Brexit and the impact on VAT
As of 1 January 2021, UK businesses have to consider imports and exports to and from European Union (EU) countries as they do for countries outside the EU.
This means complex customs procedures apply and the way VAT is accounted for also changes.
In this short article, discover how VAT will be changing, learn about VAT on imports and exports, and find out how Northern Ireland will be affected.
How will VAT change after Brexit?
VAT rules remain the same following the end of the transition period.
Prior to Brexit and during the transition period, the UK was part of the EU VAT regime. This means a UK business didn’t have to register for VAT in each EU country, and instead applies a common set of rules in relation to VAT.
Trade with EU countries will cease to be called dispatches and acquisitions, and will instead be referred to as imports and exports.
At the end of the transition period, goods imported from anywhere in the world have to account for import VAT.
However it’s important to note, the above applies only if the value exceeds £135. For imports beneath this amount, there’s still a need to account for VAT but you must use the new e-commerce rules.
In broad terms, VAT will be payable upon import, although the UK government has introduced the postponed VAT payment system to avoid cash flow issues.
This lets businesses importing goods into the UK account for the VAT on their next VAT Return, and means the goods can be released from customs without the need for VAT payment.
This means that nothing will effectively change from a cash flow point of view compared to before, although there will obviously be new administrative requirements.
When it comes to exporting goods to EU countries, the VAT situation also changes. Exports to EU countries are treated like those to non-EU countries, which is to say, they should be zero-rated for UK VAT.
This will apply regardless of whether you’re exporting goods to a consumer (B2C), or to a business (B2B). In other words, there’s no longer any need to observe distance selling regulations, or to verify the VAT status of the recipient business.
This could mean businesses selling B2C to the EU need to register for EU VAT and appoint fiscal representatives depending on the requirements of the countries in which they sell.
This means no VAT is payable but you still have to include the exports as part of your VAT accounting.
However, UK businesses that use the Mini One-Stop Shop (MOSS) system will need to register for the non-union MOSS and will no longer benefit from a €10k threshold before having to apply the place of supply rules.
This means many more businesses may be liable to VAT in the countries they sell digital services to and will need to register for non-union MOSS.
Northern Ireland VAT and customers after 1 January 2021
When it comes to VAT after the end of the transition period, Northern Ireland isn’t like the three other countries that comprise the UK.
It will use the Northern Ireland Protocol, which is part of the Withdrawal Agreement between the UK and EU that aims to avoid a customs border between Northern Ireland and the Republic of Ireland (ROI).
There are different rules for the supply of goods and services, and this is what is currently proposed by the government:
Northern Ireland will remain part of the EU customs and VAT regime when it comes to trade with the Republic of Ireland and the rest of the EU. From a customs perspective, moving goods from Northern Ireland to Great Britain won’t change. There will be no additional processes, paperwork, or restrictions.
From a VAT perspective, these movements will continue to be treated like domestic sales and purchases as they are today. This means that, among other things, there won’t be import VAT due on movements.
Services are excluded from the Northern Ireland Protocol, so sales of services between Northern Ireland and the Republic of Ireland/EU from 1 January 2021 will be treated like Third Country supplies.
As already mentioned, this results in very little change from a VAT perspective. Similarly, nothing will change for supplies of services between Great Britain and Northern Ireland, and they will continue to be considered domestic supplies.
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