As I write the UK and EU are in the final throws of trying to bash out a post-Brexit trade deal. The atmosphere is fraught with issues of fishing, state aid and the future governance of whatever arrangements they can hammer out (or otherwise).
Whatever happens, things are going to change. Whether we get a ‘thin deal’ or ‘no deal’ there will be an impact on UK businesses in how we trade with the EU. Not to mention the associated additional admin’.
And to add more complexity, the measures to protect the Good Friday agreement will bring new processes to enable trade between Great Britain and Northern Ireland.
Then there’s the brewing fallout from the controversial Internal Market Bill, but we’ll look at that later if required.
In this blog, I’m going to consider the implications for VAT on our overseas trade when the transition period ends on 1st January 2021.
The Status Quo
Domestic VAT will not be affected and remains in the control of the UK Government, so no change there. Until the end of the transition period, the UK remains in the EU VAT regime, which is a centralised set of rules that applies to all EU member states.
This arrangement allowed for simplified VAT management across the EU and applies to areas such as EU-wide distance selling regulations and online VAT refunds.
The New World
At the end of the transition period, the UK will become a ‘third country’. That means that many UK businesses will, for the first time become an importer and/or exporter to the EU. Currently, as an EU member, these much simpler arrangements are known as dispatches and acquisitions.
In the new world, VAT will be immediately payable on all imports to UK businesses that exceed £135 in value.
The point at which VAT becomes due is when the goods enter free circulation. This could be when they are released from custom checks but the final arbiter will be HMRC and how they define when goods enter free circulation.
To sweeten this pill, the government has put in a temporary delay to the next VAT post-January 2021 return to protect cash reserves. Usefully this will also include imports from none EU countries.
But the bill from HMRC will still be ‘in the post’. So don’t rest on your laurels you’ll need to get your head around the issues of reverse charging VAT returns, using a new online system and ultimately the use of C79 reporting, if you haven’t already.
It’s worth mentioning that the same rules will apply to the B2B sales of services where VAT will be applied at the rates of the customer’s country.
Initially, the VAT impact of becoming a third country on cash flows will be mitigated, but the challenges for those new to import regulations are still there and need to be understood.
The £135 Rules
This element of the new arrangements is most likely to apply imports from EU SME businesses. Those who sell low-value items to UK consumers maybe on eBay or Etsy, for example. There are no planned VAT exceptions such as the less than £15 value that applies today.
The long and short of this is that overseas sellers will need to register for and apply UK VAT on their less-than £135 sales to Great Britain.
This is an onerous arrangement which will act as a disincentive for an overseas seller to make their goods available to UK B2C consumers. Recently William Shatner – Captain Kirk – said he was no longer going to sell his memorabilia to UK customers due to these new rules.
That’s terrible news for sci-fi fans and many others potentially.
So far, we’ve only discussed imports. There’s the issue of UK exports to consider. On the face of it, this seems more straightforward. All UK exports should be zero-rated for VAT.
Alas, that simplicity soon falls away. Zero-rate doesn’t mean zero paperwork. You’ll still need to include zero-rated goods on VAT returns.
UK goods exporters also need to register for VAT in the client countries and ensure they appoint experts to help with local arrangements which may differ between regions.
Happily, the VAT arrangements for service industries will not change dramatically.
For sellers of digital services, for example, who currently use the Mini One-Stop Shop (MOSS) system will need to re-register for the none EU MOSS and will lose the £10k threshold before having to apply VAT rules.
The NI Protocol
We come to the thorny subject of Northern Ireland and the Good Friday Agreement. This arrangement is known as the Northern Island Protocol and aims to protect the GFA by avoiding a hard Irish border. As such, NI to some extent, will remain in the EU.
The current agreement means that the current VAT charges for the movements of goods between GB and NI is the same, and there will be no additional paperwork. The current status quo will largely remain in place.
In the case of own goods from NI to GB there are changes and VAT is due on these transactions. Firms do not need to account for VAT when it moves its own goods from NI to GB.
For services, the situation differs, and the third country rules will apply to NI sales to the EU, whereby the VAT will mirror those of the client country. For sales from NI to GB, the current situation applies.
One important area NI businesses will need to take action is to do a XI VAT registration to use for trade with EU member states.
Massive change is underway in the VAT regime for those who import and export (or want to).
And while the government has provided some forms of support, the onus is on business to understand the implications and implement change. For some, this will be uncharted territory and could, in some cases, mean an existential threat to their firm.
We are down to the wire, and there’s so little time to prepare.
For Enso clients, we stand ready to support you and help guide you through the next few months and all the inevitable changes that are in motion. It’s going to be tough but be assured we’ll do all we can to get you prepared and minimise disruption.
In our next blog, we’ll discuss import and export processes, so do call back to see our take on that vital subject.