Brexit VAT changes: a practical step by step guide
The Brexit transition period ended at 11pm on 31st December 2020, and there are changes that you need to be aware of when preparing your VAT return.
Some of the key changes relating to businesses in Great Britain and their implications on the running of their business are outlined below. Please note however that businesses in Northern Ireland are subject to a new NI protocol and that the rules below don't apply to them.
VAT Returns
Boxes 8 and 9 were used for reporting sales of goods to, and purchases from the EU, so those will no longer be required for transactions from 1st January 2021 onwards. You will however need to report any transactions which took place prior to 1st January. These boxes will eventually be removed from the VAT return format.
Box 2 was used for reporting ‘acquisition tax’ on goods bought from EU VAT registered businesses. From 1st January this box will only be used by businesses in Northern Ireland who buy goods from the EU.
Service supplies
Business to Business (B2B) supplies of services
The general rule is that the place of supply is where customer belongs and that does not change. So, treatment of these sales will remain the same.
- EU customers will continue to account for local VAT in their own countries via the Reverse Charge.
- EU suppliers will continue to supply their services to UK businesses free of any VAT. UK businesses must continue to account for reverse charge VAT on receipt of these services.
Business to Consumer (B2C) supplies of services
The general rule is that the place of supply is where the supplier belongs and that does not change either. So UK VAT will continue to apply (note there are some exceptions to the general rule).
There is another exception for businesses making B2C supplies of digital services as the current threshold of £8,818 no longer applies from 1st January (see below for more details).
Goods sold to the EU
Goods sold to a EU customer will now be reported as zero-rated sales - regardless of whether the customer has an EU VAT registration number or not.
UK businesses who sell to non-VAT registered EU individuals will need to consider whether they or their customer will be responsible for paying EU VAT when the goods arrive in the EU. This must be made clear to the purchaser in the terms and conditions of sale. If the UK business is responsible then it will need to register in the relevant EU countries.
- Purchaser responsible – known as Delivered at Place (DAP):
- UK Seller zero rates the sale in the UK
- EU purchaser incurs and pays their local VAT/duty – if goods are sent by post, it is likely the package will be held by the postal service/post offices in the EU country until the relevant duty and VAT is paid
- UK seller does not have to register in the EU country
- This option may not be available in some EU countries, if the goods are sold via an online marketplace
- Likely to cause inconvenience to the purchaser and hold up delivery – increases risk of losing the customer
- Seller responsible – known as Delivered Duty Paid (DDP):
- Seller must register for VAT in the EU country of arrival
- Seller incurs the import VAT – recovers this import VAT on their EU VAT return
- Seller charges VAT at the appropriate rate for the EU country, and accounts for this on the VAT return for that country
Businesses will still need to retain evidence that the goods left the UK to support the zero rating. Please note that sales between GB and NI will remain subject to UK VAT.
One should note that the EU will be bringing in new rules in July 2021, which will apply to goods sold to EU consumers with a value of under €150. Online marketplaces (such as Amazon) will become liable for collecting and paying the VAT on these sales and the Mini One Stop Shop (MOSS) will be extended to these sales. The seller can use MOSS to report their sales to EU consumers in one return, instead of having to register in multiple EU countries. These sales will also be exempt from Import VAT when they arrive in the EU. UK businesses will need to pick which EU country they wish to register for MOSS in – only one registration is required.
Goods arriving from outside the UK
Consignments with a value under £135
GB has introduced a £135 threshold for goods coming from overseas sold to GB consumers via a third-party Online Marketplace (OMP). Here the OMP is responsible for accounting for the UK VAT on the sale and there are no import implications for the supplier. If the goods are sold direct by the supplier to the consumer, the supplier will have to VAT register in GB and account for VAT.
UK VAT will NOT be charged by the seller if the UK purchaser provides them with their UK VAT number. Where no UK VAT is incurred, then the purchaser will need to account for VAT on their return using a reverse charge: the business will charge itself the VAT in Box 1, and then recovers it in Box 4 (where entitled to recover VAT on the item imported). The net value of the goods will then be entered in Box 7.
Consignments with a value over £135
These will be subject to customs procedures, and import VAT charged on arrival. Where a UK VAT registered purchaser is responsible for the import (i.e. where their VAT details are on the import documentation), then they can use the new Postponed Import VAT (PIVA) scheme. Under this scheme, instead of having to pay Import VAT upfront and then recovering it later, the VAT registered business can account for the Import VAT on their UK VAT return. There is no need to apply for PIVA but the importer or their agent will have to indicate on the Customs declaration that PIVA will be used in order that no VAT is charged at the point of entry.
Reporting on the VAT return
The receipt of the goods is reported on the VAT return as follows:
- Box 1 – VAT on consignment (based on consignment value, at the appropriate VAT rate)
- Box 4 – Recovery of the VAT in Box 1 (where the business is entitled to recover this VAT)
- Box 7 – Consignment value The above reporting applies to consignments both over and under £135.
It’s important to note that a business can only recover the VAT in Box 4 if entitled to do so. i.e. it’s an allowable expense for VAT purposes.
VAT codes to use in your software
Sales to EU
Sales to EU countries are now treated as Exports, so there is no requirement to use any of the EU-specific VAT codes when goods are sold to EU customers. These will be treated as normal zero-rated sales, you should use the appropriate zero-rated VAT code ('0.0% Z' in QBO, 'Zero rated income' in Xero).
Purchases from EU
Per the above advice, purchases from the EU will be reported slightly differently on the VAT return.
- Quickbooks – PVA Import 20% This code will need to be activated in the software as follows:
- Go to Taxes and select Edit Settings.
- Select Edit VAT rates, and on the smaller gear icon select Show Inactive.
- Switch it on using the toggle.
- Xero – their website states that clients on MTD will be able to enter the imports manually when generating a VAT return, using a ‘PVA option’ button. There is an alternative work-round which will populate the correct boxes on the return, using one of the reverse charge VAT codes. In order to use this code:
- Select ‘Accounting’ and then ‘Advanced’
- Select ‘Tax Rates’, scroll down and click on ‘Add Domestic Reverse Charge Tax Rates’
- When entering an import in expenses, select the VAT code called ‘Domestic Reverse Charge @ 20% (VAT on Expenses)’. You may wish to make a note on the expense entry, stating that it is an import.
New VAT number checker
UK businesses would have previously used the EU VIES service to check the validity of a UK VAT number. A new UK VAT number checker is now available on the GOV.UK site here: Check a UK VAT number
Flat Rate VAT
If your UK client was selling goods to non-VAT registered EU individuals (B2C) prior to 1st January 2021, then normal UK VAT would have been applied to these sales. The only exception would have been where sales to an EU country exceeded it's distance selling threshold, in which case VAT registration would have been triggered in that country and local VAT applied to the sales.
From 1st January 2021 B2C sales of goods to EU customers are zero rated in the UK. The flat rate percentage is applied to all zero-rated sales. Therefore, businesses who make EU B2C sales of goods, and use the flat rate scheme, need to consider whether to leave this scheme.
A business can leave the flat rate scheme at any time but must write to HMRC. If this needs to be backdated, then HMRC will allow it as long the date isn't in a VAT return which has already been submitted under the Flat Rate Scheme.
Digital Services to EU consumers
UK Businesses who sell Digital Services to non-VAT registered EU consumers (B2C) will no longer be able to use the UK's MOSS service from 1st January 2021. The final UK MOSS return will be for the period ended 31st December 2020, and the deadline for submission is 20th January 2021. From 1st January, UK businesses who sell B2C digital services to the EU will need to register for MOSS in an EU country (any EU country, and only one registration is required).
EC Sales lists
These will no longer be required for EU sales that take place from 1st January 2021. Sales before this date will need to be reported, and the deadline for submitting this final EC Sales List is 21st January 2021.
Intrastat UK businesses were required to submit Intrastat returns where sales to or purchases from EU VAT registered businesses exceeded the following thresholds:
- Despatches (sales) - £250,000
- Acquisitions (purchases) - £1,500,000
From 1st January 2021 Intrastat returns will only be required if purchases from the EU are over the £1,500,000 threshold above. This requirement will remain in place in 2021 only. If a business was only submitting Intrastat returns because of the £250,000 sales threshold being breached, then Intrastat reporting will no longer be needed.
