As of Jan. 1, 2021, the UK has completed the process of leaving the EU, which began at the end of January 2020. During the year, representatives of the European Union and the UK discussed how to build further relations between the parties in a variety of areas. Negotiations went on for a long time with varying success. In the course of the discussion the new realities in which the United Kingdom and the countries of the European Union will continue to coexist were defined.
One of the things that have forever changed in doing business between the aforementioned parties because of Brexit is the rules for charging and collecting VAT on goods and services. Certain changes came into effect on January 1, 2021, and yet others are only going to be implemented on July 1, 2021. To make it easier for those who strictly follow the letter of the law and are directly affected by the Brexit-related VAT reforms, below is essential and structured information on this issue.
What EU Companies Must Keep in Mind when Trading with British Clients
See below the main Brexit-related changes to VAT payments that apply to EU companies selling goods to UK customers:
- Goods imported into the UK on deliveries, which costs are less than £135, VAT will be charged directly at the point of sale.
- For goods with a value less than £15 the Low-Value Consignment Relief (LVCR), which provided for VAT exemption on imported goods, will no longer apply.
- If goods are sold through online marketplaces (OMPs) such as Amazon, eBay, Wish, etc. - from January 1, 2021 - the responsibility for obtaining VAT payments will be put on those platforms.
- Foreign traders will retain responsibility for accounting for VAT on goods that are already in Great Britain and sold directly to British customers through their website without OMPs engagement. In this case, the overseas seller will have to apply for the VAT ID.
New rules will be relevant when selling goods to British customers if the value of the shipment does not surpass £135. Shipments above this threshold will continue to be eligible for existing customs precepts.
Key Points to Consider for UK Companies Selling Goods to EU Customers
Brexit is a two-sided process, so British companies should also prepare for the new terms of trade with EU countries:
- The first thing a UK company needs to do is to decide with its EU buyer who will be responsible for paying VAT. If the latter is responsible — the UK company will not be liable for this tax. Otherwise, a British firm is in the right to arrange the import of goods into the EU and the payment of import VAT on behalf of customers through the freight forwarder. The payment to the freight forwarder service is reimbursed at the expense of the seller from the UK.
- Resident companies from Great Britain importing into the EU are required to obtain a VAT ID in the country where the goods are introduced.
- In the case of trade with several EU states, to avoid registering for VAT ID in different countries at once, the seller may import all the goods in one country. This will make it possible to fall under the EU VAT zero-rate rules in force until January 1, 2021, for intra-EU deliveries.
The E-Commerce VAT Charges
Starting July 1, 2021, a British business entity using the IOSS system will be obliged to charge and collect VAT in the EU country where they sell goods or services according to the established regulations. These goods will then be freed from VAT charges on the importation, allowing them to be released quickly at customs. To use the IOSS system, a seller will have to register as a VAT payer in one EU country (if a company has shares in several EU countries, registration as a VAT payer is mandatory in all those states).
When the IOSS is not in use, it is possible to apply it to another facilitation mechanism for imports. VAT on imports may be charged to customers by the customs declarant (e.g., postal operator, courier firm, customs agents), who will pay it to the customs authorities through a monthly payment.
Changes to VAT on Services Charges
The alterations to the charging and collection of VAT on services are not as extensive as those on goods but still, they must be considered and well-studied too:
- With effect from 1 January 2021, the rules that applied to the charging and collection of VAT for the provision of services between the UK and EU have been abolished. Therefore, VAT for the above activities will now be charged as for any other third state that is not an EU member.
- For B2B services, the assistance is considered to be provided where the client resides. That is why the UK companies which provide services in the EU are not liable to UK VAT. EU customers will use the “reverse charge” method to show the VAT in their return. Likewise, UK companies buying services from the EU need to apply reverse charge rules in their UK VAT return.
- The £8,818 per year threshold for cross-border sales of digital services by UK companies to consumers in the EU no longer applies, so VAT must be paid on all sales.
- UK companies providing insurance and financial services to EU clients will now be subject to the existing rules on the supply of these services to customers outside the EU.
- The UK and EU suppliers have to VAT register if they have foreign B2C customers in the UK and EU.
- UK Financial Services businesses are able to recover input VAT incurred on the sales to EU consumers.
Brexit is a bilateral process that will affect trade in goods and services between the United Kingdom and EU member states. Both sides will have to be careful and keep a close eye on the new rules.
Clevver understands the depth of the possible difficulties that Brexit has brought to businesses that have trade relations with the UK and offers its help in finding a possible solution to the problem — incorporation in Ireland! Contact us to learn more.
DISCLOSURE NOTICE: Any legal or tax information in this communication (including any attachments) is for information purposes only and not intended to be used as tax or legal advice. The author is neither an Accountant nor a Lawyer and cannot be made liable. Please, contact your tax accountant or ClevverLegalServices LLP for individual consultation.