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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.

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:

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:

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.

comprehensive vat returns service

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.

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:

Infographic showing the VAT changes being made to UK Imports

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).

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:

Infographic explaining your eligibility to use postponed accounting

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:

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;

  1. you’re buying goods from a business overseas, and;
  2. you will import those goods into the UK, and;
  3. 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:

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!

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Do the VAT changes affect businesses selling directly to customers?

The short answer? Yes, they do. This is because of how Brexit affects:

What is distance selling?

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:

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.

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:

There are promises of hefty fines and penalties for failing to do one or the other.

Infographic showing what steps to take to prepare for VAT changes to distance selling

What do the VAT changes means for digital sales?

The way that VAT is charged on digital services, known as VAT MOSS, will also change.

VAT MOSS (Mini One-Stop-Shop) is a system which enables businesses selling digital services to EU customers to pay VAT more easily.

The business simply registers for VAT MOSS in any EU country, and submits a single VAT MOSS Return to account for the VAT on digital sales anywhere in the EU.

That way, the business doesn’t have to submit a separate VAT return for every EU country it sells digital services to.

Until Brexit, UK businesses sent their VAT MOSS return to HMRC, who made sure the payments went to the right place.

But, as leaving the EU also means the UK no longer belongs to the EU VAT MOSS Scheme, that’s not an option anymore.

What happens to VAT on digital sales after the transition period ends?

UK businesses who sell digital services to consumers in the EU
  • Register for VAT MOSS in another EU country. You won’t be able to register before 1st January 2021, but will need to register by the 10th of the month following your first sale. Learn more.

Or;

  • Register for VAT in every EU country that you sell digital services to. (Yes, ouch).
Sellers in the EU who sell digital services to UK customers
Digital sellers outside of the UK and EU who registered for VAT MOSS via the UK

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About The Author

Elizabeth Hughes

A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible.

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