UK VAT after the Brexit transitional period
Changes to VAT rules from 1st of January 2021
The UK exited the EU VAT regime, Customs Union and Single Market from 1st of January 2021. This means the loss of a range of compliance simplifications and the imposition of customs declarations, goods regulations, services and import VAT. A Brexit Trade and Cooperation Agreement Deal with no goods tariffs and quotas was agreed in time for the end of Brexit transition period on 31 December 2020.
UK continues to levy VAT and rules relating to UK domestic transactions continue to apply to businesses as they did previously. VAT procedures on the whole remain as those prior to 31 December 2020, but there are some changes to the VAT rules and procedures for transactions between the UK and EU member states.
BREXIT VAT CHANGES
The major changes for the UK and EU businesses following the UK leaving the VAT regime include:
- The UK will no longer have to assume the EU VAT Directive rules into their own VAT Act. It will no longer have to maintain a minimum VAT rate of 15%. However, since its VAT rate is 20% and the consumption tax accounts for almost a third of tax revenues, any reduction is highly unlikely.
- The UK will have complete control over its reduced VAT rates, which are currently restricted within the rules of the EU VAT Directive.
- The ending of zero-rated B2B intra-community supplies; all movements are now imports or exports, subject to UK or EU import VAT. Businesses moving goods now need two EORI numbers to move goods between the UK and EU.
- UK has introduced a Postponed VAT Accounting import VAT deferral scheme so no cash VAT payment has to be made by business importers to UK customs. Many EU countries do not offer the same scheme for UK businesses importing their goods.
- The loss of Distance Selling thresholds for UK e-commerce sellers of goods to EU consumers. Goods are now be subject to import VAT, and UK sellers will have to consider VAT registering in Europe immediately. EU e-commerce seller may now need to register immediately for UK VAT if they have been selling to the UK consumers under the £70,000 threshold.
- Any UK businesses with foreign VAT registration in the EU may now face the obligation ti appoint a special VAT fiscal representative.
- The scrapping of the UK £15 low-value consignment stock relief which exempts imports of goods (including from the rest of EU after Brexit) from VAT. Instead for goods at £135 or below, sellers or their postal service have to declare any pay to HMRC via a new, quarterly filling, VAT charged at the point of sale.
- For UK sellers of digital services to EU economies, the UK is no longer be a member of the EU Mini One Stop Shop single VAT return scheme. UK sellers of electronic, broadcast or telecoms services to consumers will therefore have register in any other EU state, as a non- Union businesses, to continue to file their VAT declarations for EU e-service sales. EU sellers into the UK have to now register with the UK’s HMRC for the same declaration. Any non-EU business which used the UK MOSS registration now has to register for MOSS in the EU and separately in the UK under a regular VAT return.
- There are limited changes on the Brexit VAT on services for B2B transactions after the UK leaves the EU VAT regime. The reverse charge will still apply. In the future the UK may deviate from some of the use and enjoyment rules.
- UK businesses incurring EU VAT on travel, hotel or other expenses are no longer be able to use the 8th Directive online VAT reclaim system operated via HMRC. They must use 13th Directive paper-based reclaim process. This requires individual claims to each country where there is VAT claim.
- Northern Ireland is now in a special VAT and customs relationship with the EU. Whilst NI remains within the UK VAT area, it tracks EU rules, including zero-rating for VAT on intra-community supplies across the Irish border. EU VAT on imports into Ireland via Northern Ireland are collected by the UK authorities.
IMPORTING GOODS FROM THE EU
The Government will introduce postponed accounting for import VAT on goods brought into the UK with effect from 1st of January 2021. This means that UK VAT registered businesses importing goods to the UK will be able to account for import VAT on their VAT return, rather than paying import VAT on or soon after the time that goods arrive at the UK border.
The relaxation applies to imports from the EU and non- EU countries.
Customs declarations and payment of any other duties will still be required. Customs duty will apply to some goods and excise duties will continue to apply to tobacco, alcohol and certain energy products.
Customs and excise due payments can be deferred to be settled monthly with a duty deferment account. Business needs to register with HMRC to open a duty deferment account and will need to provide a bank guarantee.
EXPORTING GOODS TO THE EU
VAT registered UK businesses continue to be able to zero-rate sales of goods to EU businesses. EU member states will treat goods entering the EU from the UK in the same way as goods entering from other non-EU countries. This means import VAT and any customs duties are due when the goods arrive in the EU.
Businesses may be able to use the Common Transit Convention(CTC) to complete some customs procedures away from the border and defer import VAT and customs duties until goods reach their final destination.
SUPPLYING SERVICES TO THE EU
The supply of services to customers in the EU from 1st of January 2021 is treated the same as those to any customer outside of EU.
The VAT treatment will be covered by the VAT place of supply rules. For UK businesses supplying digital services to non-business customers in the EU, the place of supply continues to be where the customer resides. VAT on those services is due in the EU member state in which the customer resides.
For UK businesses supplying insurance and financial services the input VAT deduction rules change from 1st of January 2021, as supplies that were previously exempt become outside the scope with recovery, thereby aligning with the existing rules for supplies of such services to customers outside of EU.
UK VAT MOSS
The UK VAT MOSS is an online service that allows EU businesses that sell digital services to customers in other EU member states to report and pay VAT via a single return and payment in their home member state.
As of 1st January 2021, businesses are no longer able to use the UK’s MOSS scheme to report and pay VAT on sales of digital services to customers in the EU. Businesses that sell digital services to consumers in the EU have to register for the MOSS non-union scheme.
Under the non-union MOSS scheme, businesses wishing to use the scheme must register by the 10th day of the month following a sale.
EU VAT REFUND SYSTEM
Prior to the end of the transition period, a UK business could recover VAT incurred in other EU countries using an electronic system. Businesses are no longer able to use that system. UK businesses can claim refunds of VAT from EU member states, but it will need to be done using the existing refund system for non-EU businesses.
The way in which refund system operates varies across each EU country, so businesses will need to check the precise requirements in each EU country where they incur VAT.