On 1 January 2021, the UK left the EU VAT regime. Although the UK has retained a VAT system, it now operates on the basis that it is a third country (with the exception of goods supplied to and from Northern Ireland ("NI"), which continue to be treated as intra-EU trade for VAT purposes).
The UK Government's agreement of the Trade and Co-operation Agreement with the EU does not change the VAT position. The TCA contains minimal provisions relating to VAT and with the exception of NI trade in goods, the UK is in most respects expected to be treated as any other third country for VAT purposes.
There are numerous changes resulting from the UK leaving the EU VAT regime that will impact businesses. In this alert we focus on three key areas in VAT that are impacted:
- VAT recovery for financial institutions - UK businesses that supply financial and insurance services (specified supplies) to EU customers may be able to recover VAT incurred on costs where previously the VAT was restricted from recovery.
- New UK VAT liabilities for online marketplaces and distance sellers of goods - For businesses making distance sales of goods into the UK from the EU, the distance selling regime no longer applies, and there may be a requirement to register in the UK and charge VAT at the point of sale. In addition, online marketplaces facilitating sales of goods in the UK to consumers may be required to account for VAT on those UK sales. New recordkeeping and invoicing requirements will also apply to impacted businesses.
- Northern Ireland trade in goods - NI will remain aligned with EU VAT rules for transactions in goods and, as such, special VAT rules apply between the movements of goods between NI and the rest of the UK and NI and the EU.
We also briefly summarise other changes those doing business in the UK should be aware of from a UK VAT perspective.
From 1 January 2021 the UK is free to introduce changes to the UK VAT laws, departing from the EU VAT Directive. Two such changes that came in with effect from 1 January 2021 are:
- VAT recovery for financial instructions making supplies to EU customers - a beneficial change that may reduce costs for those operating in the industry; and
- VAT on low value distance sales, including the abolishment of the low value consignment relief and introduction of 'deemed reseller' rules for online marketplace - accelerating changes that come into effect in the EU from 1 July 2021.
We discuss each of those changes below.
In addition, in order to implement the Northern Ireland Protocol and to ensure the continued operation of the UK VAT system as a third country to the EU, a number of other changes were introduced to the UK VAT regime, which we also discuss.
Financial Institutions and VAT savings
UK businesses that supply financial and insurance services (specified supplies) to EU customers are entitled to recover VAT incurred on costs where previously the VAT was restricted from recovery. This will bring the rules for supplies made by financial and insurance businesses to EU customers in line with the current rules as they apply to non-EU businesses. Likewise, EU businesses supplying financial and insurance services to UK customers may now be entitled to recover VAT on certain costs, previously not eligible for VAT recovery.
There may be significant cost savings where financial institutions incur costs through a UK establishment and contract with EU customers from the UK, where permitted by regulation. The same would apply for EU financial institutions using a mirrored modus operandi.
Financial and insurance institutions are recommended to review their contracting arrangements to ensure they are optimal from a VAT perspective and mitigate VAT cost for them and their clients.
Alongside this, UK VAT is no longer chargeable on certain cross-border supplies of transfers and assignments of copyright, patents, licenses, trademarks and similar rights, legal advice, banking, financial and insurance services, and supplies of staff. Specifically, where a UK business provides those services to an EU non-business customer the services are treated outside the scope of UK VAT whereas previously UK VAT may have been chargeable. This could be a significant cost saving for the customers of financial and insurance institution, for example, where supplies are made to passive holding or other non-business customers.
UK VAT compliance obligations for online marketplaces and distance sellers
The UK has introduced new rules which change how VAT is accounted for on sales of goods located outside the UK that are imported into the UK in consignments not exceeding £135 in value. The UK has removed the low value consignment relief that previously allowed goods with a value of £15 or less to be imported VAT-free into the UK and moved the obligation to account for VAT to Online Marketplaces ("OMPs") and sellers of goods.
In addition, new rules apply to sales of goods within the UK sold by overseas sellers where the sales are facilitated by an online marketplace.
We have included a high level summary of the changes below. The last minute introduction of the law in December 2020 means many businesses are still seeking clarity on how to apply the rules and manage compliance at the border.
We would note while the rules broadly align with the EU changes for distance sales and imported goods, currently due to come into force from 1 July 2021 there are some key differences. In particular, under the UK regime there is no ability for OMP or distance sellers to opt out of the rules. At this stage it also remains to be seen how much weight HMRC and UK Courts will give to the EU Explanatory Notes for e-commerce in interpreting how the rules should apply. They are of course under no obligation to refer to that guidance at all but given the similar drafting of the UK and EU provisions, we would expect the guidance to be influential when HMRC come to determining what exactly is an OMP.
For goods that are located outside the UK at the point of sale the following will apply:
- The supplier of the goods, or the operator of an OMP involved in facilitating a sale, must register and account for UK VAT at the point of sale for goods sold from outside the UK and imported in a consignment not exceeding £135 in value into Great Britain (GB). This is provided the customer has not given a valid VAT registration number.
- Valid full VAT invoices must be issued for these B2C sales sent to GB customers and there is no import VAT payable. In addition, electronic records must be retained for a period of six years. This will be a significant compliance burden for many overseas suppliers of goods. HMRC have indicated this is necessary to allow them to undertake compliance checks away from the border.
- The supplier, or an OMP involved in facilitating the sale, of goods sent to NI customers must account for UK import VAT on their VAT return for goods imported in consignments not exceeding £135 in value.
- Where goods are sold to a business customer from outside the UK, who provides a valid UK VAT registration number, the supplier of the goods, or OMP should not charge UK VAT at point of sale. Instead, if the customer is in GB, HMRC request the supplier issue an invoice including the reference "Reverse charge: customer to account for VAT to HMRC". Where goods are sent to business customers in Northern Ireland HMRC have stated it will be necessary to elect the use of postponed VAT accounting when submitting the customs declaration for the import and to include the customer's details on the declaration accordingly. The position is different where the goods are already in the UK at the time of sale and sold to VAT registered businesses as the supplier continues to be liable to account for VAT.
- The current rules will continue to apply to consignments valued over £135, i.e. import VAT will be collected by HMRC at the point of importation and postponed VAT accounting may be used to mitigate cash flow implications. The changes will also not apply to consignments of goods containing excise goods, to non-commercial transactions between private individuals, and imports from Jersey or Guernsey that are covered by the Import VAT Accounting Scheme, where existing rules continue to apply.
For goods that are located within the UK at the point of sale the following will apply:
- OMPs, where involved in facilitating a sale of goods in the UK, will have to account for VAT if they are sold through their marketplace by overseas businesses to individual consumers.
- For goods located in NI and supplied to NI customers, overseas sellers will remain liable for UK VAT even where sold via marketplaces. The OMP will not be required to register and account for VAT, but may be jointly and severally liable for any VAT unpaid by overseas sellers. We note the definitions of a marketplace for joint and several liability purposes has been amended to align it to the new deemed reseller legislation.
- For goods located in GB and sent to NI customers and vice-versa, OMPs, where involved in facilitating a sale, will have to account for VAT on sales of goods of any value owned by overseas sellers.
Northern Ireland Protocol
The NI Protocol sets out the unique position of NI, which remains aligned with EU VAT rules for transactions in goods. As part of this, goods moving between NI and GB are treated as imports/exports; while EU VAT simplifications and intra-EU rules remain applicable for goods moving between the EU and NI.
Key VAT points to be aware of with respect to NI are:
- HMRC will remain the tax collection office for NI and a UK VAT registration will cover both NI and GB.
- Those supplying, purchasing or moving their own goods between NI and the EU need to notify HMRC that they are within the scope of the NI protocol, unless HMRC has already identified them as in scope. When goods are supplied under the protocol, an “XI” prefix needs to be included on the UK VAT number when communicating with an EU customer or supplier.
- For sales of goods moving between NI and GB there is an export and import of goods but UK VAT remains chargeable on the sale by the supplier, and needs to be accounted for on their UK VAT return.
- For goods sold from GB, transported via NI, to the EU, the VAT treatment depends upon where the goods are situated at the point at which the transfer of rights to the goods takes place. UK businesses may be obligated to charge the EU customer UK VAT in certain cases, if the structure is not set up efficiently. On the other hand, EU businesses selling goods to GB customers, which move via NI, may be required to register for and charge UK VAT on the sale.
- Where a business moves its own goods between NI and GB (without a sale) the rules differ depending on the direction of the transfer. There is no requirement to account for VAT on a movement of goods from NI to GB but for goods moved from GB to NI, the movements of own goods or goods sold between VAT group members is reportable on the VAT return as an import into NI. There are specific rules for businesses that are not able to recover VAT in full to ensure they do not suffer any additional VAT cost as a result of this new reporting requirement.
- Intra-EU simplifications, such as triangulation, will be available in supply chains involving EU and NI transactions.
Other key VAT implications
- Goods moved into GB from the EU are generally subject to import VAT and will need to be reported on an import declaration. This may have cash flow implications for businesses unless they make use of the new postponed VAT accounting, which allows UK VAT registered business to account for import VAT on the UK VAT return.
- GB businesses that rely on simplifications for goods moving into or out of the UK, including call-off stock, processing and repair relief, and triangulation, are no longer able to apply them in the same way as before. Businesses relying on a UK VAT registration to apply triangulation for goods moving between EU member states need to consider their eligibility to continue to use the simplification. They may be required to register in the EU.
- Overseas businesses may continue to use the EU VAT refund system to claim a VAT refund on expenses incurred in the UK before 1 January 2021, until 11pm on 31 March 2021. After this time EU businesses that incur UK VAT, and are not UK VAT registered are required to apply under a manual refund system. This comes with additional requirements and businesses are recommended to use the EU VAT refund scheme if possible.
- Businesses registered in the UK for Mini One Stop Shop (MOSS) to report digital services sold to consumers in the EU need to register for MOSS in an EU member state. Non-UK businesses reporting UK VAT on digital services via a MOSS registration in another member state need to register for VAT in the UK to account for UK VAT on these services
- Travel operators need to review the application of the EU and UK Tour Operators Margin Scheme (TOMS) regimes.
- Freight transport services for consumers, and restaurant and catering services on passenger transport, between the EU and the UK are no longer intra-EU and may be subject to different place of supply rules.
- CJEU judgements made prior to 1 January 2021 are binding on UK Courts (to the extent they remain relevant under the legislation), and given the same weight as decisions of the Supreme Court of the UK. However, the Supreme Court can choose to depart from prior decisions in certain cases, and the UK government has confirmed its intention to allow the Court of Appeal to likewise depart from CJEU precedent. Going forwards, CJEU decisions will be persuasive but not binding on UK Courts.
Businesses should carefully review any UK activities to consider how they are impacted by the wide sweeping VAT changes that came into effect 1 January 2021.
In the immediate term there may be additional compliance obligations that need to be addressed and longer term opportunities to ensure an optimal VAT structure.