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For many, Brexit continues to be the undefined, being negotiated by the unprepared, in order to get the unspecified, for the uninformed. For others, Boris Johnson’s hard-knuckled talk, timed to boil down to deadline day, represents the dominant strategy that always had to be played against a fiercely rigid opposition- one that also risks losing out, albeit less than the protagonist.
In this post we will focus on practical examples of trading in goods post Brexit on 1 January 2021, paying special attention to taxation.
IMPORTER OF EU GOODS
Dom is a spectacles retailer based in England. Some of the spectacles he sells are purchased from a Spanish supplier called Ojos. What will be the difference between shipments arriving after 1 January 2021 compared to now?
In short, all imports of goods arriving into the country will be subject to import VAT and potentially customs duty. Traders will require an EORI number to move goods between the UK and non-EU countries.
Import VAT and Postponed Accounting
Concerning VAT, there will be no difference in Dom importing goods from an EU or non-EU country. “Postponed accounting” will be available for all imports made by a VAT registered business- that is for both EU and non-EU imports. Postponed accounting means Dom will declare and recover import VAT on the same VAT Return, rather than having to pay it upfront and recover it later. This is a cash-flow benefit for businesses that previously imported from outside the EU where VAT was paid on arrival and later claimed as input tax on a VAT return up to three months later. Import VAT certificate (C79) will no longer be issued, but can instead be downloaded from the HMRC website.
Dom does not need to apply to use postponed VAT accounting: it can be requested automatically when the shipment arrives. If however Dom deregisters, VAT on future imports would be paid at the time of arrival in the UK and become an exra business cost.
From 1 January 2021, Dom will need to make customs declarations when he imports goods from the EU. In some situations, you can delay making a declaration for up to 6 months after you imported the goods. For controlled goods such as alcohol and tobacco however, a declaration must be made when the goods arrive. You may want to get someone to deal with customs for you or find a customs provider to help you.
A comprehensive set of actions for goods importers can be revised by visiting gov.uk, including finding out whether you can use postponed VAT accounting and checking the rate of customs duty and VAT on imports.
For UK businesses that buy goods from EU suppliers exceeding £1.5m, intrastat declarations must continue to be completed in 2021 for arrivals of goods from the EU. For dispatches from the UK, the intrastat reporting obligations only apply to goods being ‘exported’ from Northern Ireland to any EU VAT registered customers in case a threshold of £250,000 is exceeded.
Back to Dom, he has received an order from a consumer based in Germany for a pair of spectacles. Until 31 December 2020, Dom will ship it to the customer and charge UK VAT at 20%. If Dom sells more than €100,000 of goods into Germany in a calendar year, to non-VAT registered customers, he must register for VAT in Germany and charge 19% German VAT on future sales. This is the essence of the “distance selling threshold” rules.
From 1 January 2021, the situation changes. First, the distance selling rules become obsolete, as the UK is no longer part of the EU. Instead, any shipments of goods from a UK supplier will be subject to VAT and duty when they arrive in the other EU country, so 19% VAT plus duty in the case of Germany. Dom’s sales will be zero rated for UK VAT purposes, in the same way that exports of goods to non-EU countries are zero rated.
This may pose a commercial and competitive hurdle for Dom. If before 1 January 2021 Dom bought spectacles from Ojos in Spain for £50 and applied a mark-up of 100% plus VAT for his sales, he will charge £120 for a business-to-consumer sale in Germany. If after 31 December 2020 Dom now pays customs duty of say 5% when the goods are imported from Spain to the UK, this will yield a cost of sales figure of £52.50 and therefore a selling price of £105. The export to the German consumer will now be zero rated for UK VAT but subject to German VAT and customs duty when it arrives there. If the import duty was 10%, with the VAT added on top, this would yield a final selling price of around £137, that is £105 plus £10.50 duty and 19% VAT on £115.50.
Warehouses in Europe
Like Dom, there is the possibility that clients could face a double duty charge on goods arriving into the UK from an EU supplier and then shipped out to the EU again. An EU warehouse may be an option in this scenario, obtaining a local VAT number to buy and sell goods from there. The challenge is for each business to consider its supply chain and where optimal trading outcomes may lie. Afterall some goods that are standard rated in the UK might be subject to reduced VAT rates in other EU countries. And some goods will be duty free to help the position further.
OTHER VAT SCHEMES
Triangulation is another important VAT simplification that may be lost after Brexit. UK companies currently relying on triangulation in order to avoid the need to register for VAT in an EU Member State, will also need to assess their position. Such arrangements will no longer be available, and this may result in multiple VAT registration requirements.
Margin schemes involve goods, such as the second-hand margin schemes. In October 2020, HMRC issued a policy paper ‘Accounting for VAT on goods moving between Great Britain and Northern Ireland from 1 January 2021‘. The paper suggests that margin schemes will remain available for sales of goods that are purchased in Northern Ireland or the EU, whether sold to customers in Northern Ireland, Great Britain or the EU. On the contrary, margin schemes will not usually apply for sales in Northern Ireland where the stock is purchased in Great Britain.
Concerning us all, the Treasury has published its policy decisions regarding duty free shopping carried by passengers across borders:
WHEN MIDNIGHT STRIKES
All the while it is worth remembering that a sub-plot continues to develop in the guise of late-in-the-day Brexit negotiations, akin to booking a GP appointment for a patient(s?) approaching life-support. A free trade agreement post-Brexit is not the whole solution for UK traders. Many of the practical issues of moving goods will not be resolved by a free trade agreement. A free trade agreement will not remove the obligation to submit customs declarations for example, therefore problems with who is legally permitted to make declarations on export and import will arise. A deal would provide for tariff-free trade on goods that qualify as EU or UK made, helping cushion the blow for sensitive sectors including automotive and agriculture. It would also include other measures to help trade flow — recognition of truckers’ permits for example. Most trade experts agree it would be better than nothing.
HOW TO PREPARE FOR BREXIT – CHECKLIST
We would urge our clients to visit gov.uk/action-2021 for a step-by-step revision on how your business may be affected.
The Institute of Chartered Accountants in England and Wales has prepared a quick-start guide, outlining a variety of areas that could impact your business post Brexit, to help you prepare for when the transition period has ended. 10 questions to ask include:
Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.