New VAT obstacles in trading with the EU can, with knowledgeable support, often be resolved. The solutions might not be painless, but the pain can be minimised through planning.
There has been considerable disquiet expressed by businesses, and those representing them, about the effect of the additional cost particularly of exporting to customers in EU countries since the UK’s departure from the bloc. Added to the significant disruption caused by the pandemic, many smaller businesses feel that their very existence is threatened by this convergence of events.
Much of this rise in costs is accounted for by the new rules around the application of VAT and the point at which it is payable. Businesses that rely on either exporting or importing to or from customers in the EU face more challenges than previously, but with the right advice risks to their future viability can often be managed.
What is happening now: exporting to the EU
Goods sold by GB businesses to customers in the EU are, subject to certain criteria, zero-rated for VAT. But the difficulty many are currently experiencing is that those same goods are now subject to the local EU rate of import VAT (which varies between EU member states) and sometimes, despite the tariff-free deal with the EU, local import duty applies too. These costs are usually paid by the freight company but passed onto the customer, creating discontent in the purchaser and sullying the reputation of the GB supplier.
While this might be smoothed over with B2B supplies, for B2C transactions this is not easily achieved. Many examples of goods being returned by EU customers because of an unexpected import VAT charge are circulating on social media, adding to the uncertainty experienced by smaller GB businesses that are unable to absorb these additional costs. Some businesses have been suspending shipments to the EU while they figure out how and if they can resolve this challenge.
With sufficient preparation, solutions can often be found to both B2B and B2C exports to EU customers, even if not always cost-free.
Find a VAT-friendly jurisdiction
The preparations set now by business would ideally take account of and prepare for changes arising later this year in the EU. From 1 July 2021, new EU ‘One Stop Shop’ (OSS) rules are coming into force. GB suppliers selling to customers across the EU will no longer have to register for VAT in all the countries in which they import or sell, and their reporting obligations will be simplified.
There are some solutions when selling into the EU where the GB supplier has a choice of EU member states in which to register for VAT. Considerations vary greatly and include user-friendly systems, language barriers, online access, geographic location for distribution, rate of VAT, etc. Under the new OSS rules, a GB exporter might add to the list a country with a user-friendly OSS system. It is also possible that the otherwise friendly EU jurisdiction chosen by a GB supplier to register for VAT may require them to appoint a VAT representative who would be jointly liable with the supplier for the VAT payments. It is an expensive option and might tip the scales in favour of another EU jurisdiction.
Importing goods to GB
GB businesses importing goods worth more than £135 from the EU will pay import VAT. However, rather than paying VAT at the point of importation and reclaiming it at later date, businesses can account for both input and output tax on the same VAT return which has obvious cash flow benefits. This is postponed VAT accounting (PVA).
Postponed VAT accounting does not require authorisation from HMRC and is available for almost all goods, with exceptions such as excise goods. However, it remains important to inform UK Customs that the UK business is the import of record and that import VAT will be paid under postponed VAT accounting,
The situation in Northern Ireland (NI) is governed by the Northern Ireland Protocol, the purpose of which is to ensure specific goods (such as fresh food products) follow strict Customs processes before moving into the EU or GB from NI. Services are unaffected by the protocol. A central tenet of the Protocol is that NI remains aligned with the EU VAT Union for goods, while remaining part of a single market with GB.
GB-based businesses exporting goods to the Republic of Ireland via NI must ensure EU import VAT is paid (whether by the GB business or the EU customer) in the same way as exporting to any other EU member state. Likewise, a Republic of Ireland business selling into GB via NI must ensure they or their customer accounts to HMRC for UK VAT on importation.
The difficulty for the EU and UK authorities is identifying which goods are “at risk” of entering NI only to be transported on, effectively importing the goods into the EU or into GB. Businesses trading in or through NI are referred to the online Trader Support Service for further assistance with non-VAT issues arising from declarations including “at risk” goods. Businesses trading in goods transported from NI either to GB or to an EU member state are required to register with HMRC for an XI prefix to their GB VAT registration number.
Trading conditions between GB and the EU are more administratively onerous than before we left the trading bloc. The amount of paperwork now required to perform what was a relatively straightforward transaction is already leading businesses to suspend trading with their EU customers while they work out the most efficient and cost-effective way of maintaining their EU market. Some have already decided the hurdles are too high to negotiate and are turning their attention elsewhere. Although the VAT requirements can seem overwhelming, with some careful planning there are ways to mitigate some of the more costly and time-consuming elements.
For further information and advice on how to navigate the new VAT regime, our specialist team would be delighted to have an initial discussion to see if we can help.