Brexit and the impact on VAT
Updated: Sep 1, 2022
Effective from 1 January 2021, the UK has left the EU’s customs union and VAT system and as a result, this has affected and brought major changes to VAT and customs rules.
The EU/UK Trade and Co-operation Agreement eliminates customs duties on goods traded between the UK and the EU, provided they are of UK or EU origin. Traders must be able to demonstrate that their goods comply with the agreement's strict new origin rules.
In instances where goods are not originated from the UK or the EU cross the UK-EU border, customs duty may be applied in accordance to the UK Global Tariff for goods imported into the UK or the EU's Common Customs Tariff for goods exported to the EU. Thus, importers who distribute goods not originating from UK/EU, face the risk of incurring double duty. Once, upon arrival at the hub, and again, upon shipment across the UK-EU border to customers. It is vital for all trading companies to review their supply chain and consider using a customs procedure such as customs warehousing, to avoid a double duty liability.
Despite the new trade agreement, border checks and the requirement for importers and exporters to file customs declarations are still prerequisite when moving goods into or out of the EU, and this poses considerable logistical and administrative challenges for businesses. Businesses exporting to the EU are already required to submit customs declarations upon entering the EU's customs territory, and many first-time importers in the EU face unexpected difficulties as their VAT registration is not for international trade, resulting in significant delays.
All intracommunity movements are now treated as imports or exports, subject to UK or EU import VAT, as a result of the elimination of zero-rated Business to Business (B2B) intracommunity supplies. Two Economic Operators Registration Identification (EORI) numbers are now required for businesses transporting goods between the UK and the EU.
EU businesses without a presence in the UK will be required to appoint an indirect customs representative in the UK for UK importation purposes.
On B2B transactions, where UK businesses purchase from a supplier in one EU member state in order to sell to a business customer in another EU member, the EU VAT triangulation simplification has been lost. This could result in additional VAT registrations.
Importers of non-controlled goods from the EU into the UK are currently allowed to delay submission of their customs declaration to HMRC for up to six months from the date of import. Businesses will have another challenge to overcome as from 1 July 2021, as UK customs will require complete customs entries to be submitted at the time of delivery.
Overseas sellers of goods to customers in the United Kingdom must now register for VAT in order to account for UK VAT on sales of consignments worth less than GBP135. Where goods are sold through an online marketplace, the online marketplace is responsible for registration. Vendors from the EU who trade directly with UK customers must register separately. Consignments with a total worth of GBP135 or more, will remain subject to UK import VAT as well as standard customs rules and processes.
Prior to 1 January 2021, the UK was subject to the EU's distance selling rules, which exempted EU sellers from registering for VAT in the UK unless they sold more than GBP70,000 of goods to UK consumers in a calendar year.
All vendors who sell to the UK without using an online marketplace must now register before proceeding with their first sale.
The place of supply of services supplied and / or of services received between taxable persons in the EU and companies based in the UK, does not change with the exit of the UK from the EU.
As a general rule, services supplied by a UK business to an EU business will continue to be subject to VAT in the country where the customer is established, and the business customer will be liable to account for that VAT through a reverse charge. EU VAT registration numbers continue to be the most reliable indicator of an EU customer's business status, although other evidence may be accepted.
Similarly, services supplied by an EU business to a UK business will generally be considered to have been supplied outside the EU and thus will not be taxable under EU VAT rules but will be subject to the UK reverse charge for the UK business customer.
Business to consumer (B2C) services of a professional, technical, intellectual, or intangible nature provided to customers in the EU were subject to UK VAT until 1 January 2021.However, the law has changed to exempt all such services provided to private customers who are typically based outside the UK (in the EU or elsewhere in the world) from UK VAT. As a result, VAT will be waived on fees for these services provided to individuals who are ordinarily resident in the EU and receive them in a private capacity.
Businesses in the EU and the rest of the world must claim UK VAT incurred after 1 January 2021. Businesses in the UK wishing to claim VAT on purchases made in the EU must submit hard copy claims to the relevant EU member state.
The VAT status of financial services supplies between UK and EU counterparties has changed as a result of Brexit. Certain supplies of financial or insurance services or intermediary services made to EU counterparties are now subject to the same VAT treatment as supplies to the rest of the world, creating a new opportunity to recover VAT on those supplies. Prior to 1 January 2021, UK financial services businesses were generally unable to reclaim this VAT.
From 1 January 2021, the UK is no longer part of the EU's mini one stop shop (MOSS) system, an optional regime for accounting for VAT on cross-border supplies of telecoms, broadcasting and electronically supplied services to private individuals. To continue using MOSS, UK businesses, as well as businesses from other countries that previously registered in the UK, must re-register in an EU member state. Alternatively, they may register for VAT in each EU member state in which they provide these services to private consumers. Additionally, the EU MOSS previously included a €10,000 threshold, which some smaller businesses may have used to avoid the requirement to register for the scheme but that threshold have been abolished.
As a result of the UK's exit from the EU, UK businesses registered for VAT in the EU may now be required to appoint a fiscal representative in each member state where they are registered for VAT.
Brexit has removed the UK of its ability to influence EU-level tax matters but has had no effect on the UK's extensive network of double tax treaties.
After 1 June 2021, UK companies making interest and certain royalty payments to EU companies will be required to withhold income tax at source, unless a lower or zero rate is available under a double taxation agreement. Although the majority of the UK's double taxation agreements effectively eliminate withholding tax on interest and royalties, this is not always the case.
Additionally, beginning 1 June 2021, the treatment of inbound dividend payments from EU resident companies to UK resident associated companies will be determined by the relevant EU Member State's domestic laws and provisions of the relevant double tax treaty with the UK. As a result, withholding taxes on dividend payments from EU-resident companies may become necessary. On the other hand, the UK does not impose a withholding tax on dividend payments, which means that no withholding tax will apply to outbound dividend payments made by UK-resident companies to companies registered in any EU Member State or other country.
*DISCLAIMER: This article and its publication are intended to provide a brief introduction and act as a general guide. This is provided for information purposes only and cannot be utilized as a substitute for professional advice. This document does not represent a legal opinion and one must not rely on it without receiving independent advice based on the particular facts of its own case. No responsibility is accepted by the author or the publishers for any loss suffered from acting or refraining from acting based on the contents of this publication.
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