The end of the Brexit Transition period on 31st December 2020 saw the new regulations and compliance requirements placed on UK firms exporting goods into the EU. The Free Trade Agreement negotiated between the UK and the EU thankfully eliminated many tariffs and quotas on goods traded. However, the VAT consequences of the UK now being outside the Single Market and Customs Union were not addressed in the FTA.
The Before: VAT in the Single Market
Prior to Brexit, the UK traded within the Single Market, which allowed British businesses to benefit from various EU VAT directives that effectively reduced or removed VAT liability on goods trading within the Single Market. Given that VAT rates can be as high as 21% in countries to which UK businesses often transport goods, the Single Market offered significant financial relief when it came to VAT. Overall, VAT implications on trade were minimal, and if levied, there were various simplified mechanisms for businesses to reclaim VAT.
New VAT Requirements after Brexit
Previously in the Single Market, an Intra-Community supply meant that VAT of 0% was applied and it was the end consumer that ultimately paid VAT. Now, UK companies face considerably more paperwork from the need to restructure their VAT set-up—including new registrations and applications. Failing to do so could result in penalties; or worse - the goods will not reach their destination. There are Incoterms where businesses could pass the Import VAT charge onto their customers; however, the financial burden could lead to losing customers or delays in customers receiving their supplies.
After Brexit, goods shipped from the UK to the EU are now considered exports into the EU, therefore are subject to the same compliance requirements as exports from as any other country outside of the EU. For most British businesses, this is the first time they have had to deal with import VAT and the associated paperwork. VAT registrations are now required in one or more countries in the EU (depending on whether the transaction is B2B or B2C) because the goods are treated as 3rd party supplies. The rules that previously created thresholds whereby UK businesses could sell low-value goods without a VAT registration have also been eliminated.
Other Trade Considerations
Some European countries also now require a Fiscal Representative to act as their “VAT agent”. There could be several forms in different languages to complete for this requirement, adding to the costs and administrative burden of trading. Moreover, UK businesses need to obtain a new EORI number, separate to the one they already have. Incorrectly completed import documents could mean any recoverability of the import VAT is either at risk or made impossible. The key task of British businesses now is to make sure they are set up correctly for trade with the EU - and sooner rather than later. Even if businesses only start to restructure now, there are still opportunities for reclaiming any Import VAT already suffered.
Author: VAT IT
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