How will accounting for VAT on imports & exports change from 1 January 2021?

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The 1 January 2021 is a key date for all businesses here in the UK that buy from or sell to counties within the EU. From this date VAT rules relating to imports and exports to and from the EU will change.

Prior to Brexit and during the transition period, the UK has been part of the EU VAT regime. This means a UK business doesn’t have to register for VAT in each EU country, and instead applies a common set of rules in relation to the accounting for VAT. However, from 1 January 2021, UK businesses will treat EU countries like they already do countries outside the EU.

In broad terms, VAT will be payable upon import, although the UK government will introduce the postponed VAT payment system to avoid cash flow issues. This will let 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. Importantly, this means that nothing will change from a cash flow point of view compared to current arrangements, although there will obviously be new administrative requirements.

In more detail:

VAT on imports

Currently, VAT-registered businesses apply VAT through the EU reverse charge mechanism. For goods imported from elsewhere in the world, they have to account for import VAT – from 1 January 2021, this will include the countries within the EU.

This will apply where the value of goods imported exceeds £135. For imports below this amount, there is 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 more on this below.

VAT is applied at the point the goods enter free circulation – 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.

VAT can be paid at the tax point if you wish, in which case monthly C79 reports should be obtained from HMRC, as has long been the case 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 will be optional, it will be mandatory if you defer the submission of customs declarations. It’s worth remembering that postponed VAT accounting will also be used for all imports from outside of the EU too. This represents a significant change from how VAT is currently accounted for, 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 and when you should include it in your VAT Return.

When it comes to VAT on services, as a general rule following the end of the transition period, sales of cross border purchases of services from one business to another 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 exports

From 1 January 2021, when it comes to exporting goods to EU countries, the VAT situation also changes. Exports to EU countries will be treated like those to non-EU countries – they will 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 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 records.

B2B sales of goods will continue to be generally subject to tax in the country of the customer and administered through reverse charge. However, things aren’t as straightforward for businesses selling goods B2C to the EU – any goods shipped to the EU will be subject to import VAT on arrival, with customers having to pay the VAT before they can take delivery of their shipment. From 1 July 2021, things change and access will be given to a One-Stop-Shop (OSS) whereby non-EU sellers will charge and collect the VAT based on the location of its customers, and will then file quarterly OSS returns – they will have to select one country in which to register (this will normally be the country where stock enters the EU). UK businesses will need to register as soon as they commence trading in the EU, regardless of the value of your EU sales.

When it comes to selling services, rather than goods cross-border, things will continue much as currently. 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.

UK businesses that currently use the Mini One-Stop-Shop (MOSS) system will need to register for the OSS referred to earlier. The €10,000 threshold that is currently in place before VAT needs to be accounted for will not apply.

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 reverse 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 above is but a brief summary of the changes that businesses will need to deal with in the weeks ahead. More detail on VAT and duty changes can be found on the GOV.UK website – for importing click here, and for exporting click here.

If you have any concerns, please do not hesitate to contact me, or your local Thomas Westcott office.

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