While there is still a significant amount of uncertainty surrounding Brexit, and particularly whether there will be a Free Trade Agreement, some things are clear. Additional paperwork will be required for almost any movement of goods to or from the EU which may include the requirement to submit Customs Declarations. When and how import VAT is paid is also changing.
VAT and Duty Changes due to Brexit: What you need to do
Businesses that intend to move goods to or from the EU after 1 January 2021 need to review their business processes and arrangements to make sure they are prepared for the changes on 1 January 2021. In particular we recommend:
- Check whether you have an EORI and if not apply for one now
- Talk to your EU suppliers and customers and discuss who will make the relevant import and export declarations and who will be shown as the exporter and importer
- Make sure your contracts specify who will be responsible for Customs Declarations, taxes and duty
- Speak to the businesses who transport your goods to make sure they have all the information they require
- If you import goods and would like to use Postponed VAT Accounting (PVA) ensure whoever submits the import entry is aware of this and has the necessary information
- Consider applying for a Duty Deferment Account
- If you are exporting goods make sure you have correct evidence of exports
- Decide whether you will use an agent, such as a Customs Agent, Freight Forwarder or Fast Parcel Operator to lodge entries.
- Consider whether you can apply for a Government Grant to help cover training or IT costs
- If you are an ecommerce trader and/or are subject to the distance selling VAT regulations currently, you will need to review your processes in accordance with the changes (detailed later in this article), you may need to register for VAT in new jurisdictions and/or sign up for the non- EU ‘one stop shop’.
- From 1 January 2021, the Northern Ireland Protocol comes into force. There will be special provisions which only apply in Northern Ireland so if you move goods into, out of, or through Northern Ireland make sure you check the latest guidance. You should also sign up for the Trader Support Service (a free resource from HM Revenue and Customs)
The Government is providing a range of support, including webinars to walk you through the changes, these are available to watch on demand
If you would like any advice on this subject and any other VAT related matters, please get in touch with your usual contact
A SUMMARY OF POST-BREXIT UK BORDER CONTROLS
From the 1 January the transitional period with the EU will end and the UK will take independent control of border processes. These processes will be introduced in three stages up to July 2021.
Stage One: January 2021
- Prepare for basic customs requirements for non-controlled goods; including keeping records of imports and making arrangements toward accounting for and paying VAT
- Full customs declarations needed for controlled goods which will also be subject to physical checks at the point of destination or other approved premises
- Export declarations and UK exit Safety and Security declarations will be required for all goods
- Traders importing and exporting goods using the Common Transit Convention will need to follow all of the transit procedures – these will not be these will not be introduced in stages.
- Traders have up to six months to complete import declarations, tariffs may become due on relevant items but this can be deferred until the declaration is made.
Stage Two: April 2021
- Products of animal origin (POAO) will require pre-notification and health documentation, some products will be in higher risk categories and may require pre-authorisation from January – please do check APB categories. Checks will be made at the point of destination until July 2021.
Stage Three: July 2021
- Customs declarations will be due at the point of import (deferrals are expected to end) for all goods as well as VAT an excise duties where necessary.
- Prepare for customs compliance checks (may be done at the port or an inland centre)
- Safety & Security Declarations are to be made (in accordance with current Rest of World trade).
- Commodities subject to sanitary or phytosanitary (SPS) controls will need to arrive at an established point of entry with a Border Control Post (BCP).
Helping businesses get ready for changes to trade with Europe from 1 January 2021
HMRC has written to 206,000 VAT registered businesses about the steps they need to take to get ready - you can see it here. They have also launched a series of short information videos that can be accessed here.
HMRC also has an online forum where you can submit questions.
THE DETAIL: IMPORTING GOODS INTO THE UK
From 1 January 2021 Import declarations will be required for goods coming into the UK from the EU, this will be the case even if there is a Free Trade Agreement. If a UK business is shown as the importer they will need to show their EORI number on the import entry.
For standard goods, it may be possible to delay submitting Customs Declarations and paying duty (but not VAT, if you are VAT registered) for imports from the EU between 1 January and 30 June 2021. For controlled goods (e.g. firearms, torture equipment, some plants, excise goods and sanction goods etc) and for businesses with a poor tax and customs compliance history, standard declarations will be required from 1 January 2021 (deferred declarations will not be available). HMRC will be writing to businesses to tell them if they cannot defer declarations.
If import declarations are deferred the supplementary declaration will have to be submitted to HMRC through a procedure called Simplified Declaration. If a business is considering deferring declarations they will need to ensure they meet conditions imposed by HMRC, which are explained here, and that they or their agent are authorised to submit Simplified Declarations and have a Duty Deferment Account.
From 1 January 2021 import VAT will be payable on standard or reduced rate goods arriving in the UK from the EU.
VAT registered businesses will be able to reclaim the import VAT provided the goods are to be used for taxable business activities and recovery is not specifically blocked, e.g. business entertainment.
Under the current rules import VAT is paid at the time the goods are imported and is reclaimed through the VAT return. From 1 January 2021 a new system called Postponed VAT Accounting (PVA) will be introduced. This will allow VAT registered businesses to pay import VAT and reclaim it through their VAT returns. The payment and reclaim happen on the same return which represents a significant cash flow advantage over the current system. PVA will apply to all imports not just those from the EU. Businesses do not need to apply to use it but certain detail does need to be shown on the entry for it to apply.
The VAT due on imports should be included in box 1 of the VAT return, the amount being reclaimed in box 4, and the net value in box 7. HMRC will be introducing an online system that will provide statements of the monthly import VAT to be shown on the VAT return. If import entries are deferred PVA must be used to declare the import VAT on the VAT return covering the date the import was made.
For non-freight imports, the Government’s Border Operating Model advises that for commercial goods imported in luggage or small vehicles, with a value not exceeding £1500, a simple online declaration should be made before the goods arrive in Great Britain. Standard declarations will be required for higher value consignments, excise, or restricted goods or goods that require a license. In both cases, oral declarations at the point of import using a Red Point/Channel, if one exists, can be made.
VAT and Low Value Imports
Low-Value Consignment relief will be abolished and the treatment of imports of £135 or less will also change from 1 January 2021. The change will not apply to excise goods or non-commercial transactions between private individuals.
Where the UK purchaser is a private individual or a business that does not give the supplier its UK VAT registration number the supplier has to charge UK VAT (assuming the goods are not zero rated). The supplier has to be or become VAT registered and declare VAT on the imported goods to HMRC through their VAT returns.
For business to business sales not exceeding £135, if the customer gives the supplier its UK VAT registration number, import VAT will be accounted for by the customer using the reverse charge on its VAT returns. A similar procedure to PVA.
This change is unlikely to result in significant administrative change for UK customers but it will see VAT being charged on purchases that may previously have been VAT free. VAT registered businesses could improve cash flow by providing suppliers with their VAT number and declaring and reclaiming the VAT on these purchases through their VAT return.
Import duty is not payable on imports of £135 or less unless the goods are subject to Excise duty, so duty is unlikely to be an issue.
Further details of these changes are in an HMRC Policy Paper published in October.
If a Free Trade Agreement is not agreed with the EU import Duty could be payable on imports from the EU. The proposed duty rates are contained in the UK Global Tariff.
If duty is payable having a Duty Deferment Account (DDA) with HMRC is likely to be helpful. A DDA offers several advantages:
- A delay in paying the charges for an average of 30 days
- No need to pay immediately each time goods are cleared
- HMRC can normally clear goods more quickly because they do not have to handle payments for each transaction
Historically HMRC required a bank guarantee for a DDA but it is now possible to apply to waive this requirement. HMRC will consider liquidity and past tax and customs compliance when deciding whether to agree any waiver request. The application for a DDA and guarantee waiver can be made online.
For many goods the duty rate will be zero but if duty is payable it cannot be reclaimed and if a business then sells goods back into the EU duty may well be charged again when the goods re-enter the EU. This could be a significant additional cost. There may be ways to mitigate these, e.g. by using Customs Warehouse, which may be worth considering.
EXPORTING GOODS TO THE EU
Again, from 1 January 2021 Export Declarations will have to be made for almost all goods moving from the UK to the EU. For freight exports, the entry has to be submitted to HMRC electronically using the National Export System (NES) before the goods arrive at the port of export. There are slightly different time limits for different types of export.
Businesses should decide whether they will make these declarations themselves or whether they will use an agent. HMRC authorisation is required to submit declarations.
The export declaration must include a significant amount of details such as:
- the Customs Procedure Code,
- Commodity Code for the goods,
- departure point and destination,
- consignee and consignor,
- nature, amount, and packaging of the good
- transport method and costs,
- any certificates and licences
The NES will generate a unique consignment number which will enable the goods to clear customs and be exported. In addition to submitting the Export Declarations certain goods may require specific paperwork, such as licences, permits and health certificates.
We would recommend a specialist agent is used to submit these declarations, as they are complex and to avoid any delays all relevant paperwork needs to in place.
For postal consignments exported by Royal Mail Group (RMG) the use of the CN22/CN23 customs forms will apply for standard goods not exceeding £900 in value.
For goods exported by parcel operators (other than the RMG), a standard electronic customs declaration will be required for goods over £900 in value, controlled goods, or where the parcel operator is not authorised by HMRC to submit a simplified declaration.
As with imports, goods exported in baggage will have to be declared to HMRC, this could be through an online form, a standard declaration or in the ‘Goods to Declare’ channel at the point of destination.
This link takes you to the Government tool for checking duties and customs procedures when exporting goods.
Evidence required to Zero rate exports
From 1 January 2021 if you are a VAT registered business selling standard or reduced rate goods into the EU you can zero-rate your sale whether it is to businesses or private customers. The evidence required to support zero-rating will be different from that currently required for EU despatches. There will no longer be any requirement for the customer to be VAT registered or for you to quote their VAT number on your invoice.
You must, however, hold either official evidence, e.g. a copy of the UK Customs declaration showing the goods have left the UK, or commercial transport evidence such as waybills, certificate of shipping or International Consignment Notes (CMRs) together with supplementary evidence such as orders, proof of payment etc.
Whichever method is used to export goods businesses need to ensure they have sufficient evidence to show why UK VAT was not charged.
EU IMPORT DECLARATIONS
Businesses also need to consider the import procedures required when the goods enter the EU, in particular who will complete the EU customs declaration, who will be shown as the importer of record and consequently who will pay any import duty and VAT due.
Many logistics and courier companies offer a service where they will pay any import VAT and duty direct to the relevant EU Tax Authorities. This does improve the customer experience as the goods can be delivered to them quickly. Where customers are private individuals who are unable to reclaim any import VAT this is an attractive option although any duty and VAT would have to be taken into account in the price quoted.
The situation with business customers is more complicated. If the UK supplier is shown as the Importer of Record the UK business would pay any EU import VAT and Duty. This would be the case if the goods are sold on a Delivered Duty Paid (DDP) basis. This option offers a good experience for the customer but there are implications for the UK supplier, in particular how does it deal with the EU VAT it has paid.
In some EU countries which operate an extended reverse charge system, such as France, the Netherlands, and Spain, it may be possible to reclaim the import VAT directly from the Tax Authorities by submitting a 13th Directive VAT reclaim. There would be cash flow and administrative costs associated with this.
As an alternative, the UK business could register for VAT in the EU member state of import, reclaim the import VAT through its EU VAT return and charge the customer local VAT. Again, this would involve additional costs and in setting up and administering EU VAT registrations and in many EU countries a Fiscal Representative would be required.
Many EU business customers may be entitled to reclaim any EU import VAT that is due. Many EU countries also operate deferred import VAT payment systems, similar to Postponed VAT Accounting described above, allowing the import VAT to be declared and reclaimed through the customer’s VAT returns. If an EU business currently imports goods from Outside the EU it is likely they will have processes in place to deal efficiently with import VAT and duty.
Having the EU customer as the Importer of Record may therefore result in minimal disruption for them while saving the UK business significant additional cost. It is something we recommend you discuss with your EU customers.
Distance selling refers to sales made to non-taxable persons.
These will be sales from a business to consumers (B2C), for example, retail customers or sales to businesses that are not required to be VAT registered.
From 1 July 2021, Article 14 of the VAT directive will extend this definition so that the distance sales rules will apply to supplies of goods transported by or on behalf of the supplier, “including where the supplier intervenes indirectly in the transport of the goods”.
This change is intended to prevent sellers circumventing the distance selling rules by utilising third-party distribution companies to transport goods to the end customer.
Current rules on distance selling
Under the current rules, distance sales by a UK business, including in NI, to a customer in another member state are treated as a domestic sale in the country in which the customer is established. The UK supplier is therefore treated as making the supply in the customer’s member state.
Subject to the VAT registration threshold in the customer’s country, this may create a liability for the UK company to register for VAT in that member state, or in any or all states where the threshold is exceeded. Thus, a supplier may be required to register in all 27 member states in respect of its distance sales. This may be arranged by a fiscal representative or agent.
Suppliers of goods on a distance selling basis from another member state to a UK customer may, therefore, require the supplier to register and account for VAT in the UK. Where the supplies to customers do not exceed the VAT registration threshold in a particular member state, the supplier is required to charge VAT at the rate in force in the member state in which the supplier is established.
For example, a sale by a supplier in France to a non-VAT registered customer in the UK will carry French VAT unless the supplier’s sales to the UK exceed the distance selling threshold (currently £70,000 per calendar year), in which case the French supplier will be required to register and account for UK VAT, charging UK VAT to the customer, as appropriate.
Distance selling simplifications
From 1 July 2021, an optional scheme is to be introduced covering the distance selling of goods with an intrinsic consignment value less than EUR 150. This scheme will be available to both EU and third-country suppliers, including in NI and GB, selling goods direct to end customers in the EU.
Option 1: The One-Stop-Shop (OSS)
Under this scheme, the seller of the goods will be required to appoint an intermediary in a single member state, unless the seller is established in a country with which the EU has concluded an agreement on mutual assistance and from which it carries out the distance sales of goods.
The supplier will charge and collect VAT at the point of sale and the intermediary will declare and pay that VAT to the appropriate member state via a ‘one-stop-shop’ (OSS).
Option 2: Collection of VAT by the declarant
If a non-EU supplier chooses not to use the OSS, any import VAT due on the importation of goods (with a value below EUR150) will be collected from customers by the customs declarant (eg, the courier, postal operator or customs agent), who will, in turn, pay over the VAT to the tax authority by a monthly payment.
Distance selling over EUR 150
Where non-EU suppliers make direct sales to end consumers and the intrinsic consignment value exceeds EUR 150, the supplier will be required to treat these sales as exports or imports, as they do at present.
Low value consignment relief (LVCR)
The current low value consignment relief, which allows goods to be imported from third countries where the value is below EUR 22, will cease with effect from 1 July 2021.
Excise duties for distance selling
Goods subject to excise duties will not be eligible for the OSS and will be subject to the normal rules for third-country imports, as at present, and a full customs declaration will be required.
Customs procedures for distance selling
After the transition period, goods to the value of less than EUR 150, with the exception of alcoholic and tobacco products, perfumes and toilet waters, will not be liable to customs duty where they are imported from a non-EU territory for delivery direct to an end consumer in the EU.
However, the movement of goods, including distance sales to consumers, will become subject to customs supervision and controls.
According to EU law, goods brought into the customs territory of the EU are subject to customs supervision and may be subject to customs controls. Goods must be presented to customs. This applies equally to goods acquired online and subsequently delivered via parcel delivery from the UK as of the end of the transition period, whether those goods are sent by post or by express couriers.
The customs declarations and documentation required may be different depending on the value of the consignment and the means of delivery; ie, whether delivery is being made by post or by courier).
Distance selling services
The current mini-one-stop-shop scheme (MOSS) and non-Union MOSS schemes for services will be extended and incorporated into the OSS.
Ecommerce and online marketplaces
Businesses operating electronic interfaces, such as marketplaces or platforms will, in certain situations, be deemed for VAT purposes to be the supplier of goods sold to customers in the EU by companies using the marketplace or platform.
Where this applies, marketplace operators will be required to collect and pay the VAT due on these sales. The responsibility for product VAT liability will, however, rest with the seller.
The outlook for distance selling after Brexit
Under the new arrangements, for businesses with regular, low-value sales across a number of EU member states, reporting such sales under a single VAT registration through the OSS system may be less onerous.
However, businesses with higher-value transactions, businesses storing fulfilment or similar stocks in other member states and businesses using marketplaces, will need to review their VAT reporting obligations and supply chains to ensure compliance and maximise any opportunities for streamlining VAT reporting.