What impact does Brexit have on the way we account for VAT?
5th January 2021
Domestic VAT rules have not changed. However the VAT rules relating to trade within the EU have. The terminology has changed to start with. Previous to Brexit we referred to dispatches and acquisitions. We now refer to imports and export when trading with the EU, which is in line with trade with other countries.
VAT would normally be payable on import, although the Government has introduced “the postponed VAT payment system” to avoid cash flow issues. This means that if you import goods to the UK then you can account for the VAT on the next VAT return, and the goods can be released from customs.
Although nothing will change from a cash flow point of view there will be more administrative requirements.
Please note the rules differ for Northern Ireland, there is more about Northern Ireland at the bottom of the document.
Import VAT (imports greater than £135 in value)
Prior to Brexit VAT registered businesses applied VAT through the reverse charge rules. For example you would have given your VAT number to the supplier and VAT would not have been applied to the invoice.
Post Brexit, import VAT will need to be accounted for on any goods imported from the EU. This is how it worked previously for imports from the rest of the world. This is applied for all goods where the value exceeds £135. The VAT is applied at the point the goods enter free circulation, and this is considered the VAT tax point. This could either be at the port or when the goods are released from customs.
You will need to collect evidence from HMRC demonstrating when the tax point is for your VAT records.
The VAT can either be paid at the tax point, but most businesses are likely to make use of the postponed VAT accounting system. https://www.gov.uk/guidance/check-when-you-can-account-for-import-vat-on-your-vat-return
The postponed VAT accounting system is similar to the reverse charge mechanism whereby import Vat was not paid up front but accounted for as an input and output on the same VAT return. The postponed VAT accounting system is mandatory where you defer the submission of customs declarations.
The postponed VAT accounting system is now available to use for imports outside the EU too.
VAT on services provided to business to business customers within the EU will be subject to tax in the country of the customer. This means that the tax will generally be treated as a reverse charge on the customer’s VAT return in their own country.
Further guidance on how to complete your VAT return for import VAT: https://www.gov.uk/guidance/complete-your-vat-return-to-account-for-import-vat
You will need to obtain a monthly postponed import VAT statement from HMRC in order to complete your VAT return. You will need a Government Gateway account linked to your EORI number in order to register. You should get access now to ensure you are ready to get your first statement: https://www.gov.uk/guidance/get-your-postponed-import-vat-statement.
Import VAT (imports less than £135 in value)
VAT on imports valued at less than £135 will have VAT applied at the point of sale, instead of as import VAT at customs.
For Foreign Business to Consumer Sellers, this means they will have to register for UK VAT and charge UK VAT to non vat registered consumers.
For Foreign Business to Business Sellers, this means the UK VAT will be reverse charged to the customer. In other words the recipient business will account for the UK VAT as a reverse charge on their VAT return. The Recipient business should provide their VAT number to the seller, so that they know they are VAT registered. Otherwise the Business to Consumer rules will have to apply and the Seller will have to charge and account for UK VAT.
Other changes include the removal of low value consignment relief, and online marketplaces involved in facilitating the sale will have to account for the administration of the VAT.
Where do I find the new import VAT codes? You can find the PVA Import VAT codes in the VAT rate settings in QuickBooks.
- Go to Taxes and select Edit Settings
- Select Edit VAT rates, and on the smaller gear icon select Show Inactive
- Switch it on using the toggle
Why can't I see these codes when creating a transaction? These new VAT codes will only appear if the transaction is dated on or after 1 January 2021.
Xero says “Using PVA in Xero will be simple
We have developed a PVA update in Xero. It will be released well before you need to deal with your first VAT Return in the new year. The new functionality will be automatically available at no extra cost to Xero customers who use Making Tax Digital (MTD) or the new non-MTD VAT. Flat rate and old non-MTD VAT Returns will not have PVA functionality.
The first VAT Return that will offer PVA will be due around 7 March 2021, for any period ending 31 January 2021. You’ll need to make sure you include your EORI and VAT registration number on your customs declaration. This will help HMRC calculate your Monthly Postponed Import VAT Statement (MPIVS), which will be available in your HMRC portal.
When creating a VAT Return in Xero next year, you’ll just need to select the ‘PVA option’ button and add the amount from your MPIVS. Xero will then populate your VAT Return automatically. No accounting transactions required. If you can’t or don’t want to use PVA, there’ll be no change to the way you deal with VAT on imports for your business.”
VAT on Exports
Post Brexit exports to EU countries need to be treated like those of non-EU countries. This means they need to be zero rated for UK VAT. This applies to both Business customers and Consumers, which means you no longer need to verify the VAT status of the customer. https://www.gov.uk/guidance/vat-exports-dispatches-and-supplying-goods-abroad#vat-on-exports.
This may mean that businesses selling to consumers in EU countries may need to register for EU VAT and comply with the requirements of the consumer’s country.
Even though you apply a zero rate VAT code, it is important to understand that although no VAT is payable the exports still have to be accounted for as part of the VAT accounting.
Sales of services to businesses in the EU will continue to be subject to tax in the recipient country. Therefore the customer will apply the reverse charge rules on their VAT return. Sales of services to consumers will still be subject to VAT in the country of the seller. (Some exceptions do apply).
UK businesses providing digital services and currently using the Mini One-Stop Shop (MOSS) will need to register for Non Union MOSS. The £10k threshold before having to apply the place of supply rules has now gone. This means more businesses selling digital services will need to register for non-union MOSS. https://www.gov.uk/government/publications/vat-mini-one-stop-shop-non-union-return-guides
Northern Ireland will apply the Northern Ireland protocol, as part of the withdrawal agreement. There are therefore different rules for the supply of goods and services https://www.gov.uk/guidance/trading-and-moving-goods-in-and-out-of-northern-ireland-from-1-january-2021
There is also a trader support service to help businesses moving goods between the UK and Norther Ireland: https://www.gov.uk/guidance/trader-support-service
If you're unsure about any of these changes and how to process them it's important that you reach out and ask for help. Support and guidance with these types of things is all part of the service when you're a client with us. Contact us and speak to one of our team and find out how we're not your average accountant.