The VAT rules for businesses in Northern Ireland and for businesses that trade with Northern Ireland will change from 1 January 2021, write Frankie Devlin and Jennifer Upton of our VAT team.
Most of the changes will arise in respect of trade in goods, as a result of the operation of the NI Protocol. However, there will also be some VAT changes in respect of trading in services as a result of the UK exiting the EU. The new VAT rules that will apply to trade in goods relating to Northern Ireland will be set out in new VAT legislation and further guidance from HMRC.
These changes will require businesses to consider the impact of the Transition Period ending on business flows, systems and processes. This may require businesses to amend existing trading incoterms, as well as require changes to invoicing, VAT logic and tax codes in ERP/finance systems to capture the VAT changes that will undoubtedly arise.
Under the terms of the Northern Ireland Protocol, Northern Ireland maintains alignment with the EU VAT rules for goods, but not for services. However, Northern Ireland is, and will remain, part of the UK’s VAT system. NI businesses will continue to submit one UK VAT return and have one UK VAT registration number.
We summarise the key changes below but do note that other changes will apply that are not covered here.
From 1 January 2021, for supplies of goods between NI and GB, the way VAT will be reported will broadly continue to apply as it does now. VAT will be charged as if they are domestic UK supplies, even though there is a recognition that supplies of goods between GB and NI (and vice versa) are exports and imports for VAT purposes after the Transition Period ends. There will be a number of exceptions to these rules, including where goods move under a customs special procedure, where the domestic reverse charge applies, where the onward supply of goods provisions are used and where goods are sold by an overseas seller through an online marketplace. In these cases, the importer/purchaser of the goods will have the VAT reporting responsibility.
When a UK VAT registered business moves its own goods from GB into NI it will have to account for output tax as if it had sold the goods to a third party. If it intends to use the goods solely to make taxable supplies, then it can claim the VAT as input tax subject to the normal recovery rules including partial exemption. The movement of own goods the other way from NI to GB does not have the same requirement to account for output tax.
UK VAT grouping will still be available to Northern Ireland businesses. Normally supplies between VAT group members are disregarded and no VAT charge arises. However, VAT groups will be required to account for VAT and reclaim it (subject to the normal recovery rules) where: a) goods are supplied by one group member to another and the goods move from GB to NI; and b) supplies are made of goods located in NI at the time of supply, unless the supply is between group members that both have establishments in NI.
The margin scheme will no longer apply to supplies of second-hand goods in NI where those goods have been brought into NI from GB and VAT will be chargeable on the full selling price. This change could be very detrimental to certain business sectors that rely on the margin scheme, as well as potentially increasing prices for the consumer.
The terms of the Ireland/Northern Ireland Protocol require that Northern Ireland maintains alignment with the EU VAT rules for goods (but not services).
Therefore, there will be no change to the current VAT rules in respect of goods traded between Ireland and NI with the exception that NI businesses and those trading in goods in NI will be required to use an “XI” prefix in front of their VAT registration number rather than the “GB” prefix when trading with EU suppliers and customers.
Note complex rules will apply to goods shipped from GB through NI to ROI and from ROI through NI to GB. This may require the use of procedures such as onward supply relief, or customs transit, to simplify the VAT implications, however, this will have to be considered on a case by case basis. The incoterms and the time at which ownership transfers are also likely to become an important factors in determining the VAT treatment in these cases.
The impact of the UK leaving the EU can affect supply chains involving UK companies even if the goods do not physically enter or leave GB.
Both GB and NI established businesses should review their supply chains to determine if they are availing of any VAT simplification measures applicable to trading in goods in the EU, as these reliefs may no longer apply, particularly for GB businesses.
Intra-EU rules and simplifications, such as triangulation, will not be available for movements of goods involving GB. However, such simplifications will be available for movements of goods involving EU member states and Northern Ireland, or where the intermediary is identified as moving goods in, from, or to, Northern Ireland in the course of its business.
Businesses that move goods between NI and non-EU countries, make a customs declaration, or get a customs decision in Northern Ireland, will need to get an EORI number with the prefix XI to report the movement of these goods. For NI businesses that are already UK VAT registered, HMRC have said they will automatically issue the XI EORI number to them by mid-December (or the business can opt to make an application if they do not receive one).
As Northern Ireland maintains alignment with the EU VAT rules for goods, the distance sale rules in respect of sales into Northern Ireland from EU member states will remain the same (until the EU rules change on 1 July 2021).
For the import of goods from a location outside the UK and EU into NI for sales to consumers, where the value of the consignment does not exceed £135 in value, the liability for import VAT will lie with the seller or online marketplace, where it facilitates the sale. The overseas business or online marketplaces will be required to register for UK VAT and be liable to account for the import VAT on their UK VAT return. This is irrespective of where the overseas business or online marketplace is established.
Where the value of the consignment from a location outside the UK and EU is in excess of £135, for business to consumer imports of goods, import VAT will continue to be payable by the consumer under the same processes as today.
It is important to note that the VAT rules relating to services is not covered by the Protocol and as such Northern Ireland will follow all the normal UK VAT rules for services. While the VAT treatment applicable to the supply of most B2B services between NI and Ireland and other countries will broadly remain the same, there are a number of issues that should be considered:
We expect the VAT recovery position for UK (both NI and GB) businesses supplying VAT exempt financial services to non-UK customers (including customers in Ireland) should improve from 1 January 2021 onwards, as such services should be regarded as “specified supplies” giving rise to VAT recovery on associated costs post Brexit. Similar changes may also apply for Irish businesses supplying VAT exempt financial services to customers located outside of the EU (including GB and NI customers).
This is a significant change from the rules applying currently and may significantly improve VAT recovery for financial services businesses.
For NI established businesses who incur VAT in other EU countries, they can continue to use the EU VAT refund system to make a claim for a refund of VAT incurred in an EU member state, where the EU VAT is incurred solely in respect of goods (so the EU VAT refund system will not be available to NI businesses when the EU VAT relates to services and in this case a 13th Directive claim will be required). Further guidance is expected on the practical application for such refunds.
The method by which GB companies reclaiming VAT incurred in EU member states in the absence of a VAT registration in that member state will change from 1 January 2021. From that date, all VAT refund claims (for goods and services) will need to be made using the 13th Directive process, where the application is submitted to the tax authority in the EU country where the VAT was incurred.
Transitional rules will apply for VAT incurred in 2020 up to 31 March 2021.
NI entities trading goods with EU entities will still be required to record the value of such transactions in the statistical boxes on their UK VAT returns, in EC Sales Lists and in Intrastat returns following the end of the Transition Period.
From 1 January 2021, GB entities must continue to submit UK Intrastat arrivals declarations for goods imported from the EU (including Ireland) into GB until 31 December 2021. It will no longer be necessary to submit an Intrastat declaration for goods exported from GB to the EU following the end of the Transition Period.
EC Sales Lists and Intrastat returns will not be required for sales between GB and NI.
As the VAT changes will be significant from 1 January 2021 and will be complex in certain areas, businesses should consider how they are impacted. For further information on any of the items listed above, please contact Frankie Devlin or Jennifer Upton of our VAT and Customs team. We'd be delighted to hear from you.