What does the post-Brexit VAT landscape look like?

But you knew all that, right?

If you’re still trying to get your head around VAT in a post-Brexit world, we’re here to help iron out the creases. The first point to note is that VAT still very much applies in 2021 and domestic VAT rules remain the same, but there is a new system for transactions between the UK and EU.

During the transition period, the UK remained part of the EU VAT system, whereby UK businesses operated under a common set of rules rather than registering for VAT in each separate country. From 1 January 2021, doing business in Europe will be more akin to working with non-EU countries. In fact, there is no more reference to ‘dispatches’ and ‘acquisitions’, but simply ‘imports’ and ‘exports’, to be in line with non-EU business.

VAT on imported goods

Items from EU countries are now considered the same as those from non-EU countries (with a few changes). Postponed accounting has been introduced for import VAT from 1 January 2021, i.e. import VAT will be accounted for on a company’s VAT return but not paid as soon as the goods enter the UK, so the goods can be released from customs before the VAT payment is made. This applies whether the goods are from inside the EU or outside the EU.

Where the goods value is less than £135, VAT is collected at the point of sale rather than the point of importation, so UK supply VAT is due instead of import VAT. It is the responsibility of online marketplaces (OMPs) to account for and collect the VAT on these goods even when they are in the UK at the point of sale.

If goods are sold directly from overseas to consumers in the UK, the overseas seller must register and account for the VAT with HMRC. Whereas, for business-to-business (B2B) transactions below £135, where a VAT-registered customer shares its registration number with the seller, the VAT is accounted for by the customer through the reverse charge system.

VAT on exported goods

Exports to EU countries are also considered the same as those to non-EU countries from January 2021, i.e. they are zero-rated for UK VAT whether the customer is a consumer or another business. Distance selling regulations and the need to verify the VAT status of the customer are no longer relevant in this regard.

Zero-rated goods require a 0% VAT rate and must be included in VAT return box 6. However, where a UK company sells goods direct to a consumer based in the EU, this will result in complications as there will be an accounting for VAT, usually dealt with by the courier (unless you happen to be VAT registered in the destination country), on import. It is therefore important to make sure you have factored in this cost to your selling price. B2B will not be affected by this. For this reason, although not a requirement, keeping a note of a customer’s VAT number is strong evidence that B2B rules should be used.

Rather than completing an EC Sales List, UK VAT-registered businesses exporting zero-rated items to EU businesses must keep proof that the goods left the UK, just as they must for non-EU exports. It is worth noting that businesses based in Northern Ireland will still need to complete EC Sales Lists.

Selling services and digital services

Using the ‘place of supply’ rules, business-to-business sales will largely continue to be subject to VAT in the customer’s country and be collected via the reverse charge system, whilst business-to-consumer (B2C) sales will generally be subject to VAT in the seller’s country.

UK businesses selling digital services that use the MOSS (Mini One-Stop Shop) system now need to register for the non-union MOSS and can’t benefit from the €10,000 threshold before applying the ‘place of supply’ rules. In order to use this scheme, you will need to register for VAT in an EU state. For reasons of a common language, it is likely many businesses will choose the Republic of Ireland, though there may be reasons to choose a different state. Details can be found here.

VAT registration number

UK businesses can still check the validity of EU businesses through the EU VAT registration number validation service. HMRC has developed a separate system for UK VAT registration to be validated as these numbers are no longer included on the EU system.

Claiming an EU VAT refund

The online system to recover VAT incurred in EU countries is no longer available and the refund must be sought from each EU member state using the same system as for non-EU businesses. This is known as 13th Directive Reclaims, and details may be found here.

The government has tried to minimise the disruption of the new VAT rules but there are major administrative changes required to maintain business in Europe, so it is still essential for a business to make sure that it is rock solid on its reporting and payment obligations under the new regime.

If you need assistance with any VAT-related issues, the trusted team at CRM is ready and able to help. Call 01865 379272 with your queries.