VAT changes after Brexit

From 1 February 2020 the United Kingdom (UK) is no longer a member of the European Union (EU). It has entered an implementation period that will last up to 31 December 2020. Within the “Withdrawal Agreement (WA)” there is a provision to potentially to extend the “implementation period” up to two years until the end of 2022.

During the implementation period, the EU and UK will seek to negotiate a Free Trade Agreement. This will include future tariffs and customs controls on movements of goods. However, this will not materially affect the post-2020 VAT changes. The EU will become a “third country” (any other countries outside UK) for the purposes of UK VAT.

The major changes for UK and EU businesses upon the UK leaving the VAT regime include:

The UK will no longer have to assume the EU VAT Directive rules into its own VAT Act. For example, it will no longer have to maintain a minimum VAT rate of 15%. However, since its current 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. Although this may be a moot point from 2022 as the EU states have agreed that they will enjoy full rate setting powers.

The ending of zero-rated B2B intra-community supplies; all movements will become imports or exports, subject to UK or EU import VAT.

By way of compensation, the UK will introduce a Postponed Accounting import VAT deferral scheme so no cash VAT payment has to be made by business importers to UK customs. However, many EU countries do not offer the same scheme for UK businesses importing their goods.

If your business is registered for VAT in the UK you’ll be able to account for import VAT on your VAT Return. This means you’ll account for import VAT on your VAT Return instead of paying when the goods arrive at the UK border. This will let your business:

  • pay import VAT later on goods you bring in from non-EU countries
  • maintain cash flow on goods you bring in from the EU

If you’re not VAT-registered in the UK, you will not be able to account for import VAT in this way, you’ll need to pay import VAT at the time you import the goods.

  • If you’re importing goods from the EU, you may be eligible to apply for transitional simplified procedures.

The loss of Distance Selling thresholds for UK e-commerce sellers of goods to EU consumers. Goods will now be subject to import VAT, and UK sellers will have to consider VAT registering in Europe immediately. Similarly, EU e-commerce sellers may now need to register immediately for UK VAT if they have been selling to UK consumers under the £70,000 threshold.

Any UK business with a foreign VAT registration in the EU may now face the obligation to appoint a special VAT fiscal representative. This applies in 19 of the 27 EU states. These agents hold direct liability for any unpaid VAT, and therefore require cash deposits or bank guarantees in exchange.

The scrapping of the UK £15 low-value consignment stock relief which exempts imports of goods (including from the rest of EU) from VAT. Instead, for goods at £135 or below, sellers or their postal service will have to declare and pay to HMRC via a new, quarterly filing, VAT charged at the point-of-sale.

For UK sellers of digital services to EU consumers, the UK will 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 non-Union businesses, to continue to file their VAT declarations for EU e-service sales. EU sellers into the UK will have to register with the UK’s HMRC for the same declaration. Any non-EU business which used the UK MOSS registration will have to reregister for MOSS in the EU and separately in the UK under a regular VAT return.

There will be limited changes on the VAT on services for B2B transactions. 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 will no longer be able to use the 8th Directive online VAT reclaim system operated via HMRC. Instead, they will use the 13th Directive paper-based reclaim process. This requires individual claims to each country where there is a VAT claim. Last UK claims via the 8th Directive will be for the final quarter of 2020.

As part of the WA, Northern Ireland (NI) will enter into a special VAT and customs relationship with the EU. Whilst NI will remain within the UK VAT area, it will track EU rules, including zero-rating for VAT on intra-community supplies across the Irish border. EU VAT on imports into Ireland via Northern Ireland will be collected by the UK authorities.

HMRC has now published its interpretation of the new EU rules, which will apply to the UK throughout the transitional period.

1. Evidence requirements for proof of transport for intra-EU supplies of goods

From 1 January 2020, all member states will harmonise their evidence requirements for zero-rating intra-EU sales. Suppliers must hold evidence such as airfreight invoices, a signed consignment document or note, and receipts from a relevant warehouse, among other forms of documentation, and in the right combination, in order to qualify for zero-rating.

2. Mandatory VAT ID number verification for zero-rating of intra-EU supplies of goods

Currently some EU member states, including the UK, allow an intra-EU supply of goods to be zero-rated even when the customer does not hold a valid EU VAT number, as long as they can prove they are in business in other ways. From 1 January 2020, in order to zero-rate a transaction it will be mandatory for suppliers to:

  • obtain the customer’s valid EU VAT registration number to include on their sales invoices; and
  • declare the transaction on their EC Sales List.

3. Harmonisation of the EU cross-border call-off stock rules

Call-off stock occurs when a supplier sends goods to a client's premises in another EU member state. The client then stores the goods and has full control over them, but does not take title to the goods until he decides to use them and draw them from stock.

The current rules on call-off stock arrangements vary between EU member states and create uncertainty as to whether call-off stock gives rise to a VAT registration requirement for supplying goods domestically in the country of the customer. From 1 January 2020, new rules will be introduced to align VAT treatments of call-off stock across the EU to prevent suppliers from having to VAT register in the customer’s country when selling under these arrangements. The recipient will be required to account for the VAT in the member state of destination as an EU acquisition.

4. Harmonisation of the EU cross-border chain transaction rules

Chain transactions occur when goods are sold between multiple businesses but there is only one intra-EU movement of goods. The current EU rules surrounding these types of transactions means that it can sometimes be difficult to know which business is making the zero- rated intra-EU supply, and which is selling domestically.

From 1 January 2020, EU member states will implement new rules harmonising VAT treatments for businesses involved in chain transactions. The new rules will clarify which business is making the zero rated intra-EU supply, to prevent businesses from having to register in multiple jurisdictions.

Leaving the EU and the Customs Union

Businesses need to start planning for new trading arrangements with the EU, which could come into force as early as January 2021. You could consider a variety of schemes such as AEO (Authorised Economic Operator), an internationally recognised quality mark important for secure supply chains; and IPR (Inward Processing Relief), which enables goods to move across a border and to be subject to processing or manufacturing without triggering customs duty or VAT.

Access to the customs warehousing scheme allows goods to be imported into the UK without being subject to customs duty or VAT until they leave the warehouse. For example: this would allow import of goods from China, and then a movement of the same goods to the EU, but only paying customs duty and VAT once.

This will be essential for facilitating imports from the US or China which are for onward sale to the EU, and for those businesses who trade with Republic of Ireland using Northern Ireland as a logistics route. The applications for all of these schemes are complex and have a long lead time.

No-deal is still a possibility

The no-deal emergency measures have been shelved for now, but the amendment to the EU (Withdrawal Agreement) Bill 2019-20 to prohibit an extension of the transitional period raises the potential risk of a no-deal situation arising again at the end of 2020. Most trade experts are of the opinion that 11 months to negotiate and finalise a free trade agreement is extremely optimistic, and without the ability to extend, no-deal is still a possibility.

This means those companies signed up to the TSP (Transitional Simplified Procedures) implemented by HMRC to make imports into the UK easier for the first year of a no-deal situation, should keep these on file in case no-deal raises its head again. However, businesses in the TSP do not need to set up a duty deferment account as this is not a requirement for the time being.

Steps to Take

If you do not have a UK EORI (Economic Operator Registration and Identification) number that starts with “GB”, you need to apply for it.

You will need to decide if you are going to use a customs agent to complete customs declaration or if you will complete them yourselves.

There is a new government funding available to help businesses train staff making customs declarations, and to help businesses who support others to trade goods to invest in IT.

If you do not have a registration number for the Transitional Simplified Procedure (TSP) we suggest that you apply for one now to make importing as easy as possible.

You will need to apply for “Duty Deferment Account” if you intend to use the TSP to import goods on which customs and excise duty will be payable. This means you can pay duties on goods monthly rather than as soon as the goods enter UK.

For export from the UK, please check the following:-

  • Whether the recipient of your products, need any extra information from you.
  • The entities/customer that you are selling to are ready to bring your goods into their country and that they are following that country’s customs processes.
  • If your goods need an export license – e.g. Controlled goods

You may consider using The Common Transit Convention (an international customs procedure) if you export often:

  • You are exporting goods through multiple Common Transit Convention territories (the EU, Turkey, Iceland, Norway, Switzerland, Liechtenstein, Republic of north Macedonia and Serbia)
  • You want to move your goods away from the border to carry out customs processes elsewhere.

If you decide to use Common Transit Convention for export, you should also consider becoming an authorised consignee. This will allow you to start export at your own premises rather than at a government office.

For temporary movement of goods, ATA Carnet may be best for you. ATA Carnet, often referred to as the "Passport for goods", is an international customs document that permits the tax-free and duty-free temporary export and import of non-perishable goods for up to one year. For example sporting or entertainment equipment.

Wilton is monitoring the changes happening with regard to VAT whilst the Free Trade Agreement is negotiated and agreed by both the UK and EU. We will keep you updated as and when necessary.

That said, it is prudent to get the business ready as per the information that is known to us at present as there are 10 months left of the current transition period – 31 December 2020.

Please let us know your current and future plans regarding trade with EU as this will enable us to provide you with the relevant advice on how to prepare your business before the end of the transition period.

Please contact us on if you require any assistance or information in this regard.