Changes in the UK VAT After Brexit: A Comprehensive Guide

Learn about the changes and their implications on UK VAT After Brexit, navigate the complexities with our comprehensive guide.
Changes in the UK VAT After Brexit

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The UK’s departure from the European Union (EU) has brought about a wave of changes, including how taxes are handled. One significant alteration is the overhaul of Value-Added Tax (VAT) regulations, impacting businesses and people. As a complete guide to navigating the new landscape and ensuring compliance, this blog post will explore many details about UK VAT after Brexit.

Let’s get started with a sip of your favorite coffee brew.

Brexit and its Origin History

If you are interested in knowing what the actual history of Brexit is, let’s explore further, or in today’s case, a bit backward:

Brexit is a word that stands for “British exit.” It’s all about the fact that before 2020, the UK was part of a big group of countries in Europe called the European Union (EU). But then the UK decided to leave, creating new business rules. This change is called Brexit.

In 2016, the United Kingdom made a fundamental decision regarding its membership in the European Union via the Brexit referendum (EU). The United Kingdom, consisting of England, Wales, Northern Ireland, and Scotland, a member of the EU since 1973, had to make a significant decision: to remain within the EU or to leave.

And then, in 2016, the UK held the Brexit referendum. The referendum results indicated that 52% of British voters wanted to leave the European Union (EU), while 48% wanted to stay. After complex negotiations, the UK officially left the EU on January 31, 2020.

UK VAT After Brexit: Impacts on Businesses

Since the historic decision for Brexit, the UK’s departure from the EU has led to many changes, including implications for company formation and VAT regulations.

While domestic VAT rules within the UK remain unchanged post-Brexit, significant adjustments have been introduced in VAT regulations concerning imports, exports, and interactions with the EU.

But how exactly has Brexit altered VAT for UK businesses? Here’s a breakdown of the critical changes in VAT for UK businesses:

Importing Goods from the EU

Previously, when the UK was part of the EU, no import VAT was charged on goods moving between EU member states with a value of £15 or less exempt from VAT. Import VAT after Brexit is now levied on goods imported from the EU into the UK, with the amount of VAT payable determined by the value of the goods.

Changes in VAT for Goods Valued at £135 and Under

After Brexit, the low-value consignment relief was removed, and VAT is now applicable to goods valued at £135 and under. Here are the key points:

  • Business-to-Customer (B2C) Transactions: Sellers are responsible for charging and collecting UK VAT at the point of sale for goods valued at £135 or lower. This means that the seller needs to register for VAT in the UK and charge the applicable VAT rate to the customer. For instance, a French business selling a £120 table to a UK customer must charge and remit 20% VAT to the UK authorities.

  • Business-to-Business (B2B) Transactions: VAT is reverse charged to the customer in B2B transactions. The buyer is responsible for declaring and paying the VAT on their next return if a business is registered. The seller needs to ensure they have the buyer’s VAT number. If the buyer fails to provide their VAT number, the sale might be treated as a B2C transaction, and the seller would need to pay HMRC the VAT.

  • Online Marketplaces (OMPs): In cases where online marketplaces facilitate the sale, they may be held responsible for collecting and accounting for the VAT if specific conditions are met.

Changes in VAT for Goods Valued over £135

After Brexit, the UK implemented changes in the VAT payment process for imports over £135. Here are the key points based on the provided information:

  • Postponed VAT Payment System: Businesses importing goods into the UK can use the postponed VAT payment system. This allows them to account for the VAT on their next VAT return instead of paying VAT upon import. This process enables goods to be released from customs without an immediate VAT payment. A C79 VAT certificate might be used as evidence for VAT records.

  • VAT Tax Point and Payment: Import VAT is applied at the point when the goods enter free circulation. This might occur at the port of entry or when the goods are released from customs warehousing if special customs procedures are used. Businesses must maintain evidence for HMRC to identify the VAT tax point for their VAT records.

  • Postponed VAT Accounting Process: Businesses can use postponed VAT accounting, which becomes mandatory if the submission of customs declarations is deferred. If a business opts for postponed VAT accounting:
    • VAT due on imports accounted for through postponed VAT accounting is declared in Box 1 of the VAT return.

    • VAT reclaimed on imports accounted for through postponed VAT accounting is declared in Box 4 of the VAT return.

    • The total value of imports (excluding any VAT) is included in Box 7 of the VAT return.

    • Ensure you promptly incorporate this claim into your VAT return, aligning it with the purchase period or adjusting it in subsequent returns if the certificate arrives late.
  • Immediate VAT Payment: If postponed VAT accounting is not used and VAT is paid immediately upon the goods entering free circulation, businesses only need to complete boxes four and seven on their VAT return.

  • Similarity to the Reverse Charge Mechanism: This postponed VAT system is akin to the reverse charge mechanism, where import VAT isn’t paid upfront and reclaimed later. Instead, it is reported on the same VAT return as input and output VAT.

These changes aim to provide flexibility for businesses in managing VAT payments on imports over £135, allowing them to account for VAT on their VAT returns rather than making immediate payments at the time of importation.

Exporting Goods to the EU

Post-Brexit, the VAT scenario for exporting goods to the EU has transformed significantly. Now, exports to EU countries mirror those to non-EU nations, requiring a zero rating for UK VAT. This change applies universally, whether a business exports to consumers (B2C) or other businesses (VAT on B2B goods after Brexit).

  • Zero-Rated Exports: Regardless of the customer type, goods exported to the EU are now zero-rated for UK VAT. There’s no longer a distinction between B2B or B2C transactions.

  • Relaxed Regulations: The need to comply with distance selling regulations and verify the recipient’s VAT status has been eliminated for exports to the EU.

  • Potential EU VAT Registration: Businesses selling B2C to the EU might need to explore EU VAT registration and appoint fiscal representatives, subject to varying requirements across EU countries.

For instance, if a UK business sells a table to France, irrespective of whether the buyer is a business or a consumer, the transaction incurs a zero rate of VAT. Understanding zero-rating is crucial; it implies a 0% VAT rate with no UK VAT payable. However, businesses must still include these exports in their VAT accounting and consider any VAT obligations in the recipient country.

Importing and Exporting Services

The changes in VAT after Brexit in the UK for importing and exporting services are more nuanced compared to the alterations in goods trading. Here’s an overview:

  • Exporting Services: Services provided to EU countries now follow a ‘place of supply’ rule. Generally, if the recipient is a business (B2B), the place of supply for most services is where the customer belongs, meaning it’s outside the scope of UK VAT.

    For business-to-consumer (B2C) services, the VAT treatment may vary based on the type of service provided. Some services, like electronic services, could still attract VAT in the EU member state where the consumer resides.

  • Importing Services: VAT rules for services imported from the EU have also changed. Reverse charge mechanisms may apply, shifting the responsibility to account for VAT from the supplier to the recipient if they are VAT-registered.

    Businesses importing services from non-EU countries follow the existing VAT rules applicable to imports.

Changes in VAT Refunds in the UK After Brexit

Post-Brexit, there have been changes to the VAT refund system in the UK, particularly concerning the VAT refund process for UK businesses exporting goods to EU countries and handling VAT on expenses incurred in EU member states:

  • VAT Refunds for EU Business Expenses: Previously, UK businesses could claim VAT refunds on expenses incurred in EU member states through the EU VAT refund system. However, post-Brexit, this mechanism no longer applies.
    UK businesses must follow specific processes set by individual EU member states to claim VAT refunds on expenses incurred within those countries.

  • Changes in VAT Refund Procedures for Exports: The processes for VAT refunds on goods exported to EU countries might vary, and businesses may need to comply with the VAT refund procedures stipulated by the specific EU member states.

    The UK might negotiate separate VAT refund agreements with individual EU countries or utilize existing international VAT refund procedures, subject to bilateral agreements and regulations.

Changes in Distance Selling Threshold (DST)

The distance selling threshold (DST) is a VAT simplification measure that allows businesses to apply their home country’s VAT rate when selling goods to consumers in other EU member states up to a specific turnover limit. However, following Brexit, the DST no longer applies to sales from the United Kingdom to the European Union. UK businesses selling to EU consumers must now register for VAT in the EU member state where the consumer is located.

Changes in Triangulation After Brexit

Triangulation is a VAT planning technique that allows businesses to move goods between EU member states without incurring VAT. Pre-Brexit, UK businesses could participate in triangulation when trading goods with other EU member states.

This is no longer possible between Great Britain and the EU following Brexit. Any movement of goods between these territories will now be considered an import or export, triggering the relevant VAT charges.

Changes for Non-residents in VAT Compliance

Following Brexit, the UK’s Value Added Tax (VAT) system has undergone significant changes, not only for residents but particularly for non-resident businesses:

  • Goods imported into the UK from non-EU countries, including by non-resident businesses, are subject to UK import VAT.

  • Non-resident businesses might need to register for UK VAT if their taxable sales to UK customers exceed the threshold. Registration allows them to charge and collect VAT from customers.

  • Nonresident businesses may need to register for VAT in individual EU member states or appoint a fiscal representative for goods sold to EU customers, depending on the specific country’s rules.

As a non-resident, you should stay informed about these regulations to ensure VAT compliance while doing business post-Brexit in the UK.

Additional Administrative Burdens and Costs Associated with UK VAT Compliance After Brexit

Post-Brexit, VAT compliance for businesses has brought about several additional administrative burdens and costs due to changes in regulations and procedures. Some of the major challenges are as follows:

  • Customs Declarations and Import Procedures: Importing and exporting goods between the UK and the EU requires extensive customs declarations. This means more paperwork, detailed information, and increased time and resources spent on customs procedures.

  • Complex VAT Registration and Reporting: Brexit has also affected the VAT registration requirements for businesses. Businesses involved in cross-border trade may need VAT registration in the UK and EU countries. This causes multiple filings and compliance efforts.

    Additionally, businesses importing goods from the EU may need to register for VAT in the UK. Adapting to different VAT rules amplifies administrative complexity.

  • Adjusting to VAT Changes: Constantly monitoring and adjusting to changes in VAT rates or thresholds impacts pricing strategies and financial planning. Updating systems to reflect these changes adds administrative effort and potential costs.

  • Record-Keeping Burden: Complying with new VAT regulations necessitates meticulous record-keeping of imports, exports, and cross-border transactions, significantly increasing administrative workload and resource allocation.

  • IT Systems Upgrade: Due to significant changes in the UK VAT after Brexit, businesses must accept and adapt to the consequences. To adapt to changes, you might have to spend money to update your IT systems and software, which will cost extra and require training for your staff to work properly.

Understanding these challenges is pivotal for businesses navigating the new VAT landscape post-Brexit. Addressing these complexities efficiently is essential for effective compliance management.

FAQs on Changes in UK VAT After Brexit

Q1: Can I reclaim EU VAT after Brexit?

Answer: Not really! After Brexit, UK businesses cannot use the EU VAT refund system to reclaim VAT paid in EU countries.

Q2: Concerning VAT, is the United Kingdom still a member of the EU?

Answer: No. After Brexit, the UK will no longer be part of the EU for VAT purposes.

Q3: Do UK companies charge VAT to the EU after Brexit?

Answer: After Brexit, UK companies generally do not charge VAT on sales to customers in EU countries. Instead, the customer is in charge of handling the VAT at the importation point.

Final Thoughts

In the wake of Brexit, the UK witnessed a significant shift in VAT regulations, introducing complexities and adding administrative burdens for businesses. As a result, different ways of handling VAT in the UK and the EU led to increased paperwork, compliance costs, and the need for careful navigation of cross-border transactions.

Adapting to these changes in VAT after Brexit in the UK has proven both a financial and logistical challenge, requiring businesses to restructure operations and invest in compliance to maintain smooth cross-border transactions.

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