As the internet makes it increasingly easy to buy and sell goods and services abroad, overseas transactions are becoming commonplace for many of our small business clients. Here, we look at how to deal with these transactions from the perspective of UK VAT.
VAT-registered businesses trading with each other can pass the VAT down the supply chain. It is the consumer at the end of the chain who ends up with all the VAT and is unable to reclaim it. As the consumer who ultimately pays the VAT, VAT is known as a consumption tax.
[Sidenote: This article was originally published in 2016, and was completely updated as a result of Brexit and the UK-EU trade deal that was agreed at the end of 2020 and is now in place. Further updates have been made in 2023.]
Until 31st December 2020, the treatment of imported goods and services within the EU differed from those outside it. UK businesses were free to import goods from EU member states without paying any import duties. This is because the UK was still within the EU customs and VAT systems, meaning there were no trade borders and, hence, no custom formalities.
As a result of Brexit, the economic relationship with the EU has ended. The transition period has finished, and from 1st January 2021, the treatment of overseas transactions within the EU changed. Britain’s new status as an independent country outside of the EU means that:
- Goods and services originating from EU countries need to be considered differently than when the UK was part of the single market.
- UK companies will now need to account for import VAT on goods and services originating from EU countries.
- Such goods are no longer VAT-free, as per the rules of intra-community supply when the UK was an EU member state.
To help businesses adjust to the new import and export landscape, the UK Government has introduced a system called Postponed VAT. This initiative enables companies to account for VAT on their next VAT return rather than paying import VAT at the port before the goods are sent to you. This is a new name for the same method used within the EU before Brexit (called “Reverse Charge”).
However, before we discuss all the potential scenarios, we must first clear up a couple of definitions that heavily impact the VAT treatment of different transactions.
Consumer or Business?
A fundamental distinction for VAT is whether someone is a consumer or a business. Generally speaking, if a person or company is VAT registered, it is a business for VAT purposes. If not, they are a consumer. This does mean that a business will count as a consumer if it is not VAT-registered.
To be considered a business sale, you must have the customer’s VAT number. Your VAT number and the customer’s VAT number should be included on the sales invoice.
Goods, Services and the Transaction’s Place of Supply
The difference between goods and services is clear in most cases, as goods are usually tangible items. For example, a table, a car or a cricket bat are obviously goods, while builders, lawyers and accountants supply services because the customer is paying for the skills of the individuals in question. The HMRC definition of a supply of services is ‘something other than supplying goods…done for a consideration’.
If you are buying and selling solely within the UK, you do not need to worry about whether you are dealing in goods or services. However, once you trade outside the UK, this distinction becomes important. This is because VAT is charged in the jurisdiction deemed to be the Place of Supply of a transaction, and this differs if we are dealing with goods or services.
Do you pay VAT on imports of Goods?
Goods originating outside of the UK (including from within EU countries) are only liable for import VAT if the total consignment value of non-excise goods exceeds £135 (goods under the value of £135 are covered separately below).
The rate at which VAT is applied to said goods and services is generally aligned with the rate that would have been applied had they been supplied in the UK, but certain categories carry different rates.
These include (but are not limited to):
- Printed goods
- Educational materials
- Charitable goods
- Medical goods/services
An official list of goods and services that qualify for relief can be found on the UK Government website.
Do you pay VAT on Services from Other Countries?
As a general rule, VAT on services from other countries remains subject to the ‘reverse charge’ procedure. Under this system, businesses act as the supplier and the customer. VAT is charged by a business to itself and is claimed back on their VAT return (subject to the prevailing regulations). In the majority of cases, these two amounts will equate to one another, incurring no additional cost.
Do you pay import VAT on goods valued at £135 and under?
The law has not only changed for high-value consignments.
In September 2018, the UK Government introduced a regulation that, among other things, removed low-value consignment relief (LVCR), which relieved import VAT on commercial goods valued at £15 or less.
In July 2020, the UK Government published the Border Operating Model, followed by a policy paper in December 2020, outlining how the UK will consider its physical and financial border with the EU after the transition period.
Online marketplaces (OMPs) (Amazon Etsy, Ebay, Gumtree etc.) are now responsible for both collecting and accounting for the VAT, but only in instances where they have facilitated the sale. In direct-to-consumer sales, where an OMP is not present at any point of the transaction, the onus is on the overseas seller to account for the VAT with HMRC.
Any goods not exceeding the customs duty threshold (£135) will have VAT applied at the point of sale rather than at the point of importation. This essentially means that UK Supply VAT, instead of Import VAT, is due on said consignments.
What is Postponed VAT accounting?
With all these new regulations coming into effect in a relatively short space of time, the UK Government has taken measures to help VAT-registered businesses with cash flow problems, should they arise.
Instead of businesses having to pay Import VAT up-front at the port and reclaiming it on their next VAT return, Postponed VAT Accounting allows businesses to account for “paying” then “reclaiming” that Import VAT on their next VAT return.
Postponed VAT proposes to be a flexible solution for any business that imports goods to the UK and does not only apply to EU countries. Businesses that already bring goods to the UK from outside the EU benefit from not having to account for import VAT that is usually due.
Postponed VAT also negates the need for goods to be held at customs until the VAT is paid, given that the new regulation allows for its inclusion on the subsequent return.
Do I need to use Postponed VAT accounting?
This is unlikely, but as with most things VAT-related, there are some minor exceptions.
The UK Government allows businesses to apply postponed VAT as they see fit, choosing which imports benefit from Postponed VAT and those dealt with under existing VAT rules.
If businesses want to pay VAT when goods enter the UK after release by HMRC – or after the point of entry – then they will need to receive periodic C79 reports from HMRC. This aligns with how goods used to be treated from countries outside of the EU.
Mandatory Postponed VAT accounting only occurs when businesses defer their customs declarations, e.g. activating their 6-month customs deferment option at the end of the UK’s transition period from the EU.
Businesses in Northern Ireland are treated slightly differently to those on the mainland, as part of the withdrawal agreement. Northern Irish businesses will continue to operate within EU VAT laws, therefore negating the need for Import VAT altogether. Such businesses can still use Postponed VAT for non-EU imports in the same way that mainland businesses can.
How does Postponed VAT accounting work?
The good news is that businesses don’t need to seek any permission from the UK Government. All UK VAT-registered companies that import goods are automatically eligible for the scheme.
Applicants need to follow three simple steps:
- Ensure the goods are in use by their business (as is standard)
- Include their EORI number (starting with GB) on their customs declaration
- Include their VAT number on their customs declaration (if applicable)
Businesses will receive an online monthly Postponed Import VAT statement:
- Unless the business has delayed its customs declaration, each statement will display the total amount of VAT postponed from the previous month.
- Statements are only made available for up to six months after publication by HMRC.
- Businesses must be registered with the CDS to view their monthly Postponed VAT statement.
If businesses use a third party to bring goods into the UK on their behalf (such as a freight forwarder or a customs agent), they will need to be told how to account for import VAT on the customs declaration. A written record must be kept of all correspondence.
Staged implementation of Postponed VAT
1st January 2020 to 30th June 2021:
- UK companies who import standard goods into Great Britain from the EU will be required to use Postponed VAT accounting to account for the import VAT on those goods.
- Making an Entry in the Declarants Record (EIDR) allows the VAT-registered importer to defer submission by up to 6 months from the point of import.
- They will then be required to use Postponed VAT accounting irrespective of when they submit their declaration.
- Where the importer does defer their supplementary declaration, they will not have a Monthly Postponed Import VAT (MPIVS) statement when they complete their return. They will need to use the information on their EIDR (or other commercial records) to estimate the amount of import VAT due and account for that tax on the VAT return relating to the relevant month.
- When the deferred declaration is subsequently submitted, the actual amount of import VAT will be calculated, and the tax due to be accounted for will be recorded on the MPIVS for the month the declaration is submitted.
- This should then be compared to the estimated amount, and any adjustments required should be made on the next VAT return.
VAT on exports
Although the 27 member states of the EU operate in a single market, each country has marginally different rules regarding when a business has to become VAT-registered. For this reason, it’s essential to understand the regulatory nuances.
Following the UK’s withdrawal, goods that are exported to the EU are treated as they would be to non-EU countries (i.e. they’ll be zero-rated for UK VAT purposes):
- The goods are still subject to VAT, but the rate to customers is 0%.
- Businesses must record exports in their VAT records, along with recording them on VAT returns.
Crucially, UK businesses that sell directly to EU consumers will need to meet the EU’s VAT requirements as they would for any other country. If you sell goods in an EU country, you will need an EU VAT number. Depending on its business practices, a company may need to register for VAT in more than one EU country.
The treatment of any sale of services varies depending on whether you are selling to a consumer or a business. If a service is being sold to a consumer, then the Place of Supply is determined as being where the supplier belongs. A UK exporter of services will, therefore, account for UK output VAT regardless of where the customer is situated. This is known as the “origin basis”.
However, if the sale is to a business, the Place of Supply is where the customer belongs. This is known as the “destination basis”. A UK customer of imported services will thus account for UK output VAT and then immediately reclaim it on the same VAT return under the reverse charge system mentioned above.
Businesses must also understand the VAT requirements in the recipient country. Services sold to EU countries are treated slightly differently (these businesses can register for the EU’s VAT MOSS scheme).
With MOSS, a UK business isn’t required to register in each EU jurisdiction, and from 1st July 2021, the VAT MOSS scheme expanded to include physical products.
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Objectively speaking, Postponed VAT should cause UK importers very few problems. The system is designed to mitigate any regulatory confusion following the UK’s exit from the EU and remove the burden of immediate payment for goods and services at the point of entry.
Having said this, it is still a reasonably momentous overhaul to the UK’s VAT system – albeit a temporary one. Any administrative changes to the UK’s import and export system have the potential to bring with them a certain amount of headache for companies used to doing business a certain way.
Our team of expert accountants have put together this article to help you navigate the choppy waters of the UK Government’s proposed Import VAT changes, and we’re ready to assist you in any way you require. Even if you hire an individual or business to take care of customs on your behalf, you’re still partially liable for import VAT.
Get in touch with us and let us help you to achieve peace of mind so that you carry on trading without any mishaps.