VAT and duty implications of Brexit

Published on January 19, 2021 by Nick Donohue - Head of Tax

Now that the UK and EU have secured a free trade agreement (“FTA”), it is paramount to understand what it means to businesses trading with the EU in terms of VAT and Duty.

Whilst headlines imply that we can carry on trading duty and quota free with the EU this may not always be the case. The deal agreed is not a ‘no tariff’ deal but is instead a preferential tariff deal that is subject to complex rule of origin requirements. Trade with the EU will only be duty free if products and materials meet the qualifying conditions of the ‘rules of origin’.

Consideration also needs to be given to the VAT implications to ensure businesses are aware of the potential need to register for VAT in other countries.

Changes have also been announced for how businesses trade with Northern Ireland.

Duty and ‘the rule of origin’

For goods to qualify for preferential tariffs when exported between the EU and UK they must largely originate, which includes elements of content, processing and assembly, from their respective country or territory (the rule of origin).

To prevent goods from non-UK or non-EU countries benefiting from the EU-UK preferential tariffs, the manufacturing or processing of goods in a third country is restricted.

To enjoy preferential tariffs the importer must provide a statement to confirm that they have documentary evidence that the goods comply with the rules of origin.

Origin is essentially the economic nationality of goods. All internationally traded goods are required to have an origin when declared to customs at the point of import.

There are two main types of product-specific rules of origin;

  • wholly obtained; and
  • substantial transformation

Wholly obtained products are goods originating entirely in the territory of the entity exporting the goods without the addition of any non-originating materials.

Substantial transformation requires goods to undergo a certain process in order to be considered originating in a given country.

This transformation can be expressed in three different ways:

  1. Change in tariff classification: a rule that requires non-originating materials to have undergone a change in classification in order to obtain originating status.
  2. Value added calculations: a rule that requires a certain percentage of the total value of the final product to be added in the territory.
  3. Specific processing: a rule that requires that a specific process be undertaken at a particular stage of the production process.

The three types of substantial transformation can be used in combination with one another.

Companies will need to carry out a supply chain audit to understand if their goods meet the specific rules of origin. The Agreement allows for full bilateral cumulation meaning both EU and/or UK content/processes can be included to claim origin.

However, this is causing confusion in businesses. In some instances, depending on the business model, some goods may not be duty free. For example, if your business imports goods from China into the UK and then re-exports them without the goods being subject to any substantial transformation to any EU market, tariffs will apply.

Products or materials originating in the EU can be considered as originating in the UK if those products are further processed in the UK or incorporated into another product prior to re-export to the EU. This means that all operations carried out in the UK or EU are taken into account when determining whether a good is able to meet a product-specific rule.

However, if products or materials are imported into the UK from the EU and then exported back to the EU without any further substantial process being carried out on the products or materials then duty may arise on the re-export. This is because the goods were neither wholly obtained in the UK and no substantial transformation was carried out on the goods before export.

Duty is a real cost to the business, and unlike VAT cannot be reclaimed.

VAT

Supply of Goods

Movement of goods from UK to the EU

A business selling goods to business customers based in the EU should check who the importer of record is. Provided the customer is the importer of record and is named as the importer of record on importation documents then the UK business does not need to register for VAT in the EU as the customer will account for import VAT.

Alternatively, if the UK business were to import the goods into the EU on behalf of their customers, there would be an obligation for the UK business to register for VAT in the EU and account for import VAT.  If this scenario applies to your business please contact us if you need further advice.

Prior to 1st January 2021, business to business (“B2B”) movements of goods (dispatches and acquisitions) between member states were ‘zero rated’ resulting in no VAT cost or cashflow implication.

From 1st January 2021, B2B movements of goods become exports and imports with the result that they are no longer ‘zero rated’. Instead, import VAT will need to be accounted for either at the time of importation or at a later date if there is a deferment account in place. The import VAT is not an absolute cost for the importer (assuming the importer makes fully taxable supplies) as the import VAT will be recoverable through their VAT return. As a result, it will be a cash flow issue rather than an absolute cost.

Movement of goods from EU member states to the UK

From 1st January 2021 buying goods from businesses based in EU member states moves from being what was a zero-rated acquisition to being a VATable import. If the UK customer is responsible for importing the goods it will either have to pay import VAT upon entry or postpone the import VAT accounting and deal with it on its VAT return (postponed accounting).

Postponed accounting is new with effect from 1st January 2021. It is positive news for businesses as it removes any cash flow issues associated with import VAT altogether.

Historically, importers would have two options;

  1. pay import VAT upon entry into the UK; or
  2. set up a duty deferment account (necessitating a bank guarantee) which deferred the payment of import VAT for between 2 and 6 weeks.

Businesses would then be able to recover the import VAT as input VAT through their VAT return, using the monthly ‘C79’ document as evidence. Obviously, there would be a delay between on the one hand paying the import VAT and on the other, recovering it.

Postponed import VAT Accounting (PVA) circumvents this time lag between payment and recovery of import VAT by allowing importers to simultaneously account for import VAT and recover it as input VAT on the same VAT return. The result is a nil net effect with no cashflow impact for businesses.

To take advantage of PVA you do not need any approval. You can account for import VAT through your VAT return if the goods you import are for use in your business and you include your VAT registration on your customs declaration.

You will be able to view and download your monthly postponed import VAT statement through your VAT online services account. You’ll need a government gateway user ID and password which is linked to your EORI number. If you do not have a user ID, you will need to create one. You will only be able to access the postponed import VAT statement for 6 months so you must make sure that you download and keep copies for your records.

Please contact us if you need any support in completing your VAT return

If you already use someone to import goods for you they will be able to complete your import declaration on your behalf, but you will need to tell them that you want to account for import VAT through your VAT return. You should also keep a written record of this instruction and their acknowledgement. When completing the import declaration paperwork they will then know to select the field that states you will be accounting for import VAT through your VAT return.

In terms of new import paperwork required for goods purchased from EU member states, your import agent should be able to deal with this for you so long as they have your VAT registration number and EORI number

Movement of goods from mainland UK to Northern Ireland

The Northern Ireland Protocol essentially creates a ‘hard border’ between mainland UK and Northern Ireland so that any goods moving from mainland UK to Northern Ireland, although still part of the United Kingdom, are now viewed as outside the UK for VAT and Customs purposes. The movement of goods from the UK to Northern Ireland will therefore be ‘exported’ from the UK and ‘imported’ into Northern Ireland.

In order for goods to be cleared into Northern Ireland, affected businesses will need a VAT registration number prefixed with ‘XI’. This is issued by registering with the Trader Support Scheme (TSS). No XI code means no entry into Northern Ireland so it is vital that this is obtained.

It is possible that customs tariffs may apply in respect of goods moving into Northern Ireland if they are deemed to be ‘at risk’. If the goods ‘originate’ in the UK or EU, then a zero tariff would apply. It is therefore important to have evidence relating to the ‘origin’ of goods moving between the two countries.

From 1 January 2021, Entry Summary Safety and Security declarations (ENS Declarations) will be required for all goods moved from mainland UK to Northern Ireland. Carriers have the legal responsibility to ensure that the UK customs authority is provided with safety and security pre-arrival information for goods being moved to Northern Ireland by way of an ENS Declaration. For these declarations, the carrier is defined as the operator of the active means of transport. For roll-on/roll-off movements, this would mean the haulier if goods are accompanied or the ferry operator if the goods are unaccompanied. The carrier can agree to pass the requirement to the trader however the carrier retains the legal responsibility. The legal requirement is that the ENS Declaration is complete and accurate to the best of the declarant’s knowledge at the time.

In terms of the import declarations into Northern Ireland, HMRC’s ‘TSS’ can handle the

necessary import documentation. For registered and eligible traders, TSS will use the Safety and Security data provided by the carrier to generate import declarations. This process maximises the chances that traders import declarations are completed on time for the goods to move. It also minimises the administrative burden on the trader.

Supply of Services

Supplies from the UK

The current rules differentiate between supplies to businesses, B2B supplies and supplies to consumers, B2C supplies.

B2B supplies

The general rule is that supplies to EU businesses are dealt with under the reverse charge procedure and the purchaser accounts for both output VAT and input VAT through their own VAT return. This has not changed as a result of Brexit. The UK supplier will not charge VAT because the supply is deemed to take place in the EU country where the customer belongs.

B2C supplies

Services provided to EU consumers after 31 December 2020 will be zero-rated. As the place of supply under EU law is the UK, they should not be VATable in the country in which the customer lives either. Accordingly, there will be no requirement to register for VAT in that country In respect of supplies to consumers.

Special types of supply

There are exceptions to these general rules. Some types of service, such as supplies in relation to UK land, transport, catering, hiring goods situated in the UK, broadcasting, electronically supplied services, telecommunication services and admission to events in the UK are treated as made in the UK and are currently liable to UK VAT even where the customer is in the EU. Such supplies will continue to remain subject to VAT.

Conversely, if any such supplies are made to EU customers after 31 December 2020 there could be an obligation to register for VAT in the country in which the customer resides or the services are used.

If you supply digital services to consumers in EU countries you will need to either register for VAT in that country or register for VAT MOSS in any EU country.

Supplies of services from outside the UK

The reverse charge régime will continue to apply to supplies received from businesses in EU countries in the same way as it does at present for supplies of services from businesses outside the EU, for example from the USA, India or Australia.

Please speak to your usual RPG contact if you would like further information on any VAT or Brexit related matters, or you are very welcome to reach out to Nick Donohue – details below.

Nick’s experience covers all major areas of taxation and during 2020 /21 Nick has led RPG’s response to the Covid-19 pandemic with interpretation and follow up of the various support packages provided by the Chancellor of the Exchequer, during what has been a very stressful time for many clients. Nick has also been instrumental in guiding clients through the conclusion of the UK’s Brexit deal, advising clients on the general tax and VAT implications of the final deal. Contact: NDonohue@rpg.co.uk

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