The United Kingdom’s departure from the European Union on 31 January 2020, and the end of the transition period on 31 December 2020, fundamentally changed the landscape for VAT and customs duties in the UK. For businesses that trade goods with EU countries and beyond, understanding these changes is crucial to maintaining compliance, managing costs, and ensuring the smooth movement of goods across borders. This detailed guide explains how Brexit has affected VAT and customs duties in the UK, highlighting the key changes and what businesses need to consider going forward.
Pre-Brexit VAT and Customs Landscape
Before Brexit, the UK was part of the EU’s single market and customs union. This meant that goods could move freely between the UK and other EU countries without customs checks or tariffs. VAT was handled under the EU VAT system, using mechanisms like acquisition VAT for goods purchased from other EU states, and the reverse charge for certain services. Businesses trading with the EU benefited from simplified procedures, and supply chains operated with minimal friction.
VAT After Brexit: Key Changes
After Brexit, the UK is no longer part of the EU VAT system, resulting in several significant changes for businesses:
1. Import VAT on Goods from the EU
Goods imported into Great Britain (England, Scotland, and Wales) from the EU are now subject to import VAT, similar to goods from the rest of the world. Businesses registered for VAT can continue to account for this using postponed VAT accounting (PVA), allowing them to declare and recover import VAT on their VAT returns rather than paying it upfront at the border. This helps to maintain cash flow and simplifies accounting.
2. Exporting Goods to the EU
Exports from the UK to the EU are treated as zero-rated exports for VAT purposes. This means UK exporters do not charge VAT on sales to EU customers but must keep evidence that the goods have left the UK to support the zero-rating. EU customers are now responsible for accounting for VAT on imports into their own country, often requiring them to pay VAT at the border unless local deferred mechanisms are in place.
3. EU VAT Registration Requirements
Some UK businesses that sell goods directly to consumers in the EU may now need to register for VAT in individual EU member states, depending on local distance selling rules or e-commerce thresholds. The EU’s One Stop Shop (OSS) scheme, available to EU businesses, does not currently extend to UK-based sellers, adding complexity for UK companies selling to EU consumers.
4. Northern Ireland Protocol
Special rules apply to Northern Ireland under the Northern Ireland Protocol. For VAT purposes, Northern Ireland remains aligned with the EU VAT system for goods but follows UK VAT rules for services. Businesses in Northern Ireland continue to treat sales and acquisitions of goods with the EU as intra-community transactions, while movements of goods between Great Britain and Northern Ireland are treated as imports and exports with customs declarations and potential VAT implications.
Customs Duties: New Challenges
Leaving the EU customs union means customs declarations and duties now apply to trade between the UK and the EU. This has added complexity and potential costs for businesses:
1. Customs Declarations
Importers and exporters must now complete customs declarations for goods moving between the UK and the EU. This involves providing detailed information about the goods, their value, origin, and classification codes. Failure to provide accurate information can result in delays, fines, or goods being held at the border.
2. Rules of Origin
The UK-EU Trade and Cooperation Agreement (TCA) allows tariff-free trade between the UK and EU, but only for goods that meet specific rules of origin. Businesses must prove that their goods originate in the UK or EU to benefit from zero tariffs, often requiring detailed supplier declarations and record-keeping. Failure to meet these requirements can result in tariffs being applied.
3. Customs Duties and Tariffs
For goods that do not meet the rules of origin or are imported from other countries, customs duties and tariffs may apply under the UK Global Tariff schedule. Businesses must classify their goods correctly and calculate any applicable duties to ensure compliance and accurate pricing.
Impact on Supply Chains and Logistics
Brexit has disrupted established supply chains, leading to delays, increased paperwork, and higher costs for many businesses. Longer lead times, customs checks, and potential tariffs have required businesses to reassess their logistics strategies. Some companies have established EU distribution hubs to maintain seamless trade with EU customers, while others have faced challenges adapting to the new rules.
Compliance and Record-Keeping
Post-Brexit, businesses must maintain thorough records of imports, exports, VAT accounting, and customs declarations to demonstrate compliance and support any claims for zero-rating or reliefs. Accurate record-keeping is also essential for audits and to avoid penalties from HMRC or EU tax authorities.
Practical Tips for Businesses
Here are some practical steps businesses can take to navigate the post-Brexit VAT and customs landscape:
- Review Your Supply Chains: Understand where your goods come from and where they are sold to ensure compliance with VAT and customs rules.
- Use Postponed VAT Accounting: Register for and use PVA to manage import VAT efficiently and avoid cash flow issues.
- Understand Rules of Origin: Work with suppliers to ensure goods meet the necessary requirements for tariff-free trade.
- Seek Expert Advice: Customs and VAT are complex areas—consult with professionals to ensure you’re meeting all obligations and taking advantage of any available reliefs.
- Consider EU VAT Registration: If selling directly to EU consumers, explore the need for VAT registration in relevant member states.
Conclusion
Brexit has had a profound impact on VAT and customs duties in the UK, requiring businesses to adapt to a new regulatory environment. From import VAT and customs declarations to rules of origin and Northern Ireland’s unique status, staying compliant and efficient demands planning and expertise. By understanding the key changes, investing in training and systems, and seeking professional support, UK businesses can navigate these challenges and continue to thrive in the post-Brexit landscape.
