Previously we talked about Brexit and your business, this week I want to look at VAT in a post-Brexit world. Last week we spoke about Brexit. This week we’re going to talk about VAT in a post Brexit world.
VAT in a post-Brexit world. What does it look like? Well, in approach, in application some differences.
Let’s deal with the good news, and yes there is some. The bulk of the current VAT rules stay as they are. Your biggest changes will be in your mindset, procedures, and paperwork. Let’s deal with that mindset stuff first.
Your business mindset
Whatever your personal views on Brexit are, it’s happening, and you can’t change that. You can’t put your hands over your eyes and say go away or be like Dorothy in Wizard of Oz to take you home – what a great film BTW!
Business owners have differing mindsets, resilience and being used to changes is part of it.
UK and the rest of the world
When we are talking about VAT and Brexit, the UK refers to England, Scotland, and Wales. When it comes to goods Northern Ireland has special trading status . Northern Ireland will have dual participation in the UK and EU VAT, Customs Union and Single Market for goods only.
From a VAT point of view countries outside of the UK will be the Rest of the World. The 27 remaining countries in the EU will see us as a third country.
What is VAT?
Value Added Value Added Tax, VAT is a Tax that is added to goods and services supplied by VAT registered businesses.
UK VAT is charged on supplies that are treated as made in the UK, and UK VAT is not charged on supplies that are treated as made somewhere else. Typically, these are ‘outside the scope supplies, no VAT for you to add onto what you charge your customer.
Will VAT continue after Brexit?
In principle the UK could abolish VAT after Brexit. The UK abolishing VAT has as much chance as Elvis Presley being spotted on the checkout at Tesco’s! VAT is big tax generator for the UK, and the rest of the world. The Office for Budget Responsibility estimates VAT to raise £136.6 billion in 2019-20, 21% of total UK tax receipts. Above all the government has also indicated it will continue to have a VAT system in the UK. Finally, bear in mind more than 160 countries have a VAT system.
Changes to VAT after Brexit
The big change for VAT in a Post Brexit World is how VAT is charged on trade with the remaining 27 member states.
Above all there are two key considerations.
What your business sells. It will either be goods, services, or a combination
Your customers types that you have, I don’t mean happy, nice, overworked, or demanding – but that’s good to know. In VAT speak, are they fellow businesses (B2B), consumers (B2C), or a combination.
Goods and Services
Goods are physical and tangible, you can see them and touch them. For example, things like food, drink, clothes, machinery, equipment, you get the picture
Services are non-physical and intangible. For example, software, legal, If you supply cross-border telecommunication, television and radio broadcasting, or digital services to non-taxable persons, you may be eligible for the scheme. Services covered under the MOSS scheme include:
VAT treatment of the sale of goods
Post Brexit, goods coming into the UK from the EU will be Imports. Vat, duties, customs declarations, forms, and procedures will apply. Any VAT due on imports will nit normally have to be paid immediately. Phew as far as your cash flow is concerned. Any VAT due will be dealt with under the VAT postponement scheme, and payable when you complete your VAT return.
If you store inventory in the EU, then EU VAT applies ! Your business has a legal obligation to register for VAT there. There are no minimum VAT registration thresholds. If you store inventory in several EU countries, then you must register separately in each member state where it’s held.)
The scrapping of the UK £15 low-value consignment stock relief which exempts imports of goods (including from the rest of EU after Brexit) from VAT. Instead, for goods at £135 or below, sellers or their postal service will have to declare and pay to HMRC via a new, quarterly filing, VAT charged at the point-of-sale.
Once registered, you need to follow the Distance Selling Rules , mentioned in last week’s blog ,
Exports
Goods supplied to countries outside of the UK will viewed as exports. They will be outside of the scope of UK VAT. This means you don’t declare VAT, but you need record the sales on your VAT return. If you are not currently VAT registered, these sales will be counted when figuring out whether you must register for VAT
VAT treatment on selling your services
When it comes to VAT on services post Brexit, our starting point is the place of supply rules. Most importantly this sets the rules as to how VAT applies, fundamentally nothing changes in principle post Brexit.
The place of supply (POS) of a service determines whether the supply is within the scope of UK VAT and whether VAT is payable on that supply.
Let’s look at the general rule for Place of supply of services
- For the place of supply for B2B services, this is where your customer belongs.
- The place of supply for B2C supplies is where your business belongs. It doesn’t matter where your customer is located.
For B2B sales the reverse charge procedure will normally apply. Under the reverse charge procedure, your customer has the responsibility to account for VAT on your supply. Your customer charges itself local VAT and claims an equivalent deduction for the VAT it has charges itself.
VAT Reverse Charging
VAT Reverse Charging post Brexit will not be completely the same from 1st January 2021 so let’s check out what will happen. Firstly, let’s check out what Reverse charging is, and surprisingly it has something in common with collect calls.
When you make a collect call , a reverse charge phone call it’s the bill payer who pays for the phone call. When your UK business receives goods or services from EU suppliers up to 31st December 2020, the Reverse Charge moves the responsibility for the recording of a VAT transaction from the seller to the buyer for that good or service.
Governments like the VAT reverse charge mechanism because it reduces the level of VAT fraud and evasion. It is your customer who is responsible for paying VAT in the country they belong and will be easier to chase than an overseas supplier.
VAT Reverse Charging only applies to services that would be zero rated, reduced rated or standard rated.
VAT reverse charge and some numbers
For example, if you sell goods to one your UK customers for £100 + VAT, they will pay £120. £100 would be yours, and £20, output VAT, has been collected by you to pay to the tax office.
Your UK customer claim the £20, input VAT, from the tax office, in real terms the tax office received the money and then pays it back! The reverse charge mechanism merges these 2 steps together, and your customer declares what they owe and claim all us one.
For example, let’s look at what happens when you sell goods to one of your customers, located in France, and registered for French VAT. They would reverse charge this transaction. You would invoice them, with no UK VAT added.
Your customer would calculate the French VAT owing, as if it has been sold to them in France, and then make a claim for it at the same time. No cash changes hands, and it is VAT neutral.
From 1st January 2021, goods sold into the EU will be exports, . Goods supplied to countries outside of the UK will viewed as exports. They will be outside of the scope of UK VAT. This means you don’t declare VAT, but you need record the sales on your VAT return. If you are not currently VAT registered, these sales will be counted when figuring out whether you must register for VAT
Reverse Charge on B2B services
Where your business does B2B sales the reverse charge procedure will normally apply. Under the reverse charge procedure, your customer has the responsibility to account for VAT on your supply. Your customer charges itself local VAT and claims an equivalent deduction for the VAT it charges itself.
As with any general rule there are always exceptions. These exceptions are covered by HMRC special rules Some of the main exceptions concern services relating to physical property, B2C supplies of telecommunications, broadcasting and e-services, and services in respect of or related to admission to cultural, artistic, sporting, scientific, educational, entertainment or similar events.
If the sales fall under the general rules, then your business customer does not need to be VAT registered. You do need to verify they are a business though, print outs of website, e-mail exchanges. If you are selling digital services B2B then they need to be VAT registered, and you need to be able to verify that.
What do you do if the reverse charge applies?
UK suppliers
Where your business makes sales (supplies) caught by the reverse charge then :
- Validating a VAT number
- If you are the supplier and you are provided with a VAT number, you should check that it is valid
- Go here, to check your customers VAT number is valid.
For imports of goods from outside the UK in consignments not exceeding £135 in value (which aligns with the threshold for customs duty liability), we will be moving the point at which VAT is collected from the point of importation to the point of sale. This will mean that UK supply VAT, rather than import VAT, will be due on these consignments.
Business to business sales not exceeding £135 in value will also be subject to the new rules. However, where the business customer is VAT registered in the UK and provides its valid VAT registration number to the seller, the VAT will be accounted for by the customer by means of a reverse charge.
Making sure you do the right thing using reverse-charge
What you should do if you’re the seller
Where your business makes sales (supplies) caught by the reverse charge then :
- Do not charge VAT on that sale
- On your sales invoices include the words ‘subject to the reverse charge’
- Keep proof that your customer is in business, and where appropriate they are VAT registered
- Make sure you verify your buyer’s location and tax registration number
What you should do if you’re the buyer
- Check the invoice to see that both the tax rate and amount are accurate
- Make sure the invoice indicates that the reverse-charge mechanism is being used
- Declare both your purchase and the supplier’s sale on your tax return
VAT on overseas services
Where you If your business buys services from outside the UK VAT reverse charging applies.
- Convert the value of the services into sterling.
- Calculate the amount of VAT due and include this in your VAT Return.
- Credit your VAT account with the amount of VAT due (as if you had supplied the services).
- Debit your VAT account with the amount of VAT due.
Goods and services bought via the reverse charge counts towards your VAT registration threshold limits. For example, advertising services, like Google ads, Facebook ads need to be monitored.
Sales of digital products
Where your business only sells B2B digital products in the EU then no need to register for EU VAT.
For UK selling in the EU, there is no minimum registration threshold for VAT in a Post Brexit World. VAT is charged at the rate due in that EU country. If your business ever sells a digital product B2C in Europe, even just once then you need to register and get yourself a VAT number.
For instance, if I sell digital downloads of I Hate Numbers and someone in France bought a copy, I would need to charge them French VAT.
If you sell B2C to the EU, then you have 2 options, I do like options.
Option One
On the the other hand, register with each country and comply with each country’s local VAT rules, and timings for administering and paying VAT. If you have customers across the EU, and you are not multi-lingual that could be a real ball ache.
Option two
VAT MOSS
MOSS simplifies things and is the sensible way to proceed.
VAT MOSS is a way of paying VAT if your business supplies certain digital services to other EU countries. The VAT MOSS (Value Added Tax: Mini One Stop Shop) was introduced so that UK sellers could just pay VAT to HMRC, instead of having to register for VAT in every EU country.
What sort of businesses need to register for VAT MOSS?
Where any of your products come in digital form and could be purchased by someone in the EU, then you might need to register for VAT MOSS.
Check out our recorded Live Webinar on EU VAT and your Digital Business. It’s a practical webinar sharing tips, guidance, how to register for MOSS, and guides.
How do you register for and pay VAT MOSS?
To register for VAT MOSS, you first must register for UK VAT. Once you’ve done that, you’ll be able to add VAT MOSS to your HMRC account.
Where your business is already registered with the UK’s VAT MOSS then the period ending December 2020 is the time that you can use it for B2C EU sales. Only include sales made before 1 January 2021 in your final return file by 20 January 2021.
MOSS VAT in a post Brexit world
The MOSS allows non-established service suppliers to file a single VAT return – documenting their sales by member state of consumption – in only one member state.
This return is then distributed to the relevant member states so VAT can be charged accordingly. Businesses established in non-EU countries who use the UK for their MOSS VAT return will have to move their MOSS identification to one of the EU member states to continue using the non-Union MOSS scheme.
Your business needs to register with a new EU VAT MOSS as a non-union scheme member. You can choose any one of the 27 EU countries, all of them will want you to choose them.
UK based businesses that are English speaking are likely to choose Ireland as their EU VAT MOSS buddy. Registration, filing, and reporting are made that much easier when you understand the portal you’re working with and its instructions. If you’re a French-speaking business, then choosing France’s VAT MOSS portal may be preferable.
You cannot register for VAT MOSS in an EU member state before 1 January 2021.
Use the European Commission website to:
- check whether you should register for the Union or Non-Union VAT MOSS
- find out who to contact to register for VAT MOSS in an EU member state
How to deal with the record keeping
VAT in a post Brexit world will need you to tighten up and review your accounting, and e-commerce systems. Evidence, validation, and efficiency is the name of the game. Get it wrong and penalties, fines, and at worst not being able to sell can happen.
There are many software and technology based solutions being developed. One example is Quaderno, which can handle those responsibilities behind the scenes. Their service is full tax compliance and deals with the reverse-charge mechanism.
If you use Quaderno for automated invoices and tax calculation, then the following will be done automatically:
- Confirming the buyer’s location
- If in the EU, verifying the business’ VAT registration number (no fraudsters!)
- Sending a fully-compliant tax invoice, immediately after the purchase
- Indicating on the tax invoice that the reverse-charge mechanism was used
Conclusion
In conclusion VAT in a Post Brexit World will be similar but different. Certainly dealing with change is a mix of sweary words, daunting, and can be overwhelming.
There is a useful checklist as a starter for ten government guidance Talk to your accounting team and try not to get overwhelmed.
If you sell digital products and want to find out more about how EU VAT will affect your business, what to do, take out the stress then access our recorded Live Webinar. Making digital sales means you need to up your game when it comes to using the right systems and software. Life is hard enough without obsessing over tax rules at home and abroad. An easy to use, intuitive helping hand can be found with Quaderno . It calculate sales tax, VAT, and GST (Gross Sales Tax) for you. Quaderno, good not just for the EU and VAT, but for dealing with VAT and sales taxes throughout the rest of the world,
Get in touch with us to see how we can help you and your business with life after Brexit and all your accounting and tax needs. For more business and finance , news, advice and tips, don’t forget to watch our weekly broadcasts, listen to our weekly podcast I Hate Numbers.