The VAT implications of the UK leaving the EU are significant, especially since no deal has yet been agreed. Whilst from a VAT perspective, there is very little clarity from the tax offices, there is clear guidance for businesses based on the assumption that the UK will be treated exactly the same as other non-EU countries from 2021.
The importance of imports…
When goods are imported into a country with a VAT regime, import VAT is charged as a percentage of the value of the imported goods. From a VAT perspective, when goods are moved between two EU member states, this is not technically an import – therefore, trade between two EU countries never results in import VAT being paid.
Once the UK is classified as non-EU, everything changes. The movement of goods from UK to the EU, or any goods coming into the UK (from the EU or otherwise) will be treated as imports and subject to VAT. Since all goods going from the UK into the EU will have VAT on them in the destination country, this creates a cash-flow impact which did not exist when the UK was part of the single market.
Determine the Importer of Record
If the import includes two parties, and not just one business moving goods between the UK and EU, they need to agree which side will be responsible for the clearance requirements. This includes customs import declarations, import duties or tariffs and import VAT. The elected party is known as the importer of record.
VAT Registration Obligations when Exporting from UK to EU (or vice versa)
The consequence of the new classification of imports means that all EU-UK trade needs to be evaluated from a VAT compliance perspective. Previously, EU-UK trade was subject to the standard EU rules – when the transactions are B2B, there is no need for a seller to register for VAT in the buyer’s country and for B2C transactions, a registration obligation in the destination country was threshold dependent. (The so-called Distance Selling thresholds).
Following Brexit, EU-UK trade will no longer be subject to these rules, and therefore each such transaction must be examined on its own merit. In general, if the selling party is responsible for paying the import VAT in the destination country, it is probable a VAT registration will immediately be required.
It is therefore imperative than you understand your incoterms on all exports and get VAT advice if you decide to export to a new jurisdiction.
Avoid EU & UK import VAT
Goods involved in EU-UK trade will become liable to import VAT payments after 31 December 2020. Whilst import VAT should never be an absolute cost to a seller, there is no doubt that the cash flow implications and potential costs of recovering the import VAT are significant.
However, with careful planning, EU/UK traders can avoid the cash payments required by taking advantage of import VAT deferment schemes available in the EU and UK. (The avoidance of import VAT can be done through the relevant countries’ postponed accounting or deferred VAT regimes.
If suppliers of goods switch to Delivered Duty Paid (DDP) INCOTERMS, they can take care of the customs processes and import VAT and ensure there is no interruption of goods movements after Brexit, and limit import taxes.
Would you like more information on Brexit? Book a consultation with your Compliance Manager today and ask them for a copy of our comprehensive Brexit VAT Guide. You can also read our blog posts on Brexit here.