Brexit and VAT - how might it change?
It is probably time to touch on the subject of what bookkeepers will have to consider when the UK leaves the EU and the effect this will have on VAT transactions. If you have clients who (VAT registered or not) deal purely with customers and suppliers within the UK, then the answer to this is that nothing will change.
However, whether the UK leaves the EU with or without a deal or remains in the customs union, the way we deal with EU VAT will change whatever the outcome.
As we stand now, sales to, and acquisitions from, the EU are counted as EU transactions and for Business to Business (B2B) dealings, no VAT on EU sales appears on the VAT return with the relevant VAT on acquisitions (that would have been charged if the goods had come from a UK supplier) appearing in box 2 of the VAT return. The value of sales to, and acquisitions from, the EU is shown in boxes 8 and 9 of the VAT return.
If the UK is ‘outside’ the EU for VAT purposes, then the UK will be treated by the EU as any other country in the same situation (e.g. the USA). So, in the event of a no-deal exit, such EU B2B transactions will immediately cease and all trade with EU countries will be dealt with as imports and/or exports. However, even if the UK remains within a European customs union, then as the EU VAT office is considering changes to the entire VAT system (as reported in 2018) things will change. For more information on some of the possible changes, please read this ICB article.
The following information and links represent what will happen if the UK leaves the EU without a deal in the near future (in which case the changes will happen immediately) or leaves in the future with a deal that leaves us outside the customs union.
Non-VAT registered businesses
For the first time, any non-VAT registered businesses will need to look at how they trade with the EU as they will come into the VAT system. This is because other EU countries do not have a VAT registration threshold and hence all businesses in those countries must be registered for VAT. You may not be required to charge VAT for UK transactions or complete a UK VAT return, but will be expected to fulfil all requirements as listed below. A good starting point for looking into this has been issued by HMRC, the link to which can be found here.
There is a useful link for small businesses (also issued by HMRC) here.
If you have clients that sell goods (which will now count as exports) to EU customers, then the transaction is invoiced as a zero-rated invoice and no VAT is charged. This article (again from HMRC) provides a useful starting point.
Note that businesses may have to pay taxes or duties owed in the country of destination, but they will not have to pay UK export duty.
If a business is importing goods, then EU suppliers will still invoice at zero rate but there is a difference in that import duty or VAT will have to be paid at the point of entry to the UK, thus incurring an additional charge up front before the goods can be received.
There are times when such duty may be deferred or not paid (for example, if goods are being brought into secure storage and not available for resale or use within the UK and are being exported again) but these are quite specific to certain types of trade. The level of VAT due is normally 20% but this depends on the type of article being imported (for example, the import of artworks and antiques is chargeable at the reduced rate of 5%).
If the value of goods is £135 or less, then the supplier will have to pay the duty. If the value is more than £135, then the duty must be paid on import into the UK by the purchaser. Previously, the UK had a policy not to charge any duty if the value was less than £15 but this allowance is now being removed. (Note: if a UK business is exporting to an EU customer, then the reverse is true – the UK supplier may have to pay any duty due in the country of the customer, as above for sales to the UK if the value of the goods is low but above this level, the customer will pay the relevant import tax in their own country).
However, providing the business is VAT registered in the UK, this VAT can be reclaimed (see ‘the effect on the VAT return’ below), and there should be no net additional cost to the business (except for the cost of any extended time in dealing with the additional regulations and possible costs if an agent is used to speed up and/or simplify the process). However these changes may well have an impact on cash flow as businesses will have to pay import VAT up front and reclaim it later, rather than this being a nominal transaction as at present where no actual VAT changes hands.
HMRC have a similar information page here on a starting point for imports.
Because of the border between Northern Ireland and Ireland and the contents of the Belfast Agreement, the government is looking at ways in which cross-border transactions can fulfil all requirements with the minimum of change. Note: this is a temporary arrangement which may alter.
For goods moving between Ireland and Northern Ireland, the process will be different with there being an exemption from obtaining an Economic Operator Registration and Identification (EORI) number (below). There will be no duties payable on such goods (unless they are already subject to excise duty such as alcohol or they need a special licence) or unless it is proven that the reason for so doing was to evade the payment of duty. You can find more information regarding this here.
These special arrangements will not apply to imports/exports which do not cross the Irish border but go directly from Northern Ireland to any other EU country.
However, whether importing or exporting, the one thing in common with both is the EORI registration.
If your clients are trading with the EU then they must have a UK EORI number, in exactly the same way as they require now for trading with any non-EU country. They will need to have this even if they are not VAT registered within the UK. ICB has issued this link previously but the information can be found here.
Businesses will not need to apply for a number if any of the following apply:
- they already have a UK EORI number (an EORI number that starts with GB) because they have traded goods between the UK and countries outside of the EU
- they will only import or export goods with Ireland across the Northern Ireland and Ireland border
- they will only import or export services that do not involve moving physical goods
The link includes an online application process.
HMRC have also issued a partnership pack – again we have published this link before but is it being constantly updated here.
Letters have been sent to all VAT registered businesses who trade within the EU to explain the processes they will need to follow in the event of the no deal scenario. Details are summarised in this article published by the EU VAT office in February 2019.
Other useful links
There is also a useful update here on what happens for individuals travelling around Europe after we leave.
For those dealing with countries within the EEA and EFTA, this article might be useful:
The effect on the VAT return
We shall have to return to this once everything is much clearer, but in the event of a no-deal then the VAT return boxes for EU sales and acquisitions will most likely become redundant. However, his does not mean that businesses cannot reclaim any import duty paid. At present, when importing goods from countries outside the EU, as explained above, this is paid at the point of entry. The Customs section of HMRC issue a monthly certificate which can be used to reclaim any VAT paid at the point of entry. Once this certificate has been received and checked as correct, the business can reclaim the VAT on its next return so, providing the regulations are carefully followed, no additional VAT will be due. The bookkeeping will involve recording this VAT paid and ensuring that it appears on the VAT return in box 4.
The effect on ICB assessments
ICB places a very high emphasis on how our members deal with VAT, including how to deal with EU transactions. All candidates for our assessments are expected to be able to produce the figures for VAT returns which include EU transactions. For the foreseeable future, this will not change. If the UK leaves the EU without a deal, and EU transactions become import/export transactions, then ICB will take a decision on how this will impact on assessments and further information will be issued.