VAT and Customs Impact of Brexit

Brexit introduced new challenges for those UK businesses that trade in goods with the EU...

Overview

Brexit introduced new challenges for those UK businesses that trade in goods with the EU.   Some of the difficulties are likely to be temporary, such as the practical implementation of the Northern Ireland protocol (when goods move from GB to NI), a shortage of trained customs agents, and a reluctance by some hauliers to accept new clients who wish to move goods by road to the EU.

The introduction of Postponed Accounting for import VAT for all imports, not only those from the EU, has improved importers cashflow.   Brexit was also a factor probably in the decision of the UK government to introduce proposals for a number of freeports around the UK, which may be attractive for some businesses.

Some UK businesses have chosen to reduce the additional administrative burden and the loss of some EU VAT simplifications (triangulation and call off stocks) by registering for VAT in Europe.  Some have chosen to trade as an overseas branch of their UK entity, whilst others have created a local entity, a subsidiary.  Factors that determine which EU member state they have chosen includes the local VAT regime (is registration simple, do they need to appoint a local fiscal rep, do they have postponed accounting for import VAT?), the availability of warehousing and transport links.  

Businesses that sell goods b2c to EU consumers by mail order or online, and those that export food or live animals to the EU have faced particular difficulties including delays at import into the EU, customs duty (when the goods do not originate in the UK) and import VAT “surprises”, and the cost of animal or food health certificates.

There is much less impact surrounding the supply of services to the EU, primarily concerned with the ability to trade, including financial services, and the recognition of professional qualifications gained in the UK.

Introduction of Postponed Import VAT Accounting (PVA)

There is no one-off application for PVA but rather your customs/freight agent needs to add the following codes onto each online import entry submitted to HMRC.  The PVA system applies to all imports into the UK, not merely those from the EU, so the cashflow benefit applies to all UK importers.  Some customs agents have demanded that their customers provide a written standing instruction for all entries to use PVA.

• If the entry is submitted by the HMRC online system called CHIEF enter the letter G  in box 47e on line for import VAT (B00) and enter either the EORI number (which includes your VAT registration number) into box 8 (Header Consignee) or, if applicable, the VRN in box 44h (Registered Consignee)
• If the entry is submitted via the HMRC online system called CDS, you need to enter your VAT registration number at header level in data element 3/40. VAT will be recorded against your EORI and will be at declaration level only.

The C79 hard copy monthly import VAT certificate in 2020 issued by HMRC has been replaced by an online PVA statement, which should be downloaded or printed as entries disappear after 6 months.  The importer must register to view these online statements, using the link below.

https://www.gov.uk/guidance/get-your-postponed-import-vat-statement

Postponed import VAT is paid in box 1 of the next VAT return as output tax, but the same amount is claimed as input tax in box 4 of the same return.  The only situation where PVA output tax is greater than PVA input tax is when the business uses the goods partially or fully for onward exempt sales or onward non-business activities.

There is no change to UK excise duty on tobacco, alcohol, oils etc, which remain due at the time of import.

If the UK importer had to submit an Intrastat Supplementary Declaration for Arrivals to HMRC in 2020, they must continue to submit them for the whole of 2021.

The UK PVA system is already in use throughout the EU with only four exceptions; Cyprus, Germany, Italy and Slovakia.  For imports into these countries, import VAT is paid or deferred at import.

Duty Deferment Account

If you use PVA for imports, the only reason for a duty deferment account is for the payment of customs duty.  HMRC have reduced the need for most deferment accounts to be supported by a bank guarantee, termed a Customs Comprehensive Guarantee (CCG).   The advantage of a deferment approval number (DAN) is that customs duty is not payable at the time of import but on the 15th day of the following month, providing on average four weeks until payment.  Alternatively if customs duty amounts are modest, you can decide to allow your customs agent to pay/defer the duty and recharge it to you in a disbursement invoice.

Import and export entries needed for movement of goods to and from EU

A full import and export customs entry (an online Single Administrative Document) is required for goods moving between UK and the EU.  The UK exporter and the UK importer needs a UK EORI number if not already held.  Additionally evidence of the origin of the goods and a Safety & Security declaration is required.  Certain goods such as live animals or food exported to the EU will require a health certificate, which is costly as each package requires certification rather than each shipment.

The goods are more likely to be examined by Customs on arrival in the UK or the EU post Brexit.

If goods are imported into the UK from the EU and they originate outside the EU, when the UK tariff has a positive rate of duty, customs duty will be payable.  So for example if a German wholesaler imports trainers from the Far East and exports some of them to the UK, their Country of Origin remains where they were manufactured.  It is possible that the same goods therefore could attract both EU and UK customs duty.  Possibly the EU wholesaler could use Inward Processing to relieve the EU customs duty.

The UK tariff

The UK issue a new tariff, which came into force on 1 January 2021.  The HS commodity codes are unchanged from the EU tariff, but several rates of customs duty have been simplified.  Some rates have been reduced to nil and others reduced to multiples of 2%, so 2%, 4%, 6% etc.

The actual HS codes are the same as the EU tariff, but if the UK business seeks and obtains an Advance Tariff Ruling (ATR), previously referred to as a Binding Tariff Ruling from HMRC this will apply only to the UK and the EU may have a different interpretation.  HMRC also offer a non-binding opinion service for tariff classification.

Circumstances causing a UK business to register for VAT in the EU

 

• The business has a triangulation model for some transactions, where an EU supplier sends goods to a business customer in another EU member state.  Last year, if all three businesses were VAT registered in different EU member states, the UK seller or the intermediate seller were not required to register elsewhere in the EU.  One of our clients purchases fresh fruit from Portugal for export mostly to the UK, but some of the fruit was sold to an Italian business.  As our client did not have an EU VAT number in 2021 initially, the sale by the Portuguese wholesaler for these goods moving to Italy, was a domestic sale, subject to Portuguese VAT. Portugal has a reduced rate of VAT for fruit, in contrast to the UK’s zero rate for fruit.  Our client was forced to register for VAT inside the EU, so that they did not suffer irrecoverable Portuguese VAT.
• Call off stocks.  Where UK business holds stock in the EU for the purposes of one named business customer and removes goods from the warehouse in response to each new order from the same customer.  Last year the UK business did not need to register for VAT in the other country, but in 2021, they must register.
• Installation of goods.  A simplification last year when a UK seller of goods also installed the goods physically inside the EU.  The VAT place of supply of installed goods is where the installation takes place, but last year the UK supplier did not need to register in the member state of installation under this simplification.  Now in 2021, they need to register.
• MOSS supply of digital services.  UK seller of b2c digital services (such as software) could in 2020 submit a Mini One-Stop Shop (MOSS) return to HMRC in the UK and charge VAT at the rate in the customers country.  In 2021, they must register for OSS somewhere in the EU.
• End of distance selling thresholds for b2c sale of goods.  One of the options as distance selling is no longer available to UK sellers in 2021, is to register for VAT in each customers member state.

Some EU member states will require UK businesses who register in the EU without an establishment to appoint a fiscal representative.  The fiscal representative becomes jointly and severally liable for any VAT due.

Country of Origin rules

The Country of Origin (COO) rules are complex and are contained with each individual Free Trade Agreement.  The origin rules between the UK and the EU are contained within the Trade & Co-operation Agreement (TCA).  Each chapter of the Tariff has its own origin rules.

Wholly obtained products are products obtained entirely in one country without the addition of any non-originating materials. Wholly obtained products automatically qualify for preferential treatment. The TCA document lists these products which include for example fish, vegetables, plants, livestock, meal and dairy products.

Other goods have to be subject to “substantial transformation” to change their origin status.  Substantial transformation occurs via one or more of three conditions;

• Change of tariff classification: When the work undertaken results in a change of tariff classification. For example, the tariff code for car parts, 8708, is different to that for a finished car, 8703. If a manufacturer assembles car parts into a finished car, it would qualify as a change of tariff classification.
• Sufficient value-added: The originating state must contribute a minimum percentage of the value of a product. Each component will add a certain amount of value, calculated as the percentage of the ex-works price of the final product (excluding transport and insurance costs). Typically, around 50%+ of value has to be added to claim origin.
• Specific processing: Finished products can qualify when particular specific working or processing activities are carried out. For example, a rule may require clothing products to be manufactured from yarn. The precise rules about specific products are very detailed and are determined by the detail in the Free Trade Agreement between each country.  Simple processing such as packing, cleaning, polishing, inspection, labelling and simple assembly do not change the origin status of the finished product.

An Advance Origin Ruling (AOR) can be obtained from HMRC, which provides certainty and removes risk.

One part of the COO rules for EU-UK trade is that if goods of UK origin are re-imported back to the UK or EU goods re-imported back to the EU, the free trade rules do not apply and when there is a positive rate of customs duty in the importers Tariff for that product, duty is payable. An example in early 2021 was Marks & Spencer “Percy pig” children’s sweets that are manufactured in Germany.  No customs duty was due when they were imported into the UK (under the free trade deal) but when some of those sweets were subsequently moved from the UK to the Republic of Ireland,  EU customs duty was payable at import in ROI.  If the supply chain and movement of goods remains the same, the only way to avoid customs duty in ROI would be to use Returned Goods Relief (RGR).  RGR usually requires that the goods are exported from and re-imported back to the same country, but there are some exceptions.

Sale of goods b2c to consumers in EU

Since the UK left the EU on 1 January 2021, these sales are zero rated exports in the UK.  Last year, when the UK was part of the EU, they were termed “distance sales” and the seller charged UK VAT at 20% but had to register in another member state if sales to that country alone exceeded a threshold, which was typically € 30,000 per year.  The three available options in 2021 are as follows.

• Register for VAT in each EU member state where the seller has customers and charge local VAT on the sales.
• Make an arrangement with a courier firm that delivers the goods, that they will submit the import entry on arrival of the goods into the EU (on behalf of the customer), recharge you the import VAT (which is not recoverable as input tax) and your sales price to the EU consumer reflects this additional cost.
• Pass all responsibility to the consumer to make their own arrangements for release of the goods from their local Customs, including payment of import VAT and possibly customs duty (if the wines/spirits are not manufactured in either the UK or the EU).  The risk of this option is that the customer will not be aware of the amount of customs duty and import VAT when they order and so any charge may be unexpected.  Additionally this option may cause delivery delays as the goods may not be delivered until the customer has paid the VAT and duty to their Customs/tax authority.  This option is unlikely to be useful if repeat orders from the same customer is expected.

A new EU procedure adds a fourth option to these three from 1 July 2021, but it is not compulsory, any of the four options can be used.  The new EU procedure is as follows;

Register for the scheme, called One-Stop-Shop (OSS) or Import One Stop Shop (iOSS) somewhere in the EU.  We have some clients who plan to register in Ireland or Malta, which will allow them to use the English language on the application and the returns.  Once registered, charge VAT at the rate in the customers country, so for example 23% in Ireland and 19% in Germany on each sale.  Submit a single OSS quarterly return, with the total sale plus VAT in each member state (so a maximum of 27 lines, if sales were made to every EU member state) and pay the grand total of VAT.  The tax authority where you are registered will distribute the VAT to each other member state as per your return.   The OSS system is an extension of the MOSS system already in use for the sale of e-services (not goods), so the principles and administration are already tested and in place.

If the sale is via an online platform such as Amazon, and the goods are valued under £ 135, the platform operator is obliged to charge and declare domestic VAT in the customers country.

UK businesses that sell food b2c to the EU have suffered particular issues around the requirement to obtain a health certificate for each shipment, signed by a vet. The cost of these certificates can be greater than the sale price of the food if the value of the sale to individual consumers is modest.

Moving goods temporarily to the EU

A good alternative to full import and export declarations, is to use an ATA carnet, an international customs document for the temporary movement of goods.  It reduces the administrative burden of applying separately for a temporary import relief in the EU and Returned Goods Relief on return to the UK.  The carnet requires a security deposit or guarantee at the time of application, in addition to the basic fee for its issue.  The ATA carnet usually removes the need for a customs deposit or bond at the time of import.

Each country has its own rules about what goods are allowed on an ATA carnet.  Horses moving between countries for covering or competition often use a carnet.  Both Ireland and the UK allow live animals to be included and it is very likely that France does also, but it should be checked with the carnet issuer, the London Chamber of Commerce and Industry.

Before leaving GB the driver must

• obtain the ATA carnet document from the owner or their agent
• take the goods and the ATA carnet to the UK Border Force at a UK office of departure
• obtain the additional documents required for the movement of live horses

At the EU border, the driver must present the ATA carnet and ensure it is stamped by the EU customs authorities.

After the EU border, the driver should give the ATA carnet to the recipient of the goods when they are delivered. This is so the ATA carnet is available to return the items to their country of origin, if not transported back by the same outbound haulage company.

The goods should be moved via an EU Border Control Point, which has the facilities to undertake a physical examination, if required. A list of BCP’s is available from HMRC.

Please see the link below which explains how to apply for an ATA carnet.

https://www.gov.uk/taking-goods-out-uk-temporarily/get-an-ata-carnet

Equivalence

Equivalence post Brexit refers to a system for regulating the standards or requirements of a product or a service.  It usually means that each party recognises each-others standards or regulatory regimes.  It has particular importance for the UK financial services sector who trade with EU customers.  One particular example of the importance of equivalence for goods are Scottish seed potatoes that currently do not meet EU regulatory standards and cannot be exported to the EU and in particular the Republic of Ireland.  These issues are yet to be fully resolved and further negotiations are ongoing, but there are concerns in other sectors including medicines where there are potential differences between UK and EU standards.

Goods moving from GB to Northern Ireland

Northern Ireland has a special status after Brexit, as a member of the EU single market but also part of the UK.  Sales of goods from England, Wales and Scotland to NI are domestic sales subject to UK VAT if the product is standard rated.  A special simplified customs document must be submitted to HMRC via the Trader Support Service.

Intrastat in 2021

If a UK business submitted Intrastat Arrivals supplementary declarations to HMRC in 2020 because their EU purchases of goods exceeded £ 1.5 million a year, they must continue to submit monthly declarations for the whole of 2021.  The last declaration required is 12/2021.

Completion of UK VAT return in 2021

From 1 January 2021 boxes 8 and 9 of the UK VAT return will only relate to supplies/acquisitions of goods between Northern Ireland and the EU.   Box 2 of the return, acquisition tax, will only be completed if a business based in Northern Ireland imports goods from the EU.

For all other GB businesses without any trade with Northern Ireland, boxes 2, 8 and 9 of the VAT return will be blank.

Difficulties in moving goods by road to EU

Particular issues exist for road transport that crosses more than one EU member state border; the haulier must have a UK Customs Comprehensive Guarantee to cover the potential import VAT and duty in the EU. There is anecdotal evidence that some freight transport providers were reluctant to accept new customers for road movements between the UK and the EU, in early 2021, wary of the potential risks of delays due to incomplete documentation for customs.

Sale or purchase of services b2b

The VAT treatment of the sale and purchase of services b2b is largely unchanged.  The VAT place of supply rules for b2b services used by the EU and the UK in 2021 is unchanged.  If a UK business sells services b2b to a customer inside the EU, the place of supply is where the customer belongs, so the sale has no UK VAT and is “outside the scope” of UK VAT.  There are a few exceptions to this VAT general place of supply rule concerning construction, land, admission to live events, hotels, catering and transport.  The three minor changes for these b2b sales of services to the EU are;

• No requirement to include the customers EU VAT number on the sales invoice
• No need to include the statement on the sales invoice that the sale is subject to the Reverse Charge (RC) procedure.  The RC procedure does still apply to the EU customer but there is no need to remind them of this on the invoice.
• No entry required on an European Sales List (ESL)

The purchase of b2b services from the EU also remains the same.  The EU seller does not charge domestic VAT and the UK buyer uses the RC procedure as a purchase of services from overseas.

EU VAT Refund claims

If a UK business incurs VAT on services or goods inside the EU, and EU VAT is correctly charged by the seller, the method of claiming back the VAT has changed.  A “non-union” refund claim is now required, physically posted to the EU member state where the cost was incurred, usually prepared in the language of the host. Online submission is no longer allowed.  Examples where EU VAT on such claims can be recovered are trade fair admission, hotel, taxis and purchase of goods purchased in EU and sent for processing elsewhere in the EU.  If the UK business has an establishment in the EU member state no claim is allowed.

Freeports

The UK government decision to approve a number of Freeports in the UK is not specially an outcome of Brexit but it provides some encouragement for businesses involved in international trade. Goods are held free of duty and VAT inside the freeport area, similar to the benefits of approved customs warehouses. Other, direct tax benefits are also available.  However please be aware that companies who export goods to 23 countries (including Norway, Switzerland and Canada) from UK Freeports will have to pay the full rate of customs in overseas country of arrival. This is because the Free Trade Agreements recently signed by the UK in 2021 have a clause that specifically removes the reduced or nil rate of duty in the importing country if the UK exporter has taken advantage of the tax benefits of a UK Freeport.  This policy excludes goods exported to EU, so goods exported to the EU from a UK freeport, if of UK origin, will not pay customs duty on arrival in the EU. 

European Court of Justice (CJEU)

The CJEU is no longer the final court for UK VAT cases or disputes, replaced by the UK Supreme Court. However decisions of the ECJ in 2021 and beyond, for cases which commenced prior to 2021 will still have an impact upon the UK.  As UK VAT registered businesses are able to make claims for VAT overpaid or under-recovered within a period of four years from the discovery of errors, it is likely that CJEU decisions which determine that HMRC have incorrectly  implemented EU VAT law will still have an impact for some time.

If you require further more detailed advice please contact the VAT and Customs team at James Cowper Kreston.