As we enter the final month before Brexit, the end of the transition period for the UK’s departure from the EU is well and truly in sight. One area which businesses and their advisers should consider is that of VAT on exports to the EU from the UK.
Under current legislation, provided certain criteria are met, the supply of goods can be zero-rated when goods are transported to the EU from the UK and the UK supplier can avoid registering for VAT in the member state where the goods arrive.
Distant selling is also a helpful simplification when a customer is not VAT registered. Currently, provided sales fall below a certain threshold, distance selling allows a UK exporter to charge UK VAT on its supplies to customers in other EU member states without the requirement to register for VAT there.
UK businesses can also take advantage of other simplifications such as triangulation. Once again, certain criteria must be fulfilled. If structured correctly, triangulation allows the UK business to avoid VAT registration in the EU country of destination when the goods are transported there direct from a third EU member state.
The good news for suppliers selling goods to customers in the EU27 is that all exports are expected to be zero-rated. An EORI number should be obtained, but no UK VAT will be charged on sales, but VAT on attributable costs can be recovered.
The challenge will be in resolving VAT issues thrown up upon arrival of the goods in an EU member state. Issues range from identifying who will be responsible for importation, to determining whether local EU VAT registration is required, to the change in EU rules later in 2021.
The current expectation is that goods will arrive in the EU from the UK and will be subject to local EU import VAT and potentially local EU import duty too, although the extent of any import duty will depend upon the detail of the deal (if any) agreed between the UK with the EU.
This raises some planning opportunities as well as significant preparations to undertake. Contracts with customers should be reviewed and if possible renegotiated to keep the supplier’s responsibilities simple.
This will not be possible in all cases. The supplier will then be responsible for importing the goods and must decide which EU member state is best to import the goods. Other suppliers might prefer to avoid Customs delays (see below) by keeping stock in the EU, which will cause potential VAT obligations within the EU.
Country of entry for goods
As a general principle, import VAT and import duty is paid in the country of importation. The VAT and import duty rules and procedures applied by each member state be different from one country to the next. Some countries are more user friendly than others.
Considering VAT rates can be applied differently in different jurisdictions, an exporter should consider locating a jurisdiction that is the most efficient from a VAT and administrative perspective. This might result in different rates of VAT applying to goods supplied from a store under distance selling rules and considerations should include forward planning for the new EU One Stop Shop (OSS) rules where a more user-friendly country could benefit an exporter wishing to register for a non-union OSS once the rules come into force later in 2021. Considerations should also take into account whether a local VAT Representative is required (see below).
Triangulation might not involve a UK export, but the VAT issues arising from Brexit are expected to be similar for a UK intermediary. If triangulation can no longer be used to avoid VAT registration in the country of destination, the supplier might have a choice: either register for VAT in the destination country or in the country from which the goods depart. Similar considerations as to user-friendly countries will apply.
Undertaking this planning now could save time and costs for an exporter by understanding which jurisdictions are more favourable to them.
In many EU member states, a foreign business required to VAT register there is required to appoint a VAT representative. VAT representatives become jointly liable with the supplier for the VAT payments. This requirement might not be attractive to some suppliers since the cost can be high (due to the risk VAT representatives must assume) and the relationship with the VAT representative might require time to formalise.
Delays at customs
From 1 January 2021 there will be a border between the UK and the EU and there will be border checks and additional paperwork for exporters. UK companies will need to know who is responsible for which steps in each country in its supply chain. Understanding what routes an exporter’s goods will take and on what terms (contractual terms, incoterms) should give the business an indication as to where requirements will arise and how to address these.
It is also important to note that goods leaving the UK will be funnelled through border control posts most likely resulting in delays, a particular concern for exporters of perishable goods or with impatient customers. The traditional solution of storing goods in the EU beyond any Customs delays will carry VAT obligations which should be researched as early as possible.
Although exporting goods from the UK will be tricky enough to manage when delays arise at Customs posts, the greater challenge will arise when the goods arrive in the EU.
Contract reviews should be undertaken and renegotiated where appropriate. If the supplier has the import responsibilities, a review of user-friendly and convenient EU jurisdictions should be undertaken and local obligations should be identified and addressed. These changes will affect simplifications such as distance selling and triangulation and the VAT risks can take time to address.