Perhaps one of the most difficult areas of change for businesses post-Brexit is from a VAT perspective. The simplifications of the Single Market and Customs Union no longer apply, so every import into the UK or the EU becomes liable for VAT, whether importing as an individual or a business. Different rules will apply, and care must be taken to not incur additional, unexpected liabilities.
At the end of the transition period, the concept of dispatches and acquisitions was removed for trade between the UK and EU. The UK is now a non-EU country; therefore exports and imports replace dispatches and acquisitions respectively.
In this article we will look at what this means for your business.
Businesses can still apply the VAT exemption (zero-rating VAT in the UK) for exports, as long as the relevant conditions are met. A supply to the EU is liable to the VAT exemption (zero-rate) where:
In summary, if you are selling goods and they are leaving the country i.e. exported, then you will not have to account for VAT in the UK.
VAT will become due on importation into the EU however. We will look at the implications of this later.
All consignments entering the UK from the EU are now liable for VAT, just the same as shipments from outside the EU have always been.
To ease the burden on UK businesses the Government introduced a postponed VAT accounting scheme from 1st January 2021. Essentially, this means that you do not have to pay the VAT at the time of importation and will, instead, be able to account for it on your next VAT Return.
This will eliminate the cashflow implications of VAT on import as the net effect on your VAT Return liability in that quarter will be zero. You enter the amount due on imports as an output and as input on the same return.
IMPORTANT:
If you want to take advantage of this scheme and account for UK import VAT on your VAT Return, you must tell the person dealing with customs for you, your freight forwarder or customs agent, to select this option on your customs declaration and enter your details as the consignee. Otherwise, VAT will be payable at the time of customs clearance.
As with imports to the UK, VAT is now due on every import into the EU from the UK, just the same as it has always been from countries outside the bloc.
With the aim of mitigating the complexity of this, some EU tax authorities allow the import VAT to be accounted on the next VAT local return, as the UK authorities are doing.
Some Member States allow import VAT deferment instead, so the import VAT is paid at a later date. Postponement mechanisms provide cash-flow benefits, as VAT is not paid upfront, although they do not apply automatically in most cases. There is a lesser benefit for deferment, but it can still be valuable.
Usually, EU businesses or those with an EU VAT number will need to apply for an approval or license to set up postponement or deferment, which could be revoked at any time. Moreover, Member States can impose varying conditions to meet the requirement to be able to use the mechanism.
It is, therefore, necessary to check with the authorities in each Member State the rules which apply.
Different systems apply for B2C transactions which we will review later.
In a B2B supply chain, the Importer of Record (IOR) pays the import VAT to the local tax authority – as determined by the Incoterms.
If you are supplying to a VAT registered EU business, for example a distributor or your end customer is a business, they should be able to account for VAT on the import either through a postponement or deferment mechanism, so the impact on them will be minimal.
Not all customers want to be the Importer of Record, however, as it can bring other responsibilities such as ensuring the goods meet EU standards and specifications. It also increases the cost of goods if there is a liability to pay customs duty, so suppliers need to factor in how much their customer is willing to pay.
It could be therefore, that you decide, or your customers demand, that you as the supplier takes on the IOR role and Incoterms are Delivered Duty Paid (DDP). In this case, you as the supplier will be liable for import VAT and any customs duty.
As a UK supplier you may therefore need or benefit from obtaining a VAT registration in the Member State of import to allow you to reclaim this VAT. The circumstances when you would need an EU VAT Number are as follows:
If you import into more than one EU country directly from the UK, supplying directly to consumers you would need a VAT registration in each country.
If, however, your goods are always imported into one country, for example the Netherlands, and are then distributed around the EU, you could elect to clear all goods in the Netherlands first. They would then be eligible for free circulation around the whole EU. In this circumstance you would just require a VAT Number in the Netherlands. VAT would still be charged to consumers, but B2B customers would not.
This is a potential simplification, but of course it could incur additional transport costs as compared to sending directly from the UK to Italy, for example, or holding stock in each country.
Many companies are looking closely at The Netherlands as an option to route their imports into the EU as it offers one of the most progressive VAT deferment regimes for non-resident importers of goods into the European Union. This includes two principal schemes to reduce or eliminate the import Dutch VAT due. Both involve appointing a VAT fiscal representative, who is responsible for all reporting of VAT or the movement and goods.
As the UK has become a third country for VAT purposes after Brexit, some EU tax authorities require businesses to appoint a local Fiscal Representative in order to hold a local VAT Number.
A Fiscal Representative is a local business who in many Member States takes joint and several liability for the company it represents, and the VAT amounts due.
There are companies that specialise in providing this service. It is recommended to obtain2-3 quotes to ensure costs are competitive.
Selling B2C in the EU changed from 1st January due to the end of the transition period and also again in July 2021 when the EU introduced the long awaited One Stop Shop (OSS) procedure.
From January, VAT became due on import for all shipments sent to consumers as well as businesses. Low Value Consignment Relief @ €22 was withdrawn on 1st July, as part of the introduction of the new One Stop Shop system. So now VAT is due on every import.
How you handle this with consumer orders can have profound implications for business. The options are:
Use the Import One Stop Shop system for consignments up to €150. This effectively gives you one Vat registration for the whole of the EU.
For shipments up to €150 perhaps the best option is to utilise the new Import One Stop Shop system.
The Import One-Stop Shop is a portal for non-EU businesses to ensure they comply with their VAT obligations for distance sales and imported goods to EU consumers. It is free to use for all customers but only applicable to consignments under €150 in value.
If you are a business selling products to EU consumers below €150 in value, this service is for you. Where the value of the goods you are exporting to consumers in the EU exceeds €150 you should adhere to the normal import rules on VAT.
The IOSS covers all goods that are transported or dispatched from outside of the EU at the time they are sold in consignments under €150 in value. This rule applies to consignments with multiple orders. It does not apply to goods that are subject to excise duties such as alcohol or tobacco products.
If your business is based in the UK and makes cross-border supplies where the place of supply is an EU member state, there is no registration threshold. VAT is charged at the rate applied by your customer’s country.
Using the IOSS streamlines the entire VAT process for businesses exporting to the EU. It makes it easier for you to collect, declare, and pay VAT when you’re making distance sales of imported goods that are under €150 in value.
The buyer of your goods is only charged at the time of purchase. You must charge and collect the correct VAT rate for the country where the consumer is located. This can be complicated as EU VAT rates vary by country between 17% and 27%. Your online shop and check out system need to be able to reflect this. The final price the consumer pays therefore will depend on the VAT rate in their country.
Using this system, however, means customers don’t get any unexpected fees when their goods are delivered helping you provide great customer service and build loyalty.
Whatever process you decide on, make sure you communicate the process and responsibilities to your customer before they purchase. No one likes surprises, especially those that require unexpected payments!
Registration can be completed on the portal of any EU Member State and covers you for all distance sales of imported goods to your EU customers. Unfortunately, as a UK company you can only register via a Fiscal Representative based in the EU. They may also help with the administration of the monthly IOSS VAT Returns.
If the distance sale of your goods is processed and facilitated by an online marketplace and platforms such as Amazon, Shopify, WooCommerce and PrestaShop then you may not need to use IOSS as the platform is responsible for collecting and distributing the VAT.
For packages above €150 you cannot use IOSS. There are two options as we have seen earlier:
Supply on DAP Terms
In this case your customer will be responsible for VAT and Duty on import into their country and will have to pay to the courier BEFORE delivery.
Supply on DDP Terms
You are responsible for the import VAT and duty. In order to reclaim this you will need a local VAT registration in every country you sell to.
From an administration point of view supplying on DAP terms is the simplest. It is not a smooth operating model from a customer service perspective, however. As we have seen, your customers would be liable to pay the import VAT and duty in their country which may come as a surprise, plus create hassle and delay if it needs to be paid to the courier before the goods can be delivered.
Supply on DDP definitely creates the best customer experience. Where you have EU Vat numbers, they can be used for direct sales from your website on a DDP basis. This means you would deliver duty and VAT paid to EU countries.
This can only be achieved in those countries where you have a local VAT number. Note that you have to charge the VAT rate in the country of destination as with IOSS.
Another alternative is to use a service such as the Amazon Pan-European Fulfilment Service for EU sales. This would entail holding stock in nominated Amazon warehouse(s) for them to supply direct to consumers. Amazon VAT Services offers a service to make all VAT registrations and on-going administration. This would mean directing EU customers to Amazon rather than your own shop, however, which may not be your preferred route to market.
Finally, some courier companies such as UPS and Parcelforce offer a DDP delivery service where they charge back the VAT to you. You cannot reclaim this but could charge it in advance to the customer from your website.
Either way the customer ends up paying the same final cost, as they will incur VAT at some point. Be aware of the charges your courier will levy for offering this service, however.
Although we will no longer be part of the EU, the requirement to complete an Intrastat report on any imports from the EU will remain for 2021 at least. You must complete the return in the same way as you do today for imports.
For exports, the Government will collect data through the CHIEF/CDS system, and the EU through their own import customs declaration systems, so Intrastat recording is not required.
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