How life will change for businesses in January in relation to VAT, customs and excise duties.
For businesses based in Great Britain (GB) there will be fundamental changes to the way they trade with the EU. This article considers VAT, customs and excise duties and provides a high-level overview of how life will change for British businesses in January 2021. A brief summary of the different position for businesses based in Northern Ireland (NI) is also included.
The main post-transition change will be for businesses that send goods to or receive goods from the EU, as these become exports and imports. A GB Economic Operators Registration and Identification number is needed for both. Businesses that submit intrastat declarations for goods arriving in the UK from the EU need to carry on doing so for 2021, but dispatch intrastats will no longer be required. Neither will EC Sales Lists unless the business supplies goods that are treated as intra EU despatches under the NI Protocol. This is good news as it reduces admin.
For businesses based in GB (not NI) only six boxes of the VAT return will be relevant as boxes two, eight and nine relate to EU trading in goods.
Postponed accounting will be introduced for VAT on imports. Import VAT is declared on the VAT return and then recovered on the same return subject to the normal rules. This may help cash flow. It is also important that importers remember HMRC’s new policy that only the owner of the goods can claim import VAT.
Incoterms (i.e. International Commercial terms) will be very important. Not all imports will be subject to VAT though. One of the major changes will be the different rules for consignments valued under £135 (this aligns with the customs duty threshold) where import VAT will not be due and UK VAT will instead be collected at the point of sale. If the UK customer is VAT registered it will account for this point of sale VAT as reverse charge. Valuing the consignments will therefore be key. £135 is the selling price. The Low Value Consignment Relief will be abolished.
Life will also be very different for online marketplaces (OMP) that facilitate sales of goods where the consignment is under £135. They, rather than the overseas seller, will be liable to account for the VAT unless the customer is UK VAT registered. It is therefore important to know what an OMP is.
HMRC’s definition of an OMP is a business using a website or mobile phone app (such as a marketplace, platform or portal) to handle the sale of goods to customers which meets all of the following conditions:
Businesses exporting goods to the EU will need to take account of the terms of sale to identify if they are making supplies in the EU State of delivery which could require local registration. Export evidence will be needed to zero rate the export. The Retail Export Scheme will no longer apply. EU simplifications previously available to UK businesses such as triangulation are likely to not apply.
Reclaiming VAT paid in other EU countries
From 1 January 2021, a UK VAT registered business that wishes to claim VAT incurred in the EU and that is not liable to be registered in the country where the VAT is incurred, must use the 13th Directive procedure which involves submitting individual claims to each authority rather than a portal claim. Each EU Member State will have its own conditions. Reciprocity is needed. The claim period for 13th Directive claims is different from that of the portal claims UK businesses will be accustomed to and the process may be slow.
Although the main Brexit changes relate to goods there are some service changes too. UK tour operators will only have to account for VAT on the margin obtained on UK holidays. Supplies of exempt financial services to EU customers will become supplies with a right of input tax recovery. The UK use and enjoyment rules will change. In addition, supplies of the intangible services listed in Schedule 4A para 16 Value Added Tax Act 1994 (VATA) to EU recipients that are not in business will become UK VAT free. Also, UK businesses registered for the VAT Mini One Stop Shop scheme (MOSS) will need to register in an EU member state of their choice under the non-EU scheme, or register for VAT in all EU countries where they make business-to-consumer (B2C) supplies of broadcasting, telecoms or electronic services. The €10,000 annual B2C EU sales threshold under which UK businesses do not currently need to worry about declaring EU VAT rather than UK VAT on digital supplies in the EU will no longer apply to UK businesses and a zero threshold applies instead.
Customs and excise duties
One of the biggest changes for GB business will be the requirement to submit declarations for both imports into GB from the EU and exports from GB to the EU. This is a departure from the norm that has been in place for almost 50 years. This absolute requirement brings with it an increase in administrative burden and cost. Earlier in 2020, import declaration costs were on average circa £45 to £50 – now, average declaration costs are being quoted as circa £80 – supply and demand. Many are finding it difficult to access customs clearance agents with adequate capacity at all, regardless of price or indeed those willing to take on the additional risk that some representation types bring. In volume terms, HMRC estimate that some 250 to 300 million more declarations will be submitted post-transition per year.
The chance of border delays remains high – with importers having to understand the process both for customs and for their hauliers (who will be confronted by new systems and processes) and being required to provide the correct data fields to customs agents, like commodity codes, values and origin.
Changes in commercial IT systems may be difficult to factor in whist regulations and policy are changing almost daily.
Post-transition, Incoterms (and more importantly, what they actually mean) for movements across the UK/EU border will increase in significance in comparison to movements between member states. With a true customs border, an Incoterm can dictate who within the contract has the responsibility to deal with ‘customs formalities’ – this in turn can result in the need to register and account for VAT in another territory, contract with a customs clearance agent and have an ongoing ‘relationship’ with the customs authorities in a different country – all because DDP (Delivered Duty Paid) rather than DAP (Delivered at Place) was used as an Incoterm.
Without a UK/EU trade deal, customs duty will be due on imports from the EU – even with a trade deal, duty will still be due on products that do not meet relevant ‘rules of origin’. The UK Global Tariff was published in May 2020 (and was updated on 16 December 2020) and provides details of the full Most Favoured Nation (MFN) rates that will apply to all imports into the UK (i.e. not just those from the EU). Although in many product areas the general direction of travel is down in terms of rates, many products and industries retain high rates (food, textile clothing, cars) – the potential for the UK to become a ‘duty free’ island has not been realised. In Exchequer terms, 100 percent of any customs duty collected will be retained by the Treasury as opposed to the 80 percent that is currently remitted to the EU Commission in the form of ‘traditional own resources’.
In an attempt to reduce some of the burden on UK industry, HMRC have introduced a programme of reducing the need for financial guarantees to cover processes like duty deferment accounts and the operation of procedures like customs warehousing in all but limited cases. In addition, the grant funding that has covered training has been extended to reducing some of the cost of implementing ‘self – filing’ software.
Duty relief/special procedures
The focus on Brexit and duty within the boardroom is increasing the appetite for the introduction of duty mitigation processes like customs warehousing or inward processing, all of which increase the need for compliant control and operations.
As excise duties are proper to each individual country, the rates have always been different between EU member states. The end of transition will see little different in this aspect, however the pan EU movement processes – excise movement and control system (EMCS) – will cease to apply to the UK, albeit the GB will operate a version of EMCS for GB internal movements of products in excise duty suspension.
The Taxation (post Transition) Bill was introduced in Parliament on 8 December 2020. As well as dealing with some wider more general UK changes, this Bill notably implements key aspects of the NI Protocol in UK legislation, providing legal clarity for how customs, VAT, and excise duty will be dealt with after the end of the transition period.
The Bill introduces a new model for the VAT treatment of goods arriving into the UK. The current VAT treatment for goods that are sold into the UK by overseas sellers is linked to EU rules; this link will remain for NI unlike the rest of the UK.
The Bill introduces a new Schedule 9ZA VATA to retain the acquisition tax rules for NI. New Schedule 9ZB VATA covers the VAT treatment of goods imported into NI from non-EU countries and goods exported from NI to non-EU countries. It also covers the VAT treatment of goods moving between NI and GB in line with the NI Protocol.
The Bill also introduces the framework for customs duty charges on goods arriving in NI (from both GB and ’rest of world’ countries), subject to conditions agreed under Article 5 of the NI Protocol, as well as a customs duty charge for goods arriving in GB from NI that do not qualify for ‘unfettered access’ to UK markets (non-qualifying NI goods), and goods moved to GB via NI for avoidance purposes. Where UK goods enter NI, EU tariffs should only be due if the goods ultimately enter the rest of the EU or there is a clear and present risk that they will. Clear risk will be defined by the Treasury in regulations. If the UK were to sign a zero tariff deal with the EU then this risk will be lessened. A scheme allowing businesses operating under the NI Protocol to self-declare that UK goods sent to NI will not go to the EU (so EU tariffs would not be due irrespective of the outcome of the negotiations with the EU) is now available, and an up to four month provisional authorisation will be granted to applicants while the applications are processed.
A final note
This article is only a summary of the indirect tax changes that will apply from January. It is also important to stress that there will be major EU changes in July which could impact on UK businesses trading with the EU. Specialist advice should be sought to ensure ongoing compliance. Please speak to your usual KPMG in the UK contact if you would like to discuss the impact for your business.
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