Brexit is finally happening: What VAT actions to take before Dec 31?

Over four years since the United Kingdom (UK) voted to leave the European Union (EU), Brexit is finally on the horizon.

On Dec. 31, 2020, the UK’s withdrawal agreement with the EU will end, and the UK will no longer be part of the EU for Value Added Tax (VAT) and customs purposes.

The UK Tax Authority, Her Majesty’s Revenue and Customs (HMRC), has released specific guidance around Brexit covering various areas. This now provides some certainty on the associated VAT and customs implications for businesses doing business in the UK.

Following are key considerations for businesses with UK activities to consider before Dec. 31, 2020:

Businesses importing goods into the UK

All goods entering the UK (with some exceptions for goods arriving from Northern Ireland), including those from the EU, will now be treated as imports from third countries. Customs formalities will apply, declarations will have to be lodged and customs authorities may require guarantees for potential or existing customs debts. Duties will apply on goods entering the UK from EU markets, and without a trade agreement, no preferences will be available.

Import and export licenses issued by the United Kingdom will no longer be valid in the EU, nor will authorizations for customs simplifications or procedures, such as customs warehousing.

From Jan. 1, 2021, the UK will introduce postponed accounting for import VAT on business-to-business transactions for UK VAT registered importers. This means that instead of a cash payment of import VAT being required, businesses can just self-account for the import VAT on their VAT returns. Those businesses with full VAT recovery rights can also reclaim this amount at the same time, resulting in no import VAT cashflow delays.

To benefit from this, importers must include their UK VAT registration and also their ‘GB’ Economic Operators’ Registration and Identification (EORI) on customs declarations. In the absence of either of these, UK import VAT would be collected at the port of entry.

For imports occurring between Jan. 1, 2021 and June 30, 2021, businesses will not be required to produce any customs declarations or pay any tariffs for goods entering the UK.

UK Intrastat filings may still be required for goods arriving in the UK, subject to certain thresholds.

E-commerce sellers and marketplaces

The UK will introduce a series of VAT reforms around the e-commerce industry for the sale of physical goods to private consumers (also referred to as business to consumer supplies). These will largely mirror those implemented in the EU as part of its 2021 cross-border e-commerce changes. Key changes are as follows:

• Marketplaces will be liable to account for VAT on sales of goods sold through their platforms in certain situations
• The UK low value import threshold of £15 will be abolished
• Direct business to consumer sales of goods associated with an import into Great Britain (excluding Northern Ireland) under £135 in value will be subject to VAT at the time of sale, as opposed to at the time of import. The nonresident seller, or marketplace if one is involved in the sale, would be required to charge, collect and remit VAT via a UK VAT registration. There is a nil VAT registration threshold in the UK for nonresidents.

Companies fulfilling EU orders from the UK

Shipments from the UK to other EU Member States will now be treated as exports from the UK and imports into the EU, as opposed to intra-EU community shipments.

Consideration should be given to the Incoterms of the sale, who will be the Importer of Record to clear the goods into the EU, and the associated VAT implications for both the buyer and the seller.

As mentioned above, UK Intrastat filings will still be required for such sales, subject to the typical thresholds.

Businesses doing business in Northern Ireland

Post Dec. 31, 2020, Northern Ireland (NI) will receive a special “dual status” for VAT purposes to help facilitate the supplies of goods from the EU. Broadly speaking this will provide NI businesses with unfettered access to the UK market and free access to the EU markets.

• Supplies of goods between the EU and NI will be treated as intra-EU supplies, per the current EU VAT rules for cross-border business to business supplies of goods. Businesses established in NI will receive a special VAT ID number so that they can receive goods from other EU members.
• Movements of goods from Northern Ireland to Great Britain (England, Wales, and Scotland) by NI businesses (including businesses headquartered in Great Britain with operations in NI) will continue as they do today. No declarations, tariffs, new regulatory checks, or customs checks will apply.
• Distance sales rules for business to consumer supplies of goods between the EU and NI will continue to apply.
• Supplies of services between businesses in the EU and NI will be treated as supplies of services between an EU and non-EU jurisdiction.

Digital service providers

Digital service providers (i.e. those electronically supplying music, games, films, software, online training and education services etc.) making business to consumer supplies within the EU should consider how they will report any UK VAT due moving forward from Jan. 1, 2021.

• Those businesses registered for the EU’s Mini One Stop Shop scheme in the UK should seek to re-register in another EU Member State in order to continue utilizing the simplification, as well as re-registering for UK VAT purposes to remit UK VAT due.
• Those businesses registered for the MOSS scheme in another EU Member State should register for UK VAT purposes from Jan. 1, 2021 to remit UK VAT due on their supplies of digital services.

Suppliers should also consider any potential changes around “use and enjoyment” provisions given that the UK will now be treated as a non-EU jurisdiction for VAT purposes. The use and enjoyment provisions can change the country in which VAT is due based upon where the service is actually used and enjoyed.

Summary table

Scenario	Current position	Future position	Action(s) required
Import of goods into the UK	Import VAT due at the time of import and is recoverable as input tax on receipt of a C79 certificate	Import VAT can be accounted for on the VAT return rather than paid to the customs authorities	Ensure importer has a UK EORI number, along with any necessary import licenses, the ability to appropriately track imports, and has the appropriate ERP and reporting capabilities, to self-account for import VAT
E-commerce sellers and operators selling goods into the UK	Import VAT due and paid by the importer of record, provided goods are not subject to low value exemption	Overseas sellers may be liable to collect and remit VAT on sales below £135. Specific rules apply for marketplaces and online operators	Review current sales activities into the UK to determine VAT treatment and associated obligations
Fulfilling EU orders from inventory or warehouses in the UK	Subject to the usual intra-EU supplies	Will be treated as exports from the UK and imports into the EU	Analyze associated VAT treatment of sales, and review commercial terms such as Incoterms
Doing business in Northern Ireland	Treated as part of the UK for VAT purposes	Special rules for supplies of goods to treat Northern Ireland as both part of the EU and the UK	Ensure special VAT number is obtained and consider practical aspects of doing business
Digital service providers	UK VAT is remitted on business to consumer supplies via the EU’s mini one stop shop (MOSS) scheme	A separate UK VAT registration will be required to remit UK VAT	Ensure the business is registered for the MOSS scheme in another EU Member State and registered in the UK appropriately

Recommended next steps

With the known deadline for the implementation of Brexit and the increasing certainty with regards to the implications on indirect taxes, we recommend that businesses:

• Complete a Brexit impact assessment. This should include analyzing the associated VAT implications to the business, such as reporting requirements, VAT treatment of sales and cashflow, and ensure appropriate planning is considered.
• Consider applying for an Authorized Economic Operator (AEO) status that would allow for priority treatment at cross-border physical checks.
• Review appropriate contractual terms and conditions with suppliers to ensure the VAT aspects are clear and commercially suitable.
• Consider how such changes will be managed in terms of ERP systems and tax engines.
• E-commerce sellers should consider their VAT compliance obligations as a result of Brexit, and the impact of upcoming EU-wide changes effective July 1, 2021.

Beginning Jan. 1, 2021, businesses should closely monitor the impact changes have on their business in terms of evolving supply-chain or trading patterns. It is likely that further efficiencies will emerge and be identified.