A number of VAT rules and EU-wide simplifications will automatically disappear in the UK, simply as a result of leaving the EU. New VAT and customs procedures will apply on both sides of the border, so whilst the free trade deal removes the costly tariffs that would have applied under a WTO arrangement, the UK-EU frontier will no longer be as porous and flexible as before. VAT registration obligations could arise for UK businesses in EU countries, and for EU businesses here, increasing costs, complexity and compliance.
Trade involving Northern Ireland is particularly interesting as attempts are made to create a border that meets the Good Friday agreement. In effect NI will be treated as both part of the UK and part of the EU for certain aspects of trade and taxation, which will make for additional complexity even for those just trading or even moving goods between NI and other parts of the UK. Businesses should review their NI trade in detail to understand the new requirements.
Brexit impacts the VAT, customs and administrative aspects of international trade, none more so than when businesses sell direct to consumers cross border.
Trade in physical goods is most affected by Brexit, whilst trade in services is not wholly immune. Import and export customs clearance procedures will increase for EU trade, with additional checks and delays on goods being more likely, even with the FTA. The increase in administration and changed procedures for imports and exports will raise compliance costs; failure to comply could result in delayed delivery, penalties or at worst seized goods.
The free trade agreement does not remove the possibility of duties applying. The origin of goods from outside the UK and EU will need to be reviewed to determine their duty status. Overseas good entering the UK duty free under a bilateral FTA may still face tariffs when moving on to the EU if the EU does not have a similar agreement with the country of origin (and vice versa). This could be a growing issue as the UK and EU diverge and seek new FTAs globally. The EU-UK FTA provides for free trade in goods whose origin is either EU or UK. Origin rules, particularly where some goods are incorporated into others, can become complex.
Given the length of the FTA and the lateness of its agreement, it will take time to digest in full and understand all its implications.
The phased introduction of new UK import procedures will hopefully ease the process in the first six months, however new customs declarations will be required and postponed import VAT accounting will need to be applied, in many cases (but not all). There will be a close link between the customs declaration and the import VAT accounting procedure applicable. Accounting for import VAT under the new postponed VAT accounting will provide a cash-flow benefit. The new process removes the need to make actual payments and reclaims of the import VAT, instead the VAT is accounted for on the VAT return and will simply be a paper exercise on the VAT return for many businesses, though not those exempt businesses who are ineligible to reclaim all their VAT.
New rules removing the VAT and duty free low value consignment relief will hit smaller import sales, and new rules for consignments under £135 will need attention as these will be slightly more complex.
Those businesses used to trading in goods across the EU, taking advantage of call-off stock, triangulation and other simplifications facilitating movements of goods for additional work, repair or valuation may need to review and restructure their supply chain or face additional VAT registrations across the EU and in the UK. The easements available to date under the EU rules are potentially still available but would need to be under alternative procedures (e.g. inward processing relief, customs warehousing and similar), which often require advance authorisation from HMRC or EU equivalents and may require the services of customs agents.
VAT registrations across the EU may need to be cancelled and re-applied for given the UK’s changed status as a third country, and the requirement to appoint a fiscal representative in many countries will increase costs.
Supply chains will need some attention as the implications of certain contractual delivery terms and incoterms could be severe on suppliers bringing them onshore. Alternatives that keep suppliers offshore may see a rise in compliance procedures for customers. Contractual delivery terms could give rise to unexpected VAT registration and accounting obligations across multiple countries, increasing costs and the risks of non-compliance. For supplies between businesses these matters can ultimately be managed, however for sales to consumers the added complexities are potentially more onerous.
For sales of goods direct to private consumers, the protection offered to UK suppliers by the distance selling thresholds will disappear rendering VAT registrations in the country of the consumer more likely for UK businesses selling direct to EU consumers. The same will apply to EU suppliers to UK consumers. The first, “Brexit”, change will be on 1 January, however the EU plans to shortly thereafter launch its own revised rules for its internal B2C market from July 2021. Businesses will need to consider additional VAT registrations, revised terms and conditions and/or alternative delivery routes to manage both these VAT changes.
Selling via platforms will add some complexity to the mix. It will be important for the various parties to understand their contractual obligations, particularly for UK import clearance and import VAT accounting, which will differ depending on the size of sales, and the route to market. Platforms (such as Amazon, Apple, Ali Baba etc.) have their own contractual terms and operate under more than one contract template.
Services are treated for VAT purposes in a more generous manner and the VAT impact on the service sector will be less than on the trade in physical goods. That said, sales to consumers (B2C) will be directly impacted, notably in the broadcasting, telecoms and electronic services sector. The existing EU MOSS scheme will no longer apply to UK businesses who will need to seek alternative registrations outside the UK and likewise EU vendors will need to review the specific UK VAT rules to determine if they are required to VAT register in the UK.
There is some potential good news for exempt financial services providers whose VAT recovery could improve based on future cross-border sales.
Any leniency period applicable in the new year will not be limitless and HMRC will expect business to have heeded the government advertising and to have taken steps to adapt to the new status quo (however unfair that may seem!). Given the late announcement of the FTA and the scramble to implement a number of new VAT and customs procedures in 2020, teething issues are only to be expected. It is likely that the rules will continue to evolve and for issues to arise.
If you have concerns regarding your particular business structure and obligations, we recommend seeking advice promptly. Whilst 1 January is a deadline, addressing issues in the new year will be possible, though sooner is preferable to later.
VAT Assistant Manager