Trade with the UK: VAT and customs consequences of Brexit

The trade between the EU and the Great Britain (GB) (the UK excluding the Northern Ireland (NI)) is accompanied with customs’ borders, formalities and paperwork including entry and exit declarations after 2020. Imports need to comply with EU/UK product rules and are subject to checks and controls for safety, health and other public policy purposes, including all necessary SPS controls applicable between the EU and the UK. Without a deal, tariffs and quotas would have also been imposed on trade between the EU and UK.

Import VAT is due, even if customs duties are not payable. UK VAT registered businesses will be able to use the postponed import VAT accounting.

In light of the exceptional circumstances of the deal being made just before the end of the Brexit transition period, the deal applies on a provisional basis until 28 February 2021. It needs to be formally approved by the UK and EU various institutions.

If your business sells goods in the UK or your goods transit the UK then you definitely are impacted those changes. Brexit also may have impact on your business if you provide services to UK consumers or purchase goods or services from suppliers in the UK. You also need to be ready if you are a UK business trading with EU27.

Below we provide you with an overview of major changes as well as possibilities to simplify you compliance and improve your cash flow position. Our overview is based on the current information, rules and regulations regarding the changes which will take place in January 2021 and is subject to change when more information is provided or any new legislation is enforced. Our memo is high-level and does not take into account your supply chain or any specific transactions that your company may have. Please contact us if you need a tailor-made advice on and topics.

Background

Paperwork that businesses needed to complete until the end of 2020 when selling goods in UK/EU was minimal: only an invoice and transport documents were generally required. From 1 January 2021, businesses face customs paperwork, potential inspections and regulatory compliance when moving goods from the EU into the UK or vice versa. Businesses that have not previously traded with third (non-EU) countries, need quickly to familiarize themselves with customs procedures and formalities regarding import and export of goods. They will need to engage in customs clearance procedures which are mandatory in trade with third countries.

Businesses delivering into the GB from EU may have an option to defer submitting customs declarations and payment of customs duties until 1 July 2021 if all required conditions are met. Deliveries into the EU from GB require customs declarations, and forwarders require documents such as compliant invoices, proof of origin and commodity codes of their goods from the businesses.

If your business trades with UK in services then the changes are less fundamental, however, in VAT treatment of certain sectors major changes will take place. For example, providers of B2C digital services who currently use MOSS for reporting VAT in the EU28, may need to register for VAT, appoint a fiscal representative and meet the requirements of Making Tax Digital (MTD) in the UK.

Effect to your business of Brexit in 2021: update on MOSS

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Impact on business relationships and on internal business processes

If you trade with the UK or your UK business trades with EU27, then you should consider the effect that Brexit has on your business. Various aspects should be reviewed critically. Changes in your internal business processes and controls may be needed to manage the new customs paperwork as well as the calculation and payment of customs duties due. In addition, a major review of your transactions’ VAT/customs mapping may be needed, e.g. because UK have changed from EU to non-EU country. Possible other areas to consider may include changes to your accounting/ERP systems; notifying stakeholders of new VAT ID numbers; and engaging with VAT advisors and customs forwarders to understand the customs/VAT rules applicable to your goods.

We recommend to calculate the likely additional cost of importing from EU to UK or vice versa by reviewing the commodity codes, customs value and origin of the goods. Review of existing Incoterms is also recommended. As a result of this analysis, you may find that changes are required in your supply chain or contracts because your deliveries from or to the UK will face additional costs due to the customs duties, paperwork, controls and procedures. Alternatively, use of the customs mitigation procedures could be considered to and to avoid paying too much in non-recoverable duties.

Businesses will need to manage a number of other customs requirements, such as determining which goods are subject to licensing restrictions or prohibitions.

What to do next:

• Check whether your goods attract import duties.
• Check whether any preferential treatment is applicable based on the customs rules of origin of a FTA.
• Make the necessary product-specific origin assessments.
• Take into account various rules such as “insufficient production”.
• Provide stakeholders with the required origin documentation.
• Additional registration (such as REX number) may be required.

Main changes to the trade with UK in 2021

Export/import of goods

The major changes for trading in goods moving across the UK and EU borders, and their impact on businesses from 1 January 2021, include:

• Customs clearance
  Exporters and importers will be obliged to complete customs declarations. Businesses that do not have their exit/entry documentation completed, will be stopped at the border and denied boarding or entry at UK/EU ports.
• Tariffs and other trade barriers
  Unless a preferential treatment applies, e.g. under the EU/UK trade deal (FTA), goods imported into the UK from EU or any other country will be subject to the UK Global Tariff (UKGT). Goods imported into the EU from UK will face EU’s Common External Tariff (CET) unless a FTA is signed with a country where the goods originate from, for example the goods of the preferential origin according to the EU/UK trade deal (FTA), are free from customs duties if all requirements are met, such as Rules of Origin included in the the EU/UK trade deal (FTA).

The Rules of Origin (RoO) in the Brexit deal

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Other important changes for trade in goods:

• Businesses lose a range of VAT compliance simplifications on their EU trade, for example:
• Distance selling thresholds – this means that the VAT registration may be immediately required in UK/EU27 where sales occur. OSS reporting may be an option after EU VAT Package is implemented.

VAT and online sales in 2021: more convenient due to One-Stop-Shop

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• Simplified online EU VAT reclaims (special treatment applies for supplies of goods related to the Northern Ireland (NI)).
• EU MOSS reporting for telecommunications, broadcasting and electronic (TBE) services
  Suppliers not established in the EU can choose one of the EU MSs (e.g. the Netherlands) for declaring and paying the VAT via non-Union scheme of MOSS.
• Simplified triangulations – this may mean additional VAT registration and compliance obligations .
• Fiscal representatives may be required for UK companies in several EU MSs.
  In the Netherlands a fiscal representative is not required unless a non-established company wants to make use of the deferred import VAT accounting or has EU distance sales in the Netherlands.

Options to simplify your trade and improve your cashflow

If you import from EU to UK

• Traders importing standard goods which are already free circulation in the EU from EU to UK can defer submitting customs declarations and payment of customs duties until 1 July 2021, they need, however keep sufficient records of imported goods and account for VAT by the Postponed Accounting procedure.
• Simplification for imported goods into the UK in a consignment not exceeding a value of £135.
  For imported goods in a consignment not exceeding a value of £135 import VAT will no longer be due at the border. Bulk customs declarations may be an option.
• Import VAT in UK could be deferred to a regular VAT return from 1 January 2021.
  Any VAT due in relation to an import could be declared (and reclaimed) via the importer’s VAT return under the Postponed Accounting procedure from January 2021.
• Special rules will apply for the Northern Ireland (NI)
  NI will get a special status according to the NI Protocol of the Brexit Withdrawal Agreement. What concerns the movements of goods and VAT refunds related to sales of goods, NI is treated as if it were an EU Member State (MS). Transactions involving services are not covered by the special NI Protocol, consequently, transactions in services between EU MS and NI will be treated as transactions between MSs and 'third countries' (non-EU MSs). This basically means that NI has to be treated for VAT purposes as a EU MS for movements of goods but as a non-EU MS for the services.

If you import from UK to EU

• Traders importing goods into the Netherlands can defer payment of customs duties.
• Exemption from import VAT and duties applies for consignments not exceeding a value of EUR 22. Exemption from customs duties applies for consignments not exceeding a value of EUR 150.
  After the EU e-commerce VAT package enters into force in July 2021, the low value import VAT relief (EUR 22) will be abolished. Exemption from VAT and customs will apply for consignments with a maximum value of EUR 150 if the taxable persons make use of One-Stop-Shop (I-OSS).
• Import VAT may be deferred to a VAT return in the Netherlands
  When obtaining an import VAT deferment (so-called Article 23) license, Dutch import VAT can be accounted for on the VAT return rather than paying it on the border when the goods are released. Appointing a fiscal representative is required for the companies that are not established in the Netherlands. .
• Using customs mitigation procedures (such as bonded warehousing or inward processing) may be an option to improve your cashflow and minimise your compliance costs.

Trade in services

For services UK (including NI) is now considered a non-EU MS (third state) – this entails the following:

• For certain “intangible” B2C services and B2C transport of goods the place of supply changes
• For financial services to UK customers the VAT deduction applies

Do you wonder what Brexit means for you and what are your options and possibilities? Our indirect tax advisors keep a close eye on VAT/customs developments and can provide you with the most up-to-date information and best-of-class advice regarding your possibilities to get through your Brexit transition. .