The UK has left the EU, and the transition period after Brexit comes to an end on 31 December 2020. All businesses should take action now to get ready for new rules from January 2021
All information on the UK Transition can be found at www.gov.uk/transition. A bulletin issued by the Department for Business, Energy and Industrial Strategy (BEIS) provides the latest information for businesses.
HMRC has written to VAT-registered traders who trade with the EU, to encourage them to act now in order to avoid business disruption. The Border Operating Model and tax rules will come into effect at the end of the transition period regardless of whether or not a Free Trade Agreement is negotiated.
This article looks at the planned changes to the way we deal with import/export, and how to account for VAT, from 2021. The first section covers import VAT and the changes to the tariff policy currently in force. It covers what we now know will be implemented from January 2021.The second section looks at exports.
Please note that this is a general introduction to this topic and a number of transactions will have specific treatments so all care should be taken to ensure compliance with the situation in place at the time. Please also note that the content of this article may change once the final rules are agreed and in place. The information here is correct (as per gov.uk) at the time of writing.
EORI number
From 1 January 2021, any business moving goods to or from Great Britain and the EU will need to have an Economic Operators Registration and Identification number – an EORI number. It is likely that they will already have this but, if not, an application should be made immediately otherwise the business will be prevented from moving any goods across the border. They will not usually need an EORI number if they only provide services or move foods between Northern Ireland and Ireland.
From 1 January 2021 businesses will need an EORI number that starts with XI to:
- move goods between Northern Ireland and non-EU countries
- make a declaration in Northern Ireland
- get a customs decision in Northern Ireland
To get an EORI number that starts with XI, they must already have an EORI number that starts with GB. If they do not have one, they should apply for an EORI number that starts with GB as soon as possible.
If the business already has an EORI number that starts with GB and HMRC thinks they need one that starts with XI, they’ll automatically send one in mid-December 2020.
Grants for training
Grants are available for businesses to spend on training to update their knowledge in this area to enable them to prepare for the move to the new systems. Information can be found here.
Imports to the UK
This section looks at the changes to the way we bring goods into the country and also explains the nature of tariffs that could be implemented from January 2021.
Border controls from 2021
The transition period for the UK to finalise its exit from the EU ends on 31 December 2020, and the UK will take control over its borders and new regulations will come into force.
This is being implemented in three stages:
January 2021 – traders importing standard goods will need to prepare for basic customs requirements such as the keeping of sufficient records of imported goods. Traders will also need to consider how they account for the VAT on such goods (explained later). Traders will have up to six months to complete customs declarations. If tariffs (explained later) are due, then these can be deferred until the customs declarations have been completed. There will be some live checks on the import of certain items such as high-risk live animals and plants, but they will not have to enter the UK at a Border Control Post (BCP).
April 2021 – All products of animal origin and all regulated plants and plant products (e.g. honey, milk or egg products) will require pre-notification and relevant health documentation. Any health checks will take place at the destination and not at a BCP.
July 2021 - from this date onwards, traders will have to make full customs declarations at the point of import and will have to pay tariffs at that time. Health checks will take place at a BCP and not at the destination. Full details can be found here.
Note: at the time of writing it is still not clear what will happen to trade goods from abroad that pass through Northern Ireland.
Import tariffs
An import tariff is a charge placed on certain imported goods to ensure that domestic products and jobs are protected from cheaper imports. It is intended to reduce the imports by, effectively, raising the cost of those goods. Tariffs also act as a revenue generator for the Government. Tariffs operate independently of VAT but, unlike VAT, cannot be reclaimed.
From 1 January 2021 the UK will operate its own tariff measures, called the UK Global Tariff (UKGT) which replaces the current EU Common Tariff (which applies until 31 December 2020). The main difference between the two is that the UK version has been somewhat simplified.
From 1 January 2021, the UKGT will apply to all goods imported into the UK unless:
- An exemption applies which includes areas such as temporary suspensions and tariff quotas.
- The goods come from a developing country which is listed under the UK Generalised Scheme of Preferences. The UK is currently planning to continue providing trade preferences to those countries on the existing EU list. Note: not every type of import will be included for every country on the list - for example, there is an exclusion list for arms deals with some countries.
- The country of import has a trade agreement with the UK. The government, whilst currently in the process of discussing an agreement with the EU (note: at the time of writing no such agreement has been agreed) is also discussing trade agreements with individual countries around the world. The full list of countries with whom the UK already has a signed agreement, or with whom the UK is still in negotiation, can be found here.
If the UK does not sign an agreement with the EU it will fall under the World Trade Organisation (WTO) rules. Further details are expected to be announced before the end of this year.
Some goods are covered by a tariff quota which means that imports up to the quota level can be imported at a lower, or even a zero, level. The limit may be expressed in units of weight, volume, quantity or value. Once the limit has been reached, a higher tariff rate will apply. In order to check the tariff level, you will need to search via an 8 digit commodity code, or a product description or a combination of both. The full list of proposed tariffs can be found here. The list is huge (11,830 commodities) and just glancing at the descriptions is worth it to see the variety and extent of the different commodity areas.
For example, looking at one of the earlier commodities in the list is the import of live horses (excluding those who are pure bred for breeding purposes for which the tariff is zero) - the commodity code is 0101-29-90, the existing EU tariff is 11.5% of the value and the UK Global Tariff will be 10% of the value. As in many of the commodities the percentage has been simplified. Others have changed only because the amounts are changing from Euro to sterling through a currency conversion.
VAT changes on purchases/imports from January 2021
Under the current import rules, there are differences between the import (or EU acquisition) of goods depending on whether they originate from within, or outside, the EU.
Currently, if goods come from an EU country (for example, your VAT registered business is buying in goods from a VAT registered supplier in another EU country) then the Business to Business (B2B) system operates whereby the purchaser and seller exchange VAT numbers and no actual VAT is charged on the invoice. However, the value of the nominal VAT is shown on the VAT return in boxes 2 and 4 (boxes 1 and 4 if subject to the reverse charge system) of the purchaser’s VAT return. Traders must have an Economic Operators Registration and Identification number (EORI).
If the goods are imported from a country outside the EU then the VAT is paid at the point of import before the goods can be released. Note: currently imported goods for sale of less than £15 value are not subject to import VAT (called Low Value Consignment Relief or LCVR). The value of personal gifts that can be imported free of VAT is £39.
Under normal rules, import VAT is paid directly to HMRC. For individual customers this is often via The Royal Mail, Parcel Force or a courier company depending on who is delivering the goods. Such VAT is often not recoverable as the goods are for personal use. For businesses who regularly import goods, they will often use a shipping company who collects the VAT from their customer before the goods are released, and who then reports and transfers that payment to HMRC. HMRC will then issue a C79 form to the purchasing business which can be used to reclaim the import VAT in the next VAT return. C79s are normally received just after the middle of the month following the payment, so depending on the month in which payments are made, it may be possible to claim the VAT back in the current VAT period, or it may mean waiting until the next period. Depending on the size of the amount this could very well cause a cash flow issue as the import VAT has to be physically paid and then reclaimed back via the relevant VAT return.
Important note for Northern Ireland – because NI will still make EU acquisitions and dispatches as part of the Northern Ireland Protocol, B2B will still be needed for businesses based in NI and trading within Europe. NI will still need to make use of all 9 boxes in the VAT return.
For the rest of the UK, from January 2021 the system will change – imports (acquisitions) from EU countries will be treated in the same way as those from Non-EU countries.
Goods entering the UK valued at up to £135 per consignment
The LVCR will disappear and be replaced by a new system. If the value of the goods being imported is less than £135 then the VAT is declared at the point of sale and not the point of import. Customs declarations will still have to be made (although these will be made simpler including the use of reduced data sets and bulk recording) and the goods will be subject to normal customs processes and procedures. Note: the £135 limit on the value of goods covers the value of the entire shipment and not individual items in the shipment.
There are some exceptions to this rule (what a surprise) which are:
- non-commercial consignments, such as gifts (gift relief for consignments valued up to £39 will remain)
- consignments containing any goods that are subject to an excise duty (such as alcohol and tobacco products, energy products and electricity)
- consignments from Jersey and Guernsey that are covered by the Import VAT Accounting Scheme
The purchaser will report the VAT to HMRC under VAT supply rules and not VAT import rules. The only reporting required will be the VAT on the sale which will be reported in box 1 of the VAT return.
However, if the customer is also VAT registered then these goods can be sold via the reverse charge scheme provided that VAT numbers are exchanged (so that the amount of nominal VAT will appear in boxes 1 and 4 of the purchaser’s VAT return and not in the seller’s return). If the VAT numbers are not provided then the sale is treated as a business to consumer sale and VAT charged accordingly.
Goods entering the UK with Consignment values over £135
For goods valued at over £135 (per consignment), from January 2021 it will be possible to declare (and pay) the import VAT on the next VAT return instead of paying up front and having to reclaim it later. This is called postponed accounting.
Postponed accounting can be used to account for import VAT if:
- the goods are imported for use in a business
- the business’s EORI number, which starts GB, is included on the customs declaration
- the business’s VAT registration number is shown on the customs declaration, where needed.
There are occasions when goods do not immediately go into free circulation (i.e. ready for selling). This includes, for example, goods that are imported into a bonded warehouse until needed. In such circumstances the VAT will be declared at the time the goods are released for sale.
An online monthly statement will be available to download and keep for your records. It will show the total import VAT postponed for the previous month which you should include in your VAT Return.
Due to postponed VAT accounting, there will be changes to the way you complete the boxes on your VAT Return.
Box 1
Include the VAT due in this period on imports accounted for through postponed VAT accounting.
Box 4
Include the VAT reclaimed in this period on imports accounted for through postponed VAT accounting. (Note: this may be a ‘cancelling’ item as they are likely to be for the same amount.)
Box 7
Include the total value of all imports of goods included on your online monthly statement, excluding any VAT. Any VAT on a subsequent sale will appear as normal.
This could remove the issue of cash flow as no actual import VAT will be paid – the amount is a paper transaction only. If customs declarations are postponed for any reason then an estimate should be made which will be adjusted when the final amounts are known.
To enable the entries to be correctly made in the accounts you should use the reverse charge code for VAT which will put the relevant amounts in both boxes 1 and 4 of the return.
Reclaiming VAT paid in the EU
Businesses can continue to use the existing EU VAT refund system for claiming back VAT on expenses incurred in another EU country before 1 January 2021 until 11pm on 31 March 2021. The existing system cannot be used to reclaim VAT incurred after 1 January. Each EU state will have its own rules for refunding VAT and businesses will have to register in each relevant country. A full list of the rules can be found at https://ec.europa.eu/taxation_customs/business/vat/eu-country-specific-information-vat_en
Exporting from the UK
The second section of this article covers the changes that will take place when selling goods abroad from the UK.
VAT changes on sales/income from January 2021
For sales by VAT registered businesses selling to customers within the UK there will be no change. The VAT registration threshold remains at £85,000 (or whatever threshold is in force at the time) and VAT will be charged to all customers depending on
- the percentage of VAT in force for the current item being sold
- adjustments to cover the situation where the items fall under the domestic reverse charge scheme (e.g. the ‘new; CIS scheme).
VAT is likely to change if any of the following situations arise where clients are:
- a UK seller selling goods already in the UK at the point of sale to EU consumers
- an overseas seller, or their UK VAT representative, who either:
- sells goods already in the UK at the point of sale to UK consumers
- is based outside the EU and sells goods to a UK consumer, and then imports them into the UK
- sells goods located in an EU member state to UK consumers
The current situation
The current rules with regard to VAT when selling goods overseas are as follows:
- Sales to customers outside the EU – these are sold and exported at zero rate (provided that all relevant rules are followed). No VAT appears on the return but the value of sales appears in box 6 of the UK VAT return. Seller should be aware that their customers may have to pay import taxes in their own country. Further details can be found below.
- Sales to non-VAT registered customers in the EU – provided that the value of sales to each country within the EU falls below the distance selling threshold for that country you can charge VAT as normal and report on the UK VAT return. If the value of sales is over each country’s threshold then the seller may have to register for VAT in that country and charge VAT at the county’s rate of VAT, reporting and paying VAT to that country’s VAT authority.
- Sales to VAT registered businesses in the EU – use the B2B EU sales facility – no VAT is charged on the invoice and no VAT appears on the UK VAT return but the value of sales or outputs is recorded in boxes 6 and 8 of the UK VAT return
Changes from 2021
Some changes will happen over a staggered period from January 2021. From January 1 all goods leaving Great Britain (i.e. England, Scotland and Wales) will be subject to export rules. For the purposes of VAT, as we understand it at the moment, businesses in Northern Ireland will still be subject to existing rules.
Exporters will need to make customs declarations when exporting goods to all countries, including those in the EU and suppliers may also need to obtain relevant licences.
Exporting goods
There are two types of exports (classified by the way they are transported) - direct and indirect exports.
Direct export and goods can be transferred in one of the following ways:
- In your own baggage
- In your own transport
- By rail, post or courier service
- By a shipping line, airline of freight forwarder employed by you and not your customer
An indirect export is one where the overseas customer or their agent collects or arranges for the collection of the goods from the supplier within the UK and takes them outside of the UK or EU.
There are conditions that must be fulfilled for the export to be zero-rated for VAT:
- The goods must be exported from the UK within specific time limits of the sale taking place (normally three months)
- Official or commercial evidence must be obtained of the export actually taking place
- Supplementary evidence of the export must be obtained
There are also conditions that must be fulfilled if the export is an indirect export. These are that the goods must not be:
- supplied to a private individual who is resident in the UK
- supplied to a customer that has a place of business in the UK from which taxable supplies are made
- delivered to, or collected by, a UK customer at a UK address
If all the conditions are fulfilled then goods can be zero rated for VAT, regardless of whether the customers are VAT registered or non-VAT registered in the country of destination.
If the conditions cannot be fulfilled then the goods must be supplied subject to the appropriate UK rate of VAT. If the goods are sold under zero rate VAT for export but are later found not to have been exported, or incorrect evidence provided, then VAT must be accounted for as if the goods had been sold within the UK. This involves an amendment to the VAT return to ensure that the selling price is re-allocated as VAT inclusive and, for a rate of 20%, the VAT element of the sale is calculated at a fraction of 1/6. The VAT must be accounted for in box 1 of the return for the period in which the relevant time limit expires. If the goods are subsequently exported then the VAT can be reclaimed in the period in which the evidence is produced.
For the purposes of the VAT return, no VAT will be shown in box 1 but the value of any exports must appear in box 6.
Further details and a full list of conditions and evidence requirements can be found here.
If a business is exporting to an EU country then the exporter must check that the receiver has the necessary certificates to import those goods (if relevant). However, we are still awaiting final decisions on how to deal with moving goods to or through Northern Ireland.
Selling to private individuals
HMRC have confirmed that selling goods and services (such as bookkeeping) to private (non-VAT registered) customers in the EU will no longer have VAT added.
Selling digital services abroad
Currently, if a VAT registered business sells digital services to a VAT registered business in the EU they sell this under a reverse charge and have to report the sales via the VAT Mini One Stop Shop (MOSS).
For sales made on or after 1 January 2021, businesses will not be able to use the UK’s VAT Mini One Stop Shop (VAT MOSS) service to declare sales and pay VAT due in EU member states.
The final return period for the UK’s VAT MOSS system will be the period ending 31 December 2020. Businesses should only include sales made before 1 January 2021 in the final return, which should be submitted by 20 January 2021.
Businesses will also be able to use the UK’s VAT MOSS system to:
- amend your returns until 11pm on 20 January 2022
- update your registration details until 31 December 2024
- view previous returns
Where sales are still covered by MOSS rules, for sales made from 1 January 2021, businesses will need to register for either:
Employing staff from abroad
Although not part of the VAT scheme, if any business employs staff from abroad (including EU and EEA nationals), from 1 January 2021, they must act as a sponsor and fulfil all the necessary requirements. Full details can be found at https://www.gov.uk/uk-visa-sponsorship-employers
Conclusion
To continue trading with Europe from 1 January 2021, businesses should take some key actions:
- Appoint a specialist to deal with import and export declarations. This is important regardless of the amount or value of trade the business does with Europe. Most businesses use a third party such as a freight forwarder or fast parcel operator to deal with this, and do not do their customs declarations themselves.
- Check to see if you or your clients will be able to delay declarations or duty payments.
- Register for the free-to-use Trader Support Service if the business plans on moving goods into Northern Ireland from 1 January 2021.
- For more help and advice on preparing for the end of the transition period, please visit www.gov.uk/transition.
- Check to see if a registration under another EU country’s VAT MOSS scheme is required if there is a sale of digital services
Jacquie Mount
Director of Technical Policy, ICB
