While there is still a significant amount of uncertainty surrounding Brexit, and particularly whether there will be a Free Trade Agreement, some things are clear. Additional paperwork will be required for almost any movement of goods to or from the EU which may include the requirement to submit Customs Declarations. When and how import VAT is paid is also changing.
This article outlines some of the main changes and the areas which businesses need to consider.
IMPORTING GOODS INTO THE UK
From 1 January 2021 Import declarations will be required for goods coming into the UK from the EU, this will be the case even if there is a Free Trade Agreement. If a UK business is shown as the importer they will need to show their EORI number on the import entry.
For standard goods, it may be possible to delay submitting Customs Declarations and paying duty (but not VAT, if you are VAT registered) for imports from the EU between 1 January and 30 June 2021. The HMRC guidance confirms deferred declarations will not be available for controlled goods, e.g goods that are restricted, that require a license or are subject to excise duty, or for businesses with a poor tax and customes compliance history. HMRC will be writing to businesses to tell them if they cannot defer declarations.
If import declarations are deferred the supplementary declaration will have to be submitted to HMRC through a procedure called Simplified Declaration. If a business is considering deferring declarations they will need to ensure they meet conditions imposed by HMRC, which are explained here, and that they or their agent are authorized to submit Simplified Declarations and have a Duty Deferment Account.
From 1 January 2021 import VAT will be payable on standard or reduced rate goods arriving in the UK from the EU.
VAT registered businesses will be able to reclaim the import VAT provided the goods are to be used for taxable business activities and recovery is not specifically blocked, e.g. business entertainment.
Under the current rules import VAT is paid at the time the goods are imported and is reclaimed through the VAT return. This is often many months later and has a negative effect of cash flow. From 1 January 2021 a new system called Postponed VAT Accounting (PVA) will be introduced. This will allow VAT registered businesses to pay import VAT and reclaim it through their VAT returns. The payment and reclaim happen on the same return which represents a significant cash flow advantage over the current system. PVA will apply to all imports not just those from the EU. Businesses do not need to apply to use it but certain detail does need to be shown on the entry for it to apply.
The VAT due on imports should be included in box 1 of the VAT return, the amount being reclaimed in box 4, and the net value in box 7. HMRC will be introducing an online system that will provide statements of the monthly import VAT to be shown on the VAT return. If import entries are deferred PVA must be used to declare the import VAT on the VAT return covering the date the import was made.
For non-freight imports, the Government’s Border Operating Model advises that for commercial goods imported in luggage or small vehicles, with a value not exceeding £1500, a simple online declaration should be made before the goods arrive in Great Britain. Standard declarations will be required for higher value consignments, excise, or restricted goods or goods that require a license. In both cases, oral declarations at the point of import using a Red Point/Channel, if one exists, can be made.
VAT and Low Value Imports
Low-Value Consignment relief will be abolished and the treatment of imports of £135 or less will also change from 1 January 2021. The change will not apply to excise goods or non-commercial transactions between private individuals.
Where the UK purchaser is a private individual or a business that does not give the supplier its UK VAT registration number the supplier has to charge UK VAT (assuming the goods are not zero rated). The supplier has to be or become VAT registered and declare VAT on the imported goods to HMRC through their VAT returns.
For business to business sales not exceeding £135, if the customer gives the supplier its UK VAT registration number, import VAT will be accounted for by the customer using the reverse charge on its VAT returns. A similar procedure to PVA.
This change is unlikely to result in significant administrative change for UK customers but it will see VAT being charged on purchases that may previously have been VAT free. VAT registered businesses could improve cash flow by providing suppliers with their VAT number and declaring and reclaiming the VAT on these purchases through their VAT return.
Import duty is not payable on imports of £135 or less unless the goods are subject to Excise duty, so duty is unlikely to be an issue.
Further details of these changes are in an HMRC Policy Paper published in October.
If a Free Trade Agreement is not agreed with the EU import Duty could be payable on imports from the EU. The proposed duty rates are contained in the UK Global Tariff.
If duty is payable having a Duty Deferment Account (DDA) with HMRC is likely to be helpful. A DDA offers several advantages:
- A delay in paying the charges for an average of 30 days
- No need to pay immediately each time goods are cleared
- HMRC can normally clear goods more quickly because they do not have to handle payments for each transaction
Historically HMRC required a bank guarantee for a DDA but it is now possible to apply to waive this requirement. HMRC will consider liquidity and past tax and customs compliance when deciding whether to agree any waiver request. The application for a DDA and guarantee waiver can be made online.
For many goods the duty rate will be zero but if duty is payable it cannot be reclaimed and if a business then sells goods back into the EU duty may well be charged again when the goods re-enter the EU. This could be a significant additional cost. There may be ways to mitigate these, e.g. by using Customs Warehouse, which may be worth considering.
EXPORTING GOODS TO THE EU
Again, from 1 January 2021 Export Declarations will have to be made for almost all goods moving from the UK to the EU. For freight exports, the entry has to be submitted to HMRC electronically using the National Export System (NES) before the goods arrive at the port of export. There are slightly different time limits for different types of export.
Businesses should decide whether they will make these declarations themselves or whether they will use an agent. HMRC authorisation is required to submit declarations.
The export declaration must include a significant amount of details such as:
- the Customs Procedure Code,
- Commodity Code for the goods,
- departure point and destination,
- consignee and consignor,
- nature, amount, and packaging of the good
- transport method and costs,
- any certificates and licences
The NES will generate a unique consignment number which will enable the goods to clear customs and be exported. In addition to submitting the Export Declarations certain goods may require specific paperwork, such as licences, permits and health certificates.
We would recommend a specialist agent is used to submit these declarations, as they are complex and to avoid any delays all relevant paperwork needs to in place.
For postal consignments exported by Royal Mail Group (RMG) the use of the CN22/CN23 customs forms will apply for standard goods not exceeding £900 in value.
For goods exported by parcel operators (other than the RMG), a standard electronic customs declaration will be required for goods over £900 in value, controlled goods, or where the parcel operator is not authorised by HMRC to submit a simplified declaration.
As with imports, goods exported in baggage will have to be declared to HMRC, this could be through an online form, a standard declaration or in the ‘Goods to Declare’ channel at the point of destination.
Evidence required to Zero rate exports
From 1 January 2021 if you are a VAT registered business selling standard or reduced rate goods into the EU you can zero-rate your sale whether it is to businesses or private customers. The evidence required to support zero-rating will be different from that currently required for EU despatches. There will no longer be any requirement for the customer to be VAT registered or for you to quote their VAT number on your invoice.
You must, however, hold either official evidence, e.g. a copy of the UK Customs declaration showing the goods have left the UK, or commercial transport evidence such as waybills, certificate of shipping or International Consignment Notes (CMRs) together with supplementary evidence such as orders, proof of payment etc.
Whichever method is used to export goods businesses need to ensure they have sufficient evidence to show why UK VAT was not charged.
EU IMPORT DECLARATIONS
Businesses also need to consider the import procedures required when the goods enter the EU, in particular who will complete the EU customs declaration, who will be shown as the importer of record and consequently who will pay any import duty and VAT due.
Many logistics and courier companies offer a service where they will pay any import VAT and duty direct to the relevant EU Tax Authorities. This does improve the customer experience as the goods can be delivered to them quickly. Where customers are private individuals who are unable to reclaim any import VAT this is an attractive option although any duty and VAT would have to be taken into account in the price quoted.
The situation with business customers is more complicated. If the UK supplier is shown as the Importer of Record the UK business would pay any EU import VAT and Duty. This would be the case if the goods are sold on a Delivered Duty Paid (DDP) basis. This option offers a good experience for the customer but there are implications for the UK supplier, in particular how does it deal with the EU VAT it has paid.
In some EU countries which operate an extended reverse charge system, such as France, the Netherlands, and Spain, it may be possible to reclaim the import VAT directly from the Tax Authorities by submitting a 13th Directive VAT reclaim. There would be cash flow and administrative costs associated with this.
As an alternative, the UK business could register for VAT in the EU member state of import, reclaim the import VAT through its EU VAT return and charge the customer local VAT. Again, this would involve additional costs and in setting up and administering EU VAT registrations and in many EU countries a Fiscal Representative would be required.
Many EU business customers may be entitled to reclaim any EU import VAT that is due. Many EU countries also operate deferred import VAT payment systems, similar to Postponed VAT Accounting described above, allowing the import VAT to be declared and reclaimed through the customer’s VAT returns. If an EU business currently imports goods from Outside the EU it is likely they will have processes in place to deal efficiently with import VAT and duty.
Having the EU customer as the Importer of Record may therefore result in minimal disruption for them while saving the UK business significant additional cost. It is something we recommend you discuss with your EU customers.
VAT and Duty Changes due to Brexit: What you need to do
Businesses that intend to move goods to or from the EU after 1 January 2021 need to review their business processes and arrangements to make sure they are prepared for the changes on 1 January 2021. In particular we recommend:
- Check whether you have an EORI and if not apply for one now
- Talk to your EU suppliers and customers and discuss who will make the relevant import and export declarations and who will be shown as the exporter and importer
- Make sure your contracts specify who will be responsible for Customs Declarations, taxes and duty
- Speak to the businesses who transport your goods to make sure they have all the information they require
- If you import goods and would like to use PVA ensure whoever submits the import entry is aware of this and has the necessary information
- Consider applying for a Duty Deferment Account
- If you are exporting goods make sure you have correct evidence of exports
- Consider whether you can apply for a Government Grant to help cover training or IT costs
If you would like any advice on this subject and any other VAT related matters, please get in touch with your usual AG contact or email email@example.com