Brexit, the United Kingdom’s exit from the European Union, has thrown up changes across several facets of business operations, including cross-border VAT. Given the new VAT rules for businesses trading goods and services between the UK and the EU, it becomes of essence to stay compliant and avoid the pitfalls. This article explores key changes in the VAT rules that have come to the fore post-Brexit and provides insights on what businesses need to know to navigate this new landscape.

The pre-brexit VAT landscape

Pre-Brexit, the UK had formed part of the EU VAT area in which the movement of goods was free, with no obligation to effect customs declarations and other VAT formalities. Intracommunity supplies and acquisitions were considered differently from imports and exports, accordingly easing cross-border transactions among EU businesses. That is, goods moving between EU member states with little or no barriers enjoy uniform VAT regulation.

The post-brexit VAT framework

With Brexit, the UK no longer falls within the EU VAT area, and trade across borders is fundamentally different. The key changes are as follows:

Customs Declarations and Import VAT: Goods moving between the UK and the EU are now subject to customs declarations. When goods enter the UK, import VAT is payable, though businesses can use the postponed VAT accounting scheme to account for import VAT on their VAT return instead of paying it immediately. Likewise, EU businesses exporting to the UK will have to deal with UK customs and VAT regulations.

VAT Registration in the EU: UK businesses selling goods directly to consumers in the EU may have to register for VAT in each EU member state to which they sell, depending on the level of sales. EU VAT One Stop Shop will ease the burden by allowing businesses to file only one VAT return for sales to all EU states.

Distance Selling Rules: The former distance selling thresholds are no longer applicable. UK businesses selling goods directly to EU consumers must comply with the EU’s new VAT e-commerce package, including the OSS system.

Import One Stop Shop (IOSS): The Import One Stop Shop is one of the key elements introduced to ease the declaration and payment of VAT on distance sales of goods, which have been imported from third countries including the UK, directly to consumers within the EU. Through IOSS, sellers may collect, declare, and remit VAT to the tax authorities in one EU member state for all EU sales. This system was meant to simplify VAT compliance and better the customer experience.

Other Considerations

  1. Threshold for Using IOSS: The IOSS can be used for consignments of goods with a value of up to EUR 150. Standard import VAT procedures are applied to consignments with a value above this threshold.
  2. Non-EU Businesses: The IOSS can also be used by non-EU businesses, including UK businesses, by appointing an intermediary established in the EU for the fulfillment of VAT obligations.
  3. Digital Platforms: Online marketplaces and other platforms that sell on behalf of third-party sellers are also obliged to use the IOSS for goods shipped to EU consumers. They collect the VAT and pay it directly, declaring it on the IOSS return.

Northern Ireland Protocol: Northern Ireland continues to form part of the EU VAT area for goods, but not for services. In consequence, this creates a unique situation where firms that trade with Northern Ireland have to be aware of distinct rules. Supplies of goods going from Northern Ireland to the EU, or vice versa, are considered intra-community, while supplies from and to Northern Ireland and Great Britain are treated under the UK VAT rules.

Services VAT: Again, the VAT treatment on services has also changed. In most cases, B2B services follow the reverse charge mechanism, whereby the customer accounts for VAT. With B2C services, it depends on the service and where it’s supplied.

Practical implications for businesses

Navigating the post-Brexit VAT landscape involves understanding and adapting to several practical implications:

Customs and Import Procedures: Businesses are now required to deal directly with customs procedures on UK-EU trade. This covers the accurate declaration of customs, knowledge of the tariff codes, and management of import VAT. Delay at borders and additional administrative loads are common challenges.

VAT Compliance and Registration: UK businesses would have to establish where they need to register for VAT within the EU. The OSS for distance sales can make compliance easier, but knowledge of the VAT requirements in each country is a must.

Pricing and Cash Flow Management: The necessity of paying import VAT and the probability of VAT refunds contributing to delayed cash flow are other key issues for businesses. Therefore, companies have to include this cost in their pricing and financial planning.

Systems and Processes: It means updating accounting and IT systems to deal with new requirements for VAT reporting and customs documentation. Work may be smooth with proper training of the staff, and perhaps the need to hire external expertise.

Steps for businesses moving forward

To effectively manage cross-border VAT post-Brexit, businesses should:

Stay Informed: Be updated on the changes in the VAT regulations in both the UK and EU. This includes updates from the tax authorities and seeking advice from VAT specialists.

Review and Adapt Compliance Practices: Regularly review VAT registration requirements, ensure VAT filings are completed on time and accurately, and utilize schemes like OSS where beneficial.

In-house Expertise: Develop in-house expertise or retain customs brokers to effectively manage customs declaration and compliance.

Supply Chain Optimisation: Supply chains need to be reviewed for efficiency and cost-effectiveness in light of the new VAT and customs environment.

Leverage Technology: Investment in robust accounting software that can handle the complexities of cross-border VAT and customs procedures, ensuring seamless integration and accurate reporting.

Summing up

Brexit has brought notable changes to the cross-border VAT between the UK and the EU. The introduction of the IOSS marks a turning point in simplifying VAT compliance for businesses engaged in distance sales to EU consumers. With the IOSS, the possibility exists that businesses might be able to simplify operations and enhance the experience for their customers, thereby keeping up the tempo in the post-Brexit scenario, which is changing relentlessly. Keeping abreast of VAT regulations and using the IOSS as a very valuable tool will go a long way toward helping businesses negotiate these changes and opportunities. If you need more advice on cross-border VAT, and your business has specific requirements, then visit Cross-Border VAT for detailed guidance.

Disclaimer:

This blog is for information purposes only and should not be relied or acted upon when making financial decisions. Always seek professional advise prior to taking any action.

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