Whilst the United Kingdom officially left the European Union (EU) on 31 January 2020, this prompted the start of an 11-month transitional period during which time the UK remains part of the Single Market, the EU Customs Union and the VAT Territory. With the transitional period due to end on 31 December 2020, it is important to prepare for the changes that will take place from 1 January 2021.
The UK will leave the EU VAT Territory on 31 December 2020. After this date, Great Britain (England, Wales and Scotland) will not be subject to EU VAT legislation. Northern Ireland will remain subject to EU VAT legislation in respect of transactions involving goods, but not for services. Businesses in Great Britain should therefore be aware of numerous changes applying from 1 January 2021.
Goods purchased from overseas
Acquisitions (purchases of goods from EU member states) will be treated as imports. This means that VAT on acquisitions will no longer be declared in Box 2 of the VAT return. A new system, Postponed Accounting, will be introduced and will apply to imports received from all over the world, with some exceptions such as low-value consignments (see below). The system is intended to mitigate the cashflow disadvantage posed by paying import VAT upfront and waiting to reclaim it in a later VAT return. Under the new system, import VAT can be deferred and declared to HMRC in Box 1 of the VAT return for the period of importation. The VAT can be reclaimed in the same return, in Box 4, subject to the normal rules for reclaiming input tax.
Low-value consignments, where the VAT-exclusive value does not exceed £135, will no longer be subject to import VAT. Instead, UK VAT will be due on the supply at the point of sale. If the goods are sold via an online marketplace (OMP), the OMP will be responsible for charging VAT to the customer. If the goods are not sold via an OMP, the overseas seller will be required to register and charge VAT in the UK. One exception to this rule is where the customer is VAT-registered; in this case the customer can declare the VAT due on the seller’s behalf, by way of a reverse charge.
Goods sold to overseas customers
Dispatches (zero-rated sales of goods to business customers in EU member states) will be treated as exports. Exports are zero-rated, provided certain conditions are met.
Distance sales (sales of goods to non-business persons in the EU) will also be treated as exports. The EU distance-selling regime and thresholds will no longer apply to UK suppliers.
For those supplying services internationally, there will be very few changes to the current rules. Suppliers of digital services to non-business customers (B2C) will perhaps be impacted the most. Currently, these suppliers declare and pay the EU VAT due on B2C digital services via HMRC’s EU VAT MOSS system. This system will not be accessible from 1 January 2021 and, instead, B2C digital service suppliers will need to register for a non-EU VAT MOSS scheme operated by a tax authority in a member state of their choice.
EU VAT refunds
For input VAT incurred after 1 January 2020 businesses in Great Britain will no longer be able to claim a refund using HMRC’s EU VAT refund system. The system will be accessible until 31 March 2021 for those claiming refunds for VAT incurred prior to 1 January 2021. Those businesses wishing to obtain a refund of VAT incurred in EU member states after 1 January 2021 should follow the non-EU VAT refund procedures set by the tax authority in the member state where the VAT was incurred. The deadlines and processes involved differ from state to state.
When the UK leaves the EU Customs Union on 1 January 2021 the UK will operate a full, external border with the EU. New border controls on imports from the EU to Great Britain will be introduced in stages, with customs declarations for goods which are not controlled being delayed until 30 June 2021.
From 1 January 2021
Customs declarations will be required when importing and exporting goods that are categorised as ‘controlled’. Controlled goods include alcohol and tobacco products.
For live animals and high-risk animal or plant products additional declarations should be made.
From 1 April 2021
Declarations are to be made of imports of any animal origin or plants.
From 1 July 2021
Import declarations are required for non-controlled goods imported within the last six months. For non-controlled goods imported between 1 January and 30 June 2021 it will be necessary to keep detailed records of imported goods to submit the declaration.
From 1 January 2021, there will be new rates of Customs Duty for imports – called the UK Global Tariff. In many cases, the rate of Customs Duty will be higher than the current rate. To check the tariffs that will apply to different categories of imported goods, please see https://www.gov.uk/guidance/uk-tariffs-from-1-january-2021.
Trading between Great Britain and Northern Ireland
When the UK left the European Union on 31 January 2020, the start of the 11-month transitional period commenced, during which time the whole of the UK remains part of the EU’s VAT Territory, the Single Market and Customs Union. This period comes to an end on 31 December 2020. As part of the Withdrawal Agreement between the government and the EU, Northern Ireland will leave the EU, but from 1 January 2021 will maintain alignment with the EU’s rules for VAT and Customs in respect of goods. For services, Northern Ireland will follow the VAT rules applicable to the rest of the UK. This situation will add a great deal of complexity to Northern Ireland’s VAT rules and add extra considerations for businesses in Great Britain that trade with Northern Ireland.
Preparing for 1 January 2021
Some practical actions to take now include:
- Obtaining an Economic Operator Registration and Identification (EORI) number, which will be required when trading with the EU post Brexit. It is free to obtain an EORI number and you can do so by visiting https://www.gov.uk/eori.
- Deciding whether to use an agent freight forwarder to help with making customs declarations. The following guidance outlines the services they can provide: https://www.gov.uk/guidance/appoint-someone-to-deal-with-customs-on-your-behalf
- If you buy goods from the EU, checking whether those goods are ‘controlled’. Ascertaining which declarations are required and when they will need to be made. For more information please see https://www.gov.uk/guidance/list-of-goods-imported-into-great-britain-from-the-eu-that-are-controlled.
- Checking the UK Global tariff (linked above) to see the rate of Customs Duty that is likely to apply to the goods you import.
- Deciding whether to use the Postponed Accounting system (https://www.gov.uk/guidance/check-when-you-can-account-for-import-vat-on-your-vat-return) to defer import VAT and familiarising yourself with the procedure for declaring the deferred import VAT on the VAT return.