BREXIT - VAT - 26.03.2021

Post-Brexit VAT: tips, traps and pitfalls

Your client’s trade involves exporting goods from a GB warehouse to private customers in several countries. What VAT issues must they consider to ensure these sales will not encounter problems when the goods arrive in the customer’s country?

Zero-rated exports

All sales of goods that leave GB and are destined for any country (EU or non-EU) are now zero-rated as far as UK VAT is concerned - they are classed as exports in all cases. Clients exporting goods must be clear that there is no difference between selling goods to EU or non-EU customers as far as UK VAT is concerned - the concept of “outside GB” is all that matters.

Pro advice. The reference to GB is important: businesses based in Northern Ireland are still part of the EU’s single market, so have different rules for EU and non-EU sales. You will need to review these rules if you have clients trading from Northern Ireland.

End of distance selling

Your clients might be registered for VAT in EU countries to comply with the distance selling regulations that are an important part of EU VAT legislation. The rules mean that if an EU-based business sells more than €35,000 or €100,000 of goods into an EU country other than its own, to non-VAT registered customers, it needs to register for VAT in the other EU country and charge local VAT.

It must also complete monthly or quarterly VAT returns in that country. Each EU country can choose whether to adopt the €35,000 or €100,000 threshold. But since leaving the EU, distance selling is no longer relevant for a GB-based business.

Pro advice. Many GB businesses should therefore have deregistered for VAT in EU countries on 31 December 2020 when the UK’s transitional deal ended with the EU. Check that your clients have done that if it is relevant.

Import VAT

The main challenge for your clients exporting goods post-Brexit is dealing with the arrival of their goods in the EU country where they are making sales. The goods are now subject to import VAT when they arrive, and a customs declaration is needed in all cases. The VAT rate depends on the rate that applies in that country for the goods in question. Your clients will need to be aware of the different rates and note that many countries have higher standard rates than the UK, e.g. Denmark and Sweden at 25%. These higher rates will affect your clients’ profit margin if they sell their goods on a VAT-inclusive basis.

Pro advice. Your clients must also check if customs duty is payable when the goods arrive. This would be relevant, for example, if the goods were manufactured outside the EU and were then shipped into GB and then shipped out again to the EU. These issues are known as “rules of origin” procedures (see Follow up ). Don’t forget that customs duty is a cost that cannot be reclaimed.

Who is the importer?

This is the most important question for your clients to consider. When the goods arrive in the EU, the paperwork for the customs declarations will usually be dealt with by the freight forwarding company or parcel post operator that is shipping the goods. They will need to declare an importer of record on the declaration, who is responsible for paying VAT and any duty. In practical terms, this can only be one of two parties:

  • your client - usually quoting their EU Economic Operators Registration and Identification number if they have one; or
  • their customer - showing their home address.

Local VAT registration

The main problem for your clients is that if they are declared as the importer and sell on the goods in that EU country, they are deemed to be making taxable sales there and will need to register for local VAT. However, if the customers of your clients are always declared as the importer, the registration problem is avoided. But in this situation, it is important that VAT is paid by the freight forwarder when the goods arrive, otherwise they will be held at customs and not allowed into free circulation. We are aware of reported cases of clients’ customers having to contact their local post office and pay VAT to get their goods released. This outcome is not good for future trading relationships with those customers.

Pro advice. A challenge for a non-EU business registering for VAT is that many EU tax authorities require a local tax representative to be appointed who can act on behalf of the overseas business. This is apparently the case in 19 of the 27 member states, although this number could be a moving goalpost as the post-Brexit world evolves.

Pro advice. The representatives are jointly and severally liable for any unpaid VAT of the non-EU business, so their fees can be expensive and the time and paperwork needed to deal with, say, financial guarantees can be a big burden. This is another reason why it is better if the customers buying goods from your clients are declared as the importer.

New rules coming in July 2021

The challenges for your clients exporting goods to private EU customers post-Brexit, with extra paperwork and VAT issues to deal with, might mean that it is no longer profitable to sell goods to many countries. However, important changes are taking place on 1 July 2021 in the EU with the advent of the import one-stop shop (IOSS), which should make life easier for your clients if they make shipments into the EU with a total value of €150 or less (about £135).

This would be relevant, for example, if you have clients who sell clothing into the EU. You need to alert these changes to your clients so they can consider the relevant issues. In summary, they are as below.

Registration. Your clients must register for IOSS - they can do this with the tax authority of any EU country they choose.

Sales tax. For all shipments of goods into the EU with a total value below €150 your clients will charge sales VAT to their final customers on a sales invoice, rather than have to pay import VAT as under current procedures. The amount of VAT will depend on the rate that applies for the goods in that country. The sales invoices will be sent with the goods and show the IOSS registration number of your clients.

Monthly return. The tax that has been charged to customers will be declared on a single IOSS return submitted monthly to the tax authority where your clients have registered for the scheme. The return will be divided into the 27 different countries, so that the tax collected in each country can be recorded separately.

Threshold. There will be no import duty - the €150 limit will be a duty threshold throughout the EU.

Pro advice. Although your clients can register with the IOSS in any of the 27 EU countries, it makes sense to choose a country which speaks good English. This means that Ireland would probably be the best choice, followed by Malta and the Netherlands.

Pro advice. Be clear that the €150 threshold is based on the total shipment value and not individual items within that shipment.

Online market places

There is another important issue to tell your clients about, also relevant to the changes being introduced on 1 July 2021. If they only sell their goods through an online market place (OMP), they will not need to register for the IOSS for shipments into the EU that are less than €150. In such cases, your clients will make a zero-rated business-to-business sale to the OMP, and the latter business will be responsible for paying and declaring sales VAT on its own IOSS return.

Pro advice. The IOSS cannot be used if a shipment includes any goods that are subject to EU harmonised excise duties, typically alcohol or tobacco products.

Your clients should liaise with their freight forwarder to ensure VAT is paid and the goods clear customs when they arrive in the EU to prevent delays. Make them aware of the EU’s new import one-stop shop taking effect in July 2021 for shipments of €150 or less, which should simplify procedures.

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