How does Brexit impact VAT accounting?
In this article I will explain how VAT accounting will change from the 1st January 2021, how imports from and exports to the EU will impact VAT as well as how trading with Northern Ireland businesses will change.
Note - this article was written following the announcement of a free trade agreement between the UK and EU that takes effect from 11pm on 31st December 2020.
Changes to VAT Rules
Prior to Brexit the UK was a part of the EU VAT regime which meant the UK applied common VAT rules as with other EU countries. UK businesses were also not required to register for VAT in each EU country that they sold to.
Following Brexit UK businesses will treat EU businesses in the same way they currently do with businesses outside of the EU and visa versa.
Trade with EU countries will cease to be called dispatches and acquisitions, and will instead be referred to as imports and exports.
UK Postponed VAT Payment System
After Brexit VAT will be payable upon imported goods, although the UK government has introduced the postponed VAT payment system to avoid cash flow issues.
This lets businesses importing goods into the UK account for the VAT on their next VAT Return, and means the goods can be released from customs without the need for VAT payment.
The purpose of this system is that it minimises the impact of import VAT upon businesses cash flow. Note that rules differ for Northern Ireland, further information in the section "Northern Ireland VAT after Brexit.
Further information on postponed VAT accounting can be found at - www.gov.uk/guidance/check-when-you-can-account-for-import-vat-on-your-vat-return
Import VAT
This initial section only applies to imports of more than £135 in value, for goods of less than £135 see "imports under £135" section below.
There are two ways of accounting for import VAT;
1. Postponed VAT Accounting (this is mandatory if the businesses defers the submission of customs declarations but optional for all other businesses).
Input VAT is not physically paid upfront and instead accounted for as input VAT on the VAT return. This system can also be used for imports from outside of the EU. A new online monthly statement will be available as part of the postponed VAT accounting system. This statement will show the import VAT postponed for the previous month on a transactional basis.
2. VAT paid at Tax Point
Import VAT is physically paid when good enter circulation and then reclaimed later by the business. Monthly C79 reports should be obtained from HMRC, as when importing from outside the EU.
Regarding VAT on services specifically, sales of cross border purchases of services from one business to another (B2B) will remain subject to tax in the country of the customer. The tax is generally accounted for as reverse charge in the destination country by the recipient of the service.
Imports under £135
New rules are due to be applied from 1st January 2021 for imports under £135, these rules apply to imports from inside and outside of the EU alike.
Low Value Consignment Relief (LVCR) is being abolished. This exempted imports with a value of less than £15 from import VAT.
Online marketplaces that are involved in facilitating sales will be responsible for collecting and accounting for the VAT.
VAT on imports with a value of £135 or lower will have VAT applied at the point of sale, rather than applied as import VAT at customs. For business to customer transactions this UK VAT will be charged and collected by the seller but for business to business transactions the VAT will be reverse charged to the customer.
Note the recipient business should make sure that the seller knows their VAT number, or the seller will treat the sale as a business to customer sale and apply VAT.
This is designed to replicate the "EU 2021 VAT e-Commerce Package" to be introduced across the EU in 2021.
Export VAT
Exports of goods to EU countries will be treated in the same way as exports of goods to non EU countries. Exports should be zero rated (0%) for UK VAT. (For treatment of services see below).
This applies to exports to both businesses and customers so there is no need to verify a recipient businesses VAT number.
A 0% VAT rate is applied on export sales, exports must still be included as part of your VAT accounting even though no VAT is payable.
Exports of services are treated in the same manner for VAT purposes as before 1st January 2021.
Business to business service exports are subject to VAT in the country of the customer and accounted for through reverse charge. Business to customer service exports will continue to be subject to VAT in the country of the seller.
Business that export services to the EU will need to register for HMRCs non-union MOSS (Mini One-Stop Shop) system. Further guidance on non union MOSS - www.gov.uk/guidance/pay-vat-when-you-sell-digital-services-to-eu-consumers-from-1-january-2021
Northern Ireland VAT after Brexit
From a VAT and customs perspective Northern Ireland will be treated differently to England, Scotland and Wales from 1st January 2021.&
Northern Ireland will remain part of the EUs VAT and customs regime to enable frictionless trade of goods between Northern Ireland and the Republic of Ireland (as well as the rest of the EU).
For the purposes of VAT accounting movements between the UK and Northern Ireland will continue to be treated like domestic (UK) sales and purchases. This is the same for both goods and services.
Note that for businesses based in Northern Ireland sales of services to the Republic of Ireland and rest of the EU will be treated like Third Country supplies.
A "Trader Support Service" has been set up by the UK government to provide free advice and support to businesses moving goods between Northern Ireland and the rest of the UK. Link to the Trader Support Service - www.gov.uk/guidance/trader-support-service?utm_campaign=transition_p2&utm_medium=cpc&utm_source=seg&utm_content=ala_act63&gclid=CKysz_XS9e0CFZISGwodPQ4MZA
In addition to changes to VAT accounting Brexit will also have an impact on customs requirements and I would advise seeking further information on this area. Some businesses will employ a customs broker or freight forwarder to assist with customs compliance.
If your business trades outside of the UK then consider reviewing supply chains to assess the impact of Brexit upon your businesses VAT accounting and customs requirements.