Understand VAT on imports and exports

Since 1 January 2021, businesses in the United Kingdom have had to rethink their imports and exports. England, Wales, and Scotland must follow customs procedures when trading with European Union (EU) countries and transporting goods to Northern Ireland. Additionally, how VAT is calculated has changed. This VAT change affects trade with both EU and non-EU countries.

On the other hand, the UK government has implemented several measures to reduce administrative burdens and mitigate the impact on cash flow. This blog will make you understand the changes in VAT on imports and exports in the UK when importing from the EU/exporting from the UK countries after Brexit.

• What was Brexit?
• How has VAT changed after Brexit?
• Import VAT
• VAT on imports £135 and under
• VAT on exports

What was Brexit?

On 31 January 2020, the UK officially exited the EU, and a large portion of 2020 was spent in a transition period. This provision was officially ended on 31 December 2020, and new rules took effect on 1 January 2021. Businesses did not have to make any changes to continue operating daily during the transition period. For example, the UK remained a member of the EU's customs and VAT systems which means earlier there were no trade borders between the UK and the EU, and thus no customs formalities. However, businesses that import or export to the EU must now make considerable adjustments.

The government recommends that you hire a customs broker, freight forwarder, or similar operative to assist you with customs concerning importing and exporting – though these agents may not be able to assist you with VAT, which you will need to learn on your own, or it can only be possible with the help and support of an accountant. However, customs and VAT issues can be tricky, particularly if you have previously experienced seamless movement across EU borders.

How has VAT changed after Brexit?

Domestic VAT regulations will stay unchanged following the end of the Brexit transition period. However, VAT regulations governing imports and exports to and from the European Union have changed. The UK was a member of the EU's VAT scheme before Brexit and during the transition period. This removes the need for a UK business to register for VAT in each EU country instead of relying on a common set of VAT rules. Additionally, it enabled UK businesses to take advantage of various VAT simplifications, including distance selling thresholds and the online VAT refund process. However, starting on 1 January 2021, businesses in the United Kingdom will treat EU countries in the same way they presently do with non-EU countries. Trade with EU countries is no longer referred to as dispatches and acquisitions but rather as imports and exports — again, in accordance with non-EU trade.

As per general terms, VAT is payable upon import, although the UK government has implemented a postponed VAT payment scheme in order to avoid cash flow problems. This enables businesses importing goods into the UK to account for VAT on their next VAT Return, allowing the goods to be released from customs without making the VAT payment. This also means that in comparison to the previous scenario, nothing will actually change in terms of cash flow, although there will undoubtedly be new administrative obligations.

Also See: Brexit and VAT - How will it Affect your Business?

Import VAT

Before Brexit/the end of the transition period, VAT-registered businesses in the United Kingdom imposed VAT on intra-community acquisitions via the EU reverse charge. They were required to account for import VAT on items imported from anywhere in the world. As of 1 January 2021, this rule will apply to all EU countries. This is applicable only if the amount exceeds £135. For imports under this threshold, you must still account for VAT, but you must follow new guidelines that broadly reflect the EU's VAT e-Commerce Package (even if the goods were not traded via e-commerce).

Import VAT is levied at the point at which the items enter free circulation, known as VAT tax point. This may occur at the port of entry or, if special customs procedures are used, it could be when the goods are released from customs warehousing. However, you will need to obtain documentation from HMRC when the products entered free circulation to maintain accurate VAT records. VAT can be paid at the tax point if desired; in such case, monthly C79 reports from HMRC should be acquired, as with imports from outside the EU, in order to reclaim the VAT. However, the majority of businesses are likely to use the delayed VAT accounting system.

This is similar to the reverse charge procedure, in which import VAT is not paid in advance and then reclaimed on the subsequent VAT return. Rather than that, it is accounted for on the same VAT Return as input and output VAT.

While postponed VAT accounting is optional, it is required if you postpone the submission of customs declarations. It's worth noting that postponed VAT accounting is now available for any imports from outside the EU. It is also available to businesses in Northern Ireland but will apply only to non-EU imports.

Also See: One-Stop-Shop: Changes to EU VAT rules on e-commerce

VAT on imports £135 and under

Along with the end of the transition period on 1 January 2021, the UK implemented additional measures for products entering the UK country from other countries:

1. The Low-Value Consignment Relief (LVCR) programme has been phased out. Previously, imports with a value of less than £15 were free from import VAT.
2. Where they facilitate the sale, online marketplaces (OMPs) are liable for collecting and accounting for VAT.
3. VAT is applied at the point of sale for imports having a consignment value of £135 or less, rather than as import VAT at customs. For B2C transactions, the seller will charge and collect the UK VAT, whereas, for B2B transactions, the customer will be charged for the VAT.

In short, the regulations governing sub-£135 imports require foreign sellers delivering goods to consumers in the UK to charge UK VAT and apply to be included in the UK VAT system when supplying goods worth less than £135 to end customers (non-VAT-registered individuals).

Businesses receiving items worth less than £135 will be required to account for VAT as part of the reverse charge procedure by disclosing the VAT on their next VAT Return. The tax point follows normal rules, which means that it is usually the invoice date.

Additionally, the recipient business should ensure that the seller is aware of their VAT number; otherwise, the seller will have no choice but to treat the transaction as a B2C sale and charge VAT.

Also See: Tax investigations from HMRC – What to expect?

VAT on exports

The VAT situation also changes as of 1 January 2021 when it comes to exporting goods to EU countries. Exports to EU countries are treated the same as exports to non-EU countries, which means they should be VAT-free in the UK.

This is applicable whether you are exporting items to a customer (B2C) or a business (B2B). In other words, there is no longer any requirement to adhere to distance selling regulations or to verify the recipient business's VAT status. This may require businesses that sell B2C to the EU to register for EU VAT and appoint fiscal representatives based on the rules of the countries in which they sell. It is critical to comprehend what it means to zero-rate items for VAT purposes.

This does not mean you may ignore VAT entirely. This means that you use a 0% VAT rate. Although no VAT is payable in the UK, you must still account for exports in your VAT accounting and consider any VAT requirements in the recipient country. When it comes to sales of services throughout the UK, rather than products, things remain mostly unchanged from before 1 January 2021.

With some exceptions, B2B sales of services are normally liable to tax in the nation of the customer and are controlled via reverse charge. B2C sales of services will generally continue to be subject to tax in the seller's country, with some exceptions. However, UK businesses using the Mini One-Stop Shop (MOSS) system will need to register for the non-union MOSS and lose the €10,000 threshold for applying the place of supply requirements. This means that more businesses will be subject to VAT in the countries where they sell digital services and will be required to register for non-union MOSS.

If you have any queries or want specialist advice on "VAT obligations when importing and exporting goods after Brexit", kindly call us on 03330886686, or you can also e-mail us at enquiry@dnsaccountants.co.uk

"This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction".

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.