18th November 2020Elizabeth Hughes0 Comments.16 minutesVAT
The UK has left the EU, and VAT rules will change once the Brexit transition period ends on 31st December 2020.
We explain in simple terms how the changes to VAT rules might affect your business, and what you can do to prepare. You can also use the government’s Brexit transition website to see what actions you should take now.
In most cases, the new rules come into force on 1st January 2021.
What does VAT have to do with Brexit?
As a member of the EU (and the EU VAT area), the UK’s VAT system was steered by EU VAT rules. It meant that the UK was covered by VAT rates and processes in place between:
The UK and other members of the EU, and;
The EU and other countries.
Now that the UK has left the EU, those VAT rules no longer apply.
This changes the way that VAT is processed on imports and exports to and from the UK, even if you’re not VAT-registered.
If you’re brand new to VAT and want a deeper understanding before getting stuck in to the EU VAT changes, watch our video below to get started.
How Brexit changes VAT for business-to-business (B2B) operations
This section deals with how the changes affect VAT for businesses selling to each other across the UK border.
How it normally works
When a VAT registered business in the UK sells something taxable to a UK business, it adds VAT to the sale price. The customer pays their bill to the business, which effectively acts as a tax collector and then pays the VAT amount on to HMRC.
It gets a bit more complicated when the seller and the customer are in different countries.
The seller charges VAT in their country but when a taxable item crosses a border, VAT can be charged again by the buyer’s country. This is called import VAT.
As you can imagine, paying two lots of VAT makes things more expensive, and puts customers off.
How VAT is charged when goods are moved between EU businesses
EU VAT rules encourage businesses in member countries to trade with each other, by allowing sellers to zero-rate the sales they make to businesses in other EU countries.
It means that a business in one EU country can sell to a business in a different EU country and:
Charge VAT at a rate of 0% on the sale, and;
The customer only has to pay the VAT in their own country (the import VAT).
Because the UK is no longer in the EU, these particular zero-rating rules no longer apply when buying and selling with EU businesses.
Instead, goods crossing the UK border with the EU will be treated the same as other imports and exports.
Can I still zero-rate VAT on sales to EU businesses?
The good news is that the UK has updated its own VAT rules to make up for the changes.
From 1st January 2021, you’ll be able to charge zero rate VAT on most exports from the UK to the EU.
That just leaves your customer to pay the import VAT in their own country like they normally would (which they can reclaim anyway, if they’re VAT registered).
This does mean that the EU business you’re selling to will now have to act as an importer for the goods they buy from you.
You’ll need to check that they can make customs declarations on their imports. It’s also worth noting that after 1st January 2021, they’ll be charged customs duty too.
What are the VAT changes on imports into the UK?
There are also VAT changes which will affect goods going ‘the other way’. That is, British businesses who import into the UK after the transition period ends.
These changes include:
the introduction of ‘postponed accounting’
whose responsibility it is to collect the VAT on low value goods
claiming back the VAT on EU purchases
What is postponed accounting for VAT, and what does it mean for my business?
The UK is introducing a system of postponed accounting to help businesses which import goods in to the UK.
Usually, a business which imports goods to the UK must pay import VAT (as well as the usual customs and excise charges) when their shipment reaches the UK border.
Unfortunately for businesses which aren’t VAT registered, this requirement won’t change. You’ll still need to pay import VAT at the border, unless your shipment is worth less than £135 (we’ll come back to this).
If your business is VAT registered, you’ll be able to use postponed accounting from 1st January 2021.
It means that you won’t have to pay the import VAT on your goods when they arrive in the UK.
Instead, the VAT payment will be postponed. Rather than paying at the border, you’ll account for the import VAT on your VAT return.
Effectively this means you’ll be able to pay and recover the VAT on the same VAT return, which might turn out to be great news for your cash flow.
Do I need to register to use postponed accounting for import VAT?
You don’t need to register or get special permission to start accounting for import VAT on your VAT return.
If you’re a UK VAT registered business which imports goods, you’ll be able to start using the postponed accounting system from 1st January 2021, as long as:
You are importing goods which you will use in your business, and;
You’ll also be able to use postponed accounting if you use ‘special procedures’ to import in to the UK, and submit a declaration to release your goods.
Special procedures include:
Will I pay import VAT on goods with a low value?
The way that VAT is processed on imports with a low value is also changing.
At the moment there’s a type of tax relief in place called Low-Value Consignment Relief (LVCR). As the name suggests, it relieves businesses of the need to pay VAT on imports that have a value which is less than £15. This tax relief is being withdrawn at the end of 2020. Which brings us to:
After 1st January 2021 import tax won’t be charged at the border (like it is at the moment) for goods worth less than £135. That doesn’t mean there’s no VAT to pay.
Instead, VAT will be charged at the point of sale, by the business that’s selling the goods to be imported into the UK.
So, if you’re a UK business and;
you’re buying goods from a business overseas, and;
you will import those goods into the UK, and;
the shipment is worth less than £135…
Then the seller should charge you VAT at the UK rate.
What does the seller need to do?
The seller will need to register their business for VAT in the UK. The customs invoice will need to show the UK VAT that you paid, so that the goods can clear the border.
If this affects imports that you need to make on a regular basis, it’s time for a chat with your supplier. But before you do:
If the business is selling through an online marketplace, it’s the marketplace which has to register for VAT, not the individual seller.
If the VAT isn’t charged by the seller when you make your purchase, then you’ll either need to:
Account for it as a reverse charge on your VAT return, if you’re VAT registered
Pay the import VAT at the border, if you’re not VAT registered.
Can I still reclaim VAT on EU purchases after 2020?
UK businesses which incur VAT on purchases they make in the EU can currently claim the VAT back through HMRC.
Sadly, this will come to an end on 31st March 2021, and there aren’t any other arrangements in place.
This means that you won’t be able to claim back the VAT you pay to EU sellers after the end of March, so get those claims in!
Do the VAT changes affect businesses selling directly to customers?
The short answer? Yes, they do. This is because of how Brexit affects:
If you’re a distance seller then you are, quite literally, selling at a distance, rather than making sales in-person such as in a shop.
Distance selling includes sales that are made online, or through catalogues, for instance.
Under EU distance selling rules for VAT:
An EU business which sells to a customer in a different EU country can charge VAT at the rate used in the customer’s country.
They can do that without actually being registered for VAT in that country. Instead, the seller reports the VAT when they submit a VAT return in their own country. That is, until they hit the distance selling threshold.
What are distance selling thresholds?
The distance selling threshold is the point at which a distance seller must register for VAT in the country they sell to.
Once your turnover hits the threshold for registration in that country, it’s time to register. The threshold is different from country to country.
And, you’ve guessed it.
The UK isn’t covered by those distance selling rules after 31st December 2020.
It means that you won’t be able to report the VAT on your EU distance-sales through your UK VAT return to HMRC.
What should I do to prepare for distance selling VAT changes?
If you’re a UK-based business which sells to EU customers, then you have two choices:
Move some of your stock to somewhere in the EU. You’ll need to register for VAT in the country where you hold the stock, but will be able to sell to your EU customers under distance-selling rules from there.
Register for VAT in each of the EU countries that you sell to. Customs officials in EU countries will be looking for a relevant EU VAT number on the goods that you ship.
There are promises of hefty fines and penalties for failing to do one or the other.