Domestic VAT rules remain the same following the end of the transition period.
However, VAT rules relating to imports and exports to and from the EU will change.
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.
It also means UK businesses were able to use various VAT simplifications such as distance selling thresholds and online VAT refund process.
However, as of 1 January 2021, UK businesses will treat EU countries like they already do countries outside the EU.
The VAT terminology will change accordingly. Trade with EU countries will cease to be called dispatches and acquisitions, and will instead be referred to as imports and exports – again, in line with trade with non-EU countries.
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.
Note that the rules for Northern Ireland again differ, and are explained separately below.
Prior to Brexit/end of the transition period, VAT-registered businesses applied VAT through the EU reverse charge on intra-community acquisitions.
For goods imported from anywhere in the world, they have to account for import VAT. And as of 1 January 2021 this will include the countries within the EU.
The above applies only when 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 (even if the goods were not traded via e-commerce). See the ‘VAT on imports £135 and under’ section below.
The VAT is applied at the point the goods are to enter free circulation, which is to say, this should be considered the VAT tax point.
This might be at the port of entry but it could be when the goods are released from customs warehousing, if customs special procedures are used.
However, you’ll need to collect evidence from HMRC regarding the point the goods entered free circulation for your VAT records.
The VAT can be paid at the tax point if you wish, in which case monthly C79 reports should be obtained from HMRC, as when importing from outside the EU.
But most businesses are likely to make use of the postponed VAT accounting system.
This is similar to the existing reverse charge mechanism, whereby import VAT is not physically paid upfront and then reclaimed on the subsequent VAT return. Instead, it’s accounted for as input and output VAT on the same VAT Return.
Although postponed VAT accounting is optional, it’s mandatory if you defer the submission of customs declarations.
It’s worth remembering that postponed VAT accounting can now be used for all imports outside of the EU too.
This represents a change from how VAT was accounted for prior to the end of the transition period, and is likely to provide a cash flow boost for businesses that import from outside the EU.
A new online monthly statement will be available as part of the postponed VAT accounting system. It’ll show the import VAT postponed for the previous month on a transactional basis and when you should include it in your VAT Return (that is, the correct tax point).
When it comes to VAT on services, as a general rule following Brexit/end of the transition period, sales of cross border purchases of services from one business to another (B2B) will remain subject to tax in the country of the customer (with some exceptions).
Therefore, the tax is generally accounted for as reverse charge in the destination country by the recipient of the service.
VAT on imports £135 and under
Alongside the end of the transition period on 1 January 2021, the UK is introducing additional measures for overseas goods arriving into Great Britain from outside the UK:
- Low Value Consignment Relief (LVCR) is being removed. Previously, this exempted imports with a value below £15 from import VAT.
- Online marketplaces (OMPs), where they are involved in facilitating the sale, will be responsible for collecting and accounting for the VAT.
- VAT on imports with a consignment value of £135 or lower will have VAT applied at the point of sale, rather than applied as import VAT at customs. For B2C transactions this UK VAT will be charged and collected by the seller but for B2B transactions the VAT will be revere charged to the customer.
Essentially, this means foreign sellers sending goods into the UK will need to charge UK VAT and apply to be part of the UK VAT system when supplying goods with a value of £135 or less to end consumers (that is, non-VAT-registered individuals).
Businesses who receive goods of £135 or less will have to account for the VAT as part of the reverse charge procedure, declaring the VAT on their next VAT Return. Normal rules apply for the tax point, which is to say, it will usually be the invoice date.
Additionally, the recipient business should ensure the seller knows their VAT number, or the seller will have no choice but to treat it was a B2C sale and apply VAT.
The UK measures in some respects mirror those due to be rolled out in the EU from July 2021 under the EU 2021 VAT e-Commerce Package, which we’ll be covering in a separate blog.
VAT on exports
As of 1 January 2021, 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.
It’s important to understand what it means to zero-rate goods for VAT.
It doesn’t mean you can simply forget about VAT. It means you apply a 0% VAT rate. No VAT is payable but you still have to include the exports as part of your VAT accounting.
When it comes to purchasing services, rather than goods cross-border, things continue much as they did before 1 January 2021.
Under the place of supply rules, B2B sales of services will continue to be generally subject to tax in the country of the customer and administered through reverse charge, with some exceptions. B2C sales of services will continue to be generally subject to tax in the country of the seller, again with some exceptions.
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 customs after 1 January 2021
When it comes to customs and 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 (known as a hard 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 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.
Trader Support Service
The UK government will run a new Trader Support Service for businesses moving goods to and from Northern Ireland. This will provide free support to businesses buying and selling between Northern Ireland and Great Britain. The support service will also be help if you bring goods into Northern Ireland from outside the UK.
However, negotiations are still taking place between the UK and EU to decide how goods will be moved between Northern Ireland and the UK with regard to customs and VAT. The rules above could be altered.