UK - Brexit Update
Published on April 28, 2021
At 11pm on 31 December 2020 the UK left the EU’s Single Market and UK businesses trading in goods with the EU returned to a position last experienced before 1993. Thankfully though late in the day the UK and EU agreed what was heralded as a “free trade agreement” through the publication of the Trade and Co-operation Agreement, albeit the rules are not straightforward and import duties still apply to the import of goods into the UK and EU unless the goods meet a test on origin known as the Rules of Origin.
Further complications arise for businesses trading with customers in Northern Ireland. This is because of the political will of preserving the Good Friday Agreement and not introducing a Customs border within the island of Ireland.
1. A return to imports and export of goods when trading with the EU
From a taxation perspective the main change arising as a result of Brexit and the UK leaving the EU Single Market concerns the flow of goods between the UK and EU and those goods then being regarded as imports and exports and a return to the obligation to submit import and export entries with relevant Customs authorities, together with the risk of import duties and import VAT. Whereas when the UK was part of the Single Market there was no requirement for import and export entries, no risk of import duties, albeit there were certain VAT obligations depending on the nature of the customer.
2. Has there been any change to the VAT treatment of the provision of services?
In one word “no”. There has been no change by Brexit to the place of supply rules (for services) and the VAT treatment remains the same as before. In addition the rules on the reverse charge when buying in import services remains unchanged and it is a myth that the reverse charge on services is an EU specific requirement – it is not.
3. So when do I need to do import declarations when importing goods into the UK?
In principle these are required immediately from 1 January 2021 when goods are imported into the UK from anywhere outside the UK.
However, for businesses importing goods from the EU HMRC are allowing businesses to delay the submission of import entries for all of 2021, but this requires a business to keep a record of imports and play catch up on import entries at a later date and can involve a duplication of effort.
Please note though that this concession does not apply to imports from countries outside of the EU and HMRC still require import declarations for those imports to be submitted at the time of import.
4. Are all imports from the EU now free from import duty?
Not necessarily so and it depends on whether the imported goods have EU origin status, either by being mined, grown or sufficiently made in the EU. The “Rules of Origin” specific to EU:UK trade are not straightforward and when looking to source goods from an EU supplier it is wise to establish whether the goods have EU origin status and to obtain a declaration from the supplier confirming so – this can either be a form of text on the commercial invoice or in the format of a “Suppliers Declaration”.
Important to note also that the relief from import duty (known as “preference”) has to be claimed on an import entry so very important that the person handling a business’s import entries, usually a freight forwarder or logistics company is made aware of appropriate “origin” status. Trying to amend an import entry afterwards is not straightforward.
5. And what about import VAT?
When goods are first imported into the UK they attract a liability to import VAT at the same VAT rate which would apply if the goods had been purchased from any other UK business.
Helpfully though on 1 January 2021 HMRC introduced an alternative way which businesses could choose for dealing with import VAT and it is now possible for a UK VAT registered business to self-account for import VAT through its VAT return as an output tax entry (box 1), and at the same time reclaiming it as input tax (box 4) meaning no actual cash outlay anymore for import VAT.
In order to deal with import VAT this way a business does not need prior approval from HMRC but the import entry needs to be coded in a particular way in order to “educate” Customs’ computer not to levy a charge for import VAT.
This new way of dealing with import VAT is specific to all imports, and not just to those coming from the EU.
6. Are there merits in having a “Duty Deferment Account”?
A Deferment Account is a formal credit account operated with HMRC which allows import duty charges (and import VAT as was) to be booked to the account at the point of import and settled on the 15th of the following month by direct debit. It helps simplify the process of importing.
Whilst the UK was part of the EU Single Market, because of EU Customs regulations a Deferment Account had to be backed by a bank guarantee (or similar) and this was often prohibitive for many businesses because of its impact on working capital and associated costs.
The UK is no longer bound by these rules and another helpful change taken by HMRC is that they will now allow UK established businesses to operate a Deferment Account for up to £10,000 credit line per calendar month without any guarantee requirement, and for those needing a higher monthly credit limit will allow compliant businesses to waive or reduce the guarantee requirement.
For businesses importing goods regularly then having a Deferment Account is sensible as it enables the payment of any import duty to be dealt with afterwards and saves the hassle of having to transfer funds each time goods arrive in the UK.
7. Do exports of goods from the UK need anything submitted to UK Customs?
Yes. All exports of goods now require the exporting business to submit Export Declarations to HMRC. There are two types of declaration, simplified and full, but due to certain timing requirements it is advisable for businesses to discuss these obligations with the transport company being used to move the goods out of the UK.
8. If I export goods to the EU do I take on any other obligations with paperwork across there?
It all depends on the terms of trade (known as “Incoterms”) agreed with your customer, and also the status of your customer and whether they are in business, VAT registered, or a private consumer.
When exporting goods to a business customer (i.e. B2B) in the EU the simplest solution for a UK business is to sell on an Incoterm other than DDP. DAP (delivered at place) is often preferred and means that any obligation for import entries, duties and VAT falls in the hands of the customer – so no overseas obligations for the UK exporter.
If selling on a DDP basis (delivered duty paid) then the obligation on import entries, duties and import VAT falls onto the UK exporter and can in addition also require the UK business to VAT register in the EU. Careful consideration should therefore be given to these additional ongoing obligations and costs.
In the run up to the UK leaving the EU Single Market some UK businesses selling B2B came under pressure from business customers in the EU to export to them on a DDP basis, the underlying reason being because the EU business did not want to take the risk of an import duty cost. However, with the Free Trade Agreement now in place providing goods being exported from the UK have UK origin status then there should be zero import duty when the goods are imported into the EU which helps with the debate over DAP vs DDP.
When exporting goods to private consumers (i.e. B2C) similar issues arise as with B2B exports, albeit with some UK businesses, especially online retailers, content to sell on a DDP basis because it maintains the customer’s experience. However, doing so can result in multiple EU VAT registration requirements and the decision to sell B2C on a DDP basis should not be taken lightly until 1 July 2021 that is, when simplified VAT accounting arrangements are being introduced by the EU for B2C sales.
Some courier companies are offering a solution for B2C sales and the DDP conundrum but these solutions are not without issue, especially with customer returns.
9. Simplified VAT accounting arrangements for B2C sales of goods being introduced by the EU from 1 July 2021
These changes can not come soon enough for UK based retailers wanting to sell B2C on a DDP basis to customers in the EU. The changes were first agreed by the EU in late 2017 and were due for introduction from 1 January 2021, but then delayed by six months to allow EU member states further time to implement the changes during the pandemic.
From 1 July 2021 a business not established in the EU will be able to opt for one of two different special VAT accounting schemes to deal with B2C supplies of goods to customers in the EU. For a UK business this is likely to be the “Import One Stop Shop” scheme.
Under either scheme the retailer is able to choose to register for VAT in only one EU Member State. It then submits monthly VAT returns (and payments) in that Member State detailing its B2C sales per each of the 27 member states and the tax authority receiving the VAT return shares the VAT payment behind the scenes.
One important caveat to note is that both schemes are only available for the sale of “low value goods”, currently defined by the EU as an individual consignment of not more than Euros 150 and sales above this value will still require other EU VAT registrations.
10. The position with Northern Ireland
As noted above due to the political will of preserving the Good Friday Agreement and not introducing a Customs border within the island of Ireland, Northern Ireland now has a foot in both camps.
- For Customs duty purposes it has remained within the EU Single Market meaning that goods can flow freely between Northern Ireland and the EU without any Customs declarations and also no import duty implications; and
- It remains part of the UK and its VAT territory meaning that supplies of goods from any part of the UK to Northern Ireland remains chargeable at the ordinary UK rate of VAT and recoverable by the other party as input tax in the normal manner.
However, because of the first point noted above and the perceived risk of goods from the UK mainland finding their way to the EU via Northern Ireland “duty free” there are additional obligations imposed on businesses selling goods from the UK mainland to Northern Ireland and a requirement for import declarations in Northern Ireland to deal with the payment of EU import duty or confirmation that the goods are “not at risk”.
In shorthand “not at risk” means little risk of the goods then being moved to the EU, for example sending goods to supermarkets in Northern Ireland in turn selling to consumers, or the duty rate on imported goods would otherwise be zero.
Dealing with supplies of goods to Northern Ireland is not therefore straightforward, but at present the UK has postponed the changes required by the EU until the end of October 2021, although this is subject to challenge by the EU.
In addition, as part of a range of support measures for businesses last year HMRC introduced the Trader Support Service, which can act in effect as a Customs Broker for dealing with necessary import entries in Northern Ireland. At present it is a free to use service but this is likely to change sometime after 2021.
11. Any other support available from HMRC?
As well as the usual helpline facilities HMRC have also introduced a £2,000 grant scheme which can be used to pay for professional advice covering imports, exports, rules of origin etc.
The scheme is funded by £20m and is on a first come served basis and is intended to be open until 30 June 2021, or sooner if all funds have been committed.