UK exited EU VAT regime 31 December 2020 - Brexit

The UK exited the EU VAT regime, Customs Union and Single Market from 1 January 2021. This means the loss of a range of compliance simplifications and the imposition of customs declarations, goods regulations, services and import VAT. A Brexit Trade and Cooperation Agreement deal with no goods tariffs or quotas was agreed in time for the end of the Brexit transition period on 31 December 2020.

If you want to contact the author for free VAT guidance on related issues: richard.asquith@avalara.com Northern Ireland Brexit VAT regime will take-up a special dual position. You can also check our full Brexit VAT and Customs Checklist. 

31 Dec 2020 exit from EU VAT regime, Customs Union and Single Market

Under the terms of the Brexit Withdrawal Agreement (WA), the UK has an exit transition period until 31 December 2020. The UK will continued to apply EU law during this period, with a few exceptions, as if it were a Member State. 

Brexit VAT Changes

The major changes for UK and EU businesses following the UK leaving the VAT regime include:

• The UK will no longer have to assume the EU VAT Directive rules into its own VAT Act. For example, it will no longer have to maintain a minimum VAT rate of 15%. However, since its VAT rate is 20%, and the consumption tax accounts for almost a third of tax revenues, any reduction is highly unlikely.
• The UK will have complete control over its reduced VAT rates, which are currently restricted within the rules of the EU VAT Directive. Although this may be a moot point from 2022 as the EU states have agreed that they will enjoy full rate setting powers.
• The ending of zero-rated B2B intra-community supplies; all movements are now imports or exports, subject to UK or EU import VAT. Businesses moving goods now need two EORI numbers to move goods between the UK and EU.
• By way of compensation, the UK has introduced a Postponed VAT Accounting import VAT deferral scheme so no cash VAT payment has to be made by business importers to UK customs. However, many EU countries do not offer the same scheme for UK businesses importing their goods.
• The loss of Distance Selling thresholds for UK e-commerce sellers of goods to EU consumers. Goods are now be subject to import VAT, and UK sellers will have to consider VAT registering in Europe immediately. Similarly, EU e-commerce sellers may now need to register immediately for UK VAT if they have been selling to UK consumers under the £70,000 threshold.
• Any UK business with a foreign VAT registration in the EU may now face the obligation to appoint a special VAT fiscal representative. This applies in 19 of the 27 EU states. These agents hold direct liablity for any unpaid VAT, and therefore require cash deposits or bank guarantees in exchange.
• On B2B transactions where UK businesses are buying from a supplier in one EU member state to sell to a business customer in another state, they have now lost the EU VAT triangulation simplification. This may mean extra VAT registrations.
• The scrapping of the UK £15 low-value consignment stock relief which exempts imports of goods (including from the rest of EU after Brexit) from VAT. Instead, for goods at £135 or below, sellers or their postal service have to declare and pay to HMRC via a new, quarterly filing, VAT charged at the point-of-sale.
• For UK sellers of digital services to EU consumers, the UK is no longer be a member of the EU Mini One-Stop-Shop single VAT return scheme. UK sellers of electronic, broadcast or telecoms services to consumers will therefore have register in any other EU state, as a non-Union businesses, to continue to file their VAT declarations for EU e-service sales. EU sellers into the UK have to now register with the UK’s HMRC for the same declaration. Any non-EU business which used the UK MOSS registration now has to reregister for MOSS in the EU and separately in the UK under a regular VAT return.
• There are limted changes on the Brexit VAT on services for B2B transactions after the UK leaves the EU VAT regime. The reverse charge will still apply. In the future, the UK may deviate from some of the use and enjoyment rules. There are changes on certain cross-border B2C services to EU consumers (and vice-a-versa).
• UK businesses incurring EU VAT on travel, hotel or other expenses are no longer be able to use the 8^thDirective online VAT reclaim system operated via HMRC. Instead, they must use the 13^th Directive paper-based reclaim process. This requires individual claims to each country where there is a VAT claim. Last UK claims via the 8th Directive will be for the final quarter of 2020.
• As part of the WA, Northern Ireland (NI) is now in a special VAT and customs relationship with the EU. Whilst NI remains within the UK VAT area, it tracks EU rules, including zero-rating for VAT on intra-community supplies across the Irish border. EU VAT on imports into Ireland via Northern Ireland are collected by the UK authorities.
• Intrastat reporting after Brexit is still be required for 2021 for arrivals / imports into GB from the EU. But they will not be required for distpatches / exports to the EU.

Leaving the EU Customs Union

The UK also exited the EU Customs Union at the end of 2020. This was established to remove tariffs and declarations on goods moving between member states.

As a result, all goods moving between the UK and EU require customs declarations, but will not be subject to tariffs. The UK Border Operating Model allows for the deferment of customs declarations until 1 July 2021. Make sure you have two EORI numbers. UK importers and exporters into the EU will need a customs intermediary and use their EORI number. This is because they are now non-resident within the EU Customs Union. If you need help with this or commodity codes, contact Avalara.

The responsibility for completeting declarations, paying any tariffs and import VAT is dictated in the international commercial 'INCOTERMS' contained within the terms and conditions of the contract. Typically, it is the seller who settles the border paperworks and import taxes - 'customs formalities' Common INCOTERMS are Delivered Duty Paid (DDP) and Delievered at Place (DAP). The supplier settles customs and VAT in the forms; the customer in the latter.

The UK has now offered deferred import customs declarations until January 2022.