have become very important as they determine whether the supplier or customer is responsible for paying the VAT and duty, where applicable, and who is responsible for the import declaration. Some businesses already have found that their shipments are being held by EU customs authorities as they have shipped goods without really understanding what terms mean for them and what is required to clear goods through customs.
More than one EORI number
If a UK business is the importer into an EU country according to the Incoterms, i.e. DDP terms (Delivered Duty Paid), it will need both a UK Economic Operator Registration and Identification number (an “EORI”) to clear goods for export from the UK as well as an EU EORI to clear goods for import into the EU. It may also need one in Northern Ireland if it is importing or exporting goods to or from there. It is also implied that if a UK business is the importer into the EU it will need to register for and charge VAT in that country.
Do I need anything else to clear goods through customs?
Another issue we have alerted clients to concerns import and export declarations and a potential need to set up an establishment in the EU for importing there. This particular rule is that if a UK supplier is an importer into the EU, it – or its customs agent acting ‘indirectly’ on its behalf – making the import declaration, must be established somewhere in the EU. We are now beginning to hear of goods being withheld by EU customs authorities whilst they ask for proof of EU ‘residence’ of the company. It appears in these instances that the company has not lined up an agent willing to act indirectly, i.e. to take the risk by acting in its own name and with joint liability for the import taxes, and has simply tried to ship to the EU without appreciating this obligation. Prior to this year, the rule applied but to non-EU importers and it was not always enforced. The rule stems from the EU’s customs legislation (the Union Customs Code) and actually applies to both import and export declarations. Equally, declarations in the UK are exposed in this regard as similar legislation has now been enacted, the Taxation (Cross-border Trade) Act 2018.
Customs Duty and origin rules
From 1 January 2021, as widely reported, an import of goods either into the UK or into the EU can fall under the zero preferential duty rate for UK/EU originating goods. But a zero tariff is not a given. The rules of origin need to be understood and how products and materials from outside the UK/EU, used in making goods within the UK/EU, affect the origin status. This certainly will add complexity to businesses trading in goods between the UK and EU and, unless and until certainty as to the origin has been formally considered and confirmed, could result in duty costs too. Even where a preferential duty rate applies it must still be claimed on the customs declaration otherwise the normal duty rates apply.
The rules do not just affect a customer that is an importer and responsible for any VAT and duty. They also need to be understood by suppliers that issue statements of origin. These will be relied upon by customers and, if wrong, could lead to unexpected duty costs and possibly penalties.
For those goods that do not fulfil the criteria for the zero preferential rate, new rates of customs duty will apply, and where the UK has not agreed a trade deal with a particular jurisdiction. These are set out in the “UK Global Tariff” and for the EU in its “Common External Tariff”.
From an EU perspective Northern Ireland remains part of the EU but supplies from the UK are subject to UK VAT in the normal way. This situation adds a great deal of complexity to Northern Ireland’s VAT rules and adds extra considerations for businesses in Great Britain that trade with Northern Ireland.
Authorised Economic Operator status
The EU will continue to recognise the AEO preferential importer status of UK businesses. Applying for AEO status to simplify export/import procedures is certainly something that is now worth considering.
Are all exports, whether B2B or B2C, zero-rated for VAT purposes?
All goods leaving the UK will be exports and so most will be free from UK VAT. This is not a change as such as many businesses will previously have exported goods from the EU. What will be new, however, is the likelihood that HMRC will focus on export evidence now, become more au fait with the rules and more likely therefore to challenge businesses for mistakes made. Businesses need to take care if customers or their agents collect the goods and they also need to remember that there must be evidence of export in order for VAT not to be charged. The key here is to adopt a robust procedure which collates the necessary evidence within the appropriate timescales, and is available for HMRC to easily review. The procedures should really be reviewed by a specialist as we have already seen HMRC challenging export evidence, even in the lead up to Brexit.
Do we need to file EC Sales Lists and Intrastat supplementary declarations?
EC Sales lists are no longer required, but HMRC has confirmed that Intrastat arrivals in the UK (but not Northern Ireland) over £1.5million still need to be reported. There is no need for dispatches of goods to the EU.
Are EU VAT and duty obligations important, now that’s we’ve left the EU?
You may be wondering if UK compliance is your only real concern in 2021. The answer is that you really do need to take care in your EU compliance and register for VAT etc, where necessary. This is because the 1400 plus pages of the TCA include a mutual assistance provision, i.e. allowing authorities to collect debts between the UK and EU.
Triangulation and call-off stock simplifications
Triangulation is a term used in the EU where there are three VAT registered entities in different EU countries involved in a goods supply chain, where the goods move straight from the first country supplier to the end customer in the third country. The simplification here was to allow the intermediate second entity not to have to register for VAT in either the country where the goods are supplied from, or where the goods are supplied to (the end customer’s country). This simplification cannot now be used, i.e. as of 1 January 2021, as the UK is no longer part of the EU VAT system. We have seen numerous issues thus far in January where businesses are buying from one EU country and are selling to their EU customers without the goods being shipped to the UK. It leads to the need for at least one VAT registration and of course accounting issues.
The Call-off Stock simplification too allowed an EU supplier not to have to register for VAT in the UK and to allow its customer to account for the shipment as an intra-EU acquisition, despite the supplier shipping into a customer controlled warehouse and the supplier retaining title to the goods until the customer utilises (“calls off”) the stock. Ordinarily this movement of goods would have required a VAT registration. This is also not now available and gives issues for either the supplier or its customer. For example;
- if the customers acts as the importer and pays the import VAT, or accounts for it under Postponed VAT Accounting it’s recovery of the VAT may well be challenged by HMRC as HMRC reconfirmed last year that only the owner of the goods can recover import VAT; or
- if the supplier is the importer does it need to register for VAT?
Given these simplifications no longer apply, businesses are going to need to consider alternative solutions to meet their compliance obligations and potential import VAT cost issues.
The UK’s new £135 goods rule
In the UK now, and soon to be followed by the EU in July 2021, there is a new rule for supplies of goods from overseas suppliers into the UK, with a £135 value threshold determining how VAT is accounted for. This applies to both business to business (B2B) and business to consumer (B2C) goods.
In the UK it will mean that there is a VAT registration obligation for an overseas seller (especially own website seller) where the value of any consignment is less that £135. If an overseas supplier has a current UK VAT registration it would cover the VAT accounting requirements in this regard.
The EU system will be an Import One-Stop-Shop (IOSS) registration which deals with sales of low value goods (below €150) into all EU countries enabling VAT charges to be accounted for on one VAT return. There will be an alternative solution requiring the declarant at import, e.g. the agent/ courier, to collect the VAT due from consumers. For B2C goods located in one EU country when they are sold to a consumer in another EU country, sales of these goods by a business not established in the EU will fall under the non-Union One Stop Shop (OSS) rules, again allowing one registration to cover these type of supplies.
The above requirements for low value goods may sit alongside a requirement for a ‘normal’ VAT registration in a country to which goods over the €150 threshold have been imported. Hence there will be complexity and administration involved.
These are more changes in the rules to combat VAT fraud in the import of low value goods into the UK and EU, rather than necessarily being a consequence of Brexit. But the change is an important one that applied from 1 January in the UK.
What this change means is that from 1 January 2021, where the VAT-exclusive value does not exceed £135, imports into the UK are no longer subject to import VAT or any duty. Instead, UK “supply VAT” is due at the point of sale and must be accounted for on a UK VAT return. If the goods are sold via an online marketplace (OMP), the OMP is responsible for charging VAT to the customer. If the goods are not sold via an OMP, such as if the seller sells from its own website, the overseas seller is required to register and charge VAT in the UK. One exception to this rule is where the customer is VAT registered. In that case the customer can declare the VAT due on the seller’s behalf, by way of a reverse charge.
If goods are moved into the UK in consignments prior to an order being taken there will be a VAT registration obligation in the UK.
Changes to services?
For businesses supplying services internationally, there are very few changes to the rules. There are some small changes to the place of supply rules for international B2B services, but suppliers of digital services B2C are perhaps impacted the most. Previously, these suppliers declared and paid the EU VAT due on B2C digital services via HMRC’s MOSS system. This system is no longer available as of 1 January 2021 and, instead, B2C digital service suppliers need to register for a non-EU VAT MOSS scheme operated by an EU tax authority in a member state of their choice.
EU VAT refunds
For VAT on expenditure incurred in the EU after 1 January 2020 businesses in Great Britain are no longer able to claim a refund using HMRC’s EU VAT refund portal. The system will be accessible until 31 March 2021 for those claiming refunds for VAT incurred prior to 1 January 2021.
Those businesses wishing to obtain a refund of VAT incurred in EU member states after 1 January 2021 will need to follow the non-EU VAT refund procedures. The deadlines and processes involved differ from state to state.
All in all, there is a lot to consider and new obligations to learn. There will inevitably be unusual scenarios and challenges to overcome, as we are already experiencing with clients. If you trade internationally, we would be delighted to discuss what you do and consider with you solutions to any issues we identify.
If you have already implemented a system to cope with the implications of Brexit, but are wondering if there may be some pitfalls ahead, such as a change in EU systems in July 2021, please don’t hesitate to get in touch by calling 0330 124 1399 or contacting me here.
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