How to navigate customs and VAT after Brexit

by Acuaccounts | Dec 18, 2020 | accounting, latest news, tax

Navigating customs and VAT will change after Brexit. As of 1 January 2021, UK businesses have to consider imports and exports to and from the European Union (EU) countries as they do for countries outside the EU. Complex customs procedures will apply and VAT will also change. The UK government has measures aimed at easing the administrative load and reducing the impact on cash flow.

Where is the UK with Brexit?

The UK officially left the EU on 31 January 2020, and the transition period ends 31 December 2020. New rules will be implemented on 1 January 2021. During the transition period, UK businesses have had to make few if any changes to continue day-to-day business, being still within the EU customs and VAT systems with no trade borders and customs formalities.

However, major adjustments will be required for businesses importing and exporting to and from the EU as of 1 January 2021. Customs and VAT will have to be handled like trading with non-EU countries, and this will likely be the case regardless of whether the UK can negotiate a deal with the EU.

Customs issues are complicated, especially to businesses having only experienced seamless movement across EU borders. Throughout this article, we refer to Great Britain, which is the geographical territory comprising England, Wales and Scotland separately from the United Kingdom, which comprises England, Wales, Scotland and also Northern Ireland.

This distinction is important because, in terms of imports and exports, Northern Ireland will be treated differently compared to the rest of the UK. 

Importing from the EU to the UK after the Brexit transition period

Here’s what you need to know and set up, before importing goods from the EU after the end of the transition period.

How to delay customs import declarations for up to six months?

Most goods will not require immediate import declarations for goods at the UK border, or advance authorisation for six months, from 1 January 2021 to 30 June 2021.
Exceptions are controlled goods (such as alcohol, tobacco and hydrocarbon products), or if HMRC has explicitly said your business cannot use this scheme. This might be the case if a business has a poor record in other areas of compliance.

There is a handful of qualifying factors for the use of the system:

• Businesses must be located in Great Britain. The Northern Ireland Protocol means Northern Ireland has its own rules (see the Northern Ireland VAT and customs after 1 January 2021 section).
• Goods must have been in free circulation in the EU prior to import to the UK.
• Businesses need to make a supplementary rather than full customs declaration within six months of the import date and have been authorised by HMRC to use simplified declarations. If you do this yourself, rather than via a third party, you’ll need to be registered for the CHIEF system (known as getting a CHIEF badge), and have CHIEF-compatible software.
• Since simplified declarations require a duty deferment account, you’ll also need to apply for this with HMRC.

To use this system, businesses need to make an entry in their own records for each import, known as Entry In Declarant’s Records (EIDR). This should record the customs import information.

Businesses will also need to make a supplementary declaration and Intrastat declaration within six months. 

What is the EORI number?

An Economic Operators Registration and Identification (EORI) number is a way of identifying businesses or operators who export or import to the EU. It will be required for both customs and VAT documentation.

UK businesses will need one or more of three different types of EORI number as of 1 January 2021, depending on where you import and export:

• Business in Great Britain: To trade goods with EU countries, you’ll need an EORI number that starts with GB. However, if your business only moves goods between Northern Ireland and the Republic of Ireland – and nowhere else – then it won’t usually require an EORI number.
• Businesses moving goods to or from Northern Ireland: If you move goods to or from Northern Ireland (outside of moving goods to the Republic of Ireland), you’ll need a second EORI number that starts with XI.
• Businesses making declarations or getting customs decisions in EU countries: If your business makes declarations or gets customs decisions in an EU country, you’ll need to get an EORI from the customs authority in the EU country where you submit your first declaration or request your first decision.

If you previously used an EORI number from the days of the UK’s membership of the EU, you may need to apply for one or more additional EORI numbers. However, if you already have a number starting with GB and don’t declare customs in the EU or deal with Northern Ireland, this will be sufficient.

Starting in late 2019, HMRC began automatically issuing new EORI numbers that begin with GB to UK businesses it believed need them. Businesses who did not receive one and need one should apply now. According to HMRC, it may take a week for the application to be completed.

Furthermore, in December 2020, HMRC will begin automatically issuing EORI numbers that begin with XI to businesses it believes need one. However, businesses will not receive one unless they have an EORI beginning with GB.

Community codes for customs

Customs relies on the correct classification of goods for the correct tariff and quota to be applied. Fortunately, custom codes are based on the same Harmonised System (HS) maintained by the World Customs Organisation (WCO).

Within the EU and UK, these codes are known as commodity codes (CC). They’re required for import and export documentation and decide tariffs and VAT (if any). Therefore, it is very important to use the correct commodity code.

As of 1 January 2021, the UK will continue to use the same code system as is currently used in the EU. Commodity codes are eight digits long for goods you export and 10 digits long for goods you import. Businesses need to know which code applies to the goods they wish to import – the government offers a free look-up tool online.

Applying tariffs for customs

Tariffs are a form of tax paid on imports, applied by the country to which the import is made. Tariffs in the UK are payable to HMRC. Tarifs are also referred to as duty and calculated based on the commodity code.

As of 1 January 2021, the UK Global Tariff (UKGT) will replace the EU’s Common External Tariff. The UKGT will apply to all imports from countries for which the UK does not have a trade agreement.

This will include countries within the EU in the event of a no-deal outcome at the end of the transition period. Businesses can check the tariff for an import using the government’s website look-up tool.

Companies importing only a limited amount of a product – measured in terms of weight, volume, quantity or value – might be able to use a tariff-rate quota. This means they would pay zero tariffs or a reduced rate.

For entities exporting to an EU country, the customer may need to pay an import tariff. This will depend on whether the UK and EU reach a trade agreement. 

Customs declarations for import

Simplified declarations can be used until 30 June 2021 for goods from EU countries. Afterwards business will need to ensure that a customs import declaration is made for goods that enter the UK from other countries including the EU unless they’re going into temporary storage.

The declaration includes a number of pieces of information including the EORI, commodity code, customs procedure code (CPC), the value of goods, the weight or size and country of origin.

Import declarations require software integrated into the government’s Customs Handling of Import and Export Freight (CHIEF) system. Eventually, this will be replaced with the Customs Declaration Service, or CDS, which must be used for goods moving to or from Northern Ireland.

The CHIEF system remains in use and should be used as of 1 January 2021 for most imports and exports. 

However, businesses may not need to create full customs declarations each time. Most goods imported to the UK can use the simplified frontier declaration system. This can mean goods pass through UK customs more quickly, reducing the amount of work upfront to import goods.

However, companies need to make a supplementary declaration later. Businesses need to be authorised to use the simplified declaration procedures, and need a duty deferment account as well as the CHIEF system.

Duty deferment account

Businesses importing regularly can apply to pay VAT and excise duty monthly, rather than paying upon import. A duty deferment account may require a bank or an insurance company to act as an approved guarantor on your behalf. The duty deferment account is mandatory for the simplified frontier declaration system.

Import licences

Companies may need to apply for licences to import certain goods into the UK. Some goods might require an inspection fee to be paid.

Incoterms

The commercial terms of trade (Incoterms) in business contracts show who is responsible for customs duties, import VAT, and any additional transportation and insurance costs.
Additionally, Incoterms determine when risk and liability pass from the seller to the buyer. This will not be as clear cut with customs borders, compared to the free travel of goods before Brexit/end of the withdrawal period.

Transport logistics

Transport organisations for the transport of goods across borders, such as sea shipping, couriers or air freight, will need to know many details before shipping commences. In additional businesses may have to use the correct border inspection post and pre-notification of the movement of goods. The government’s general Brexit preparedness tool for business helps to discover this information.

Exporting from the UK to the EU after the  Brexit transition period ends

Here’s what businesses need to know, or set up, before exporting goods from the UK after the end of the transition period.

EORI number

Companies need a UK EORI number beginning with GB or XI to export goods out of the UK. They also need to know the EU EORI number for the European business they are exporting to. Businesses need to contact all businesses they export to in the EU to ensure they have an appropriate EORI number ready for the end of the Brexit transition period. Moving goods to their warehouse in the EU requires your own EU EORI number.

Commodity codes

The importer in the EU will need to pay tax and duty on what is exported to them. Therefore, it’s vital to ensure businesses use the correct commodity codes.

Export declarations

For businesses making declarations themselves, they will need to register for and use the National Export System (NES), to make declarations electronically. Furthermore, they will need a CHIEF badge role.
Following this, exporters can make export declarations via the web, email, or using software. Web declarations require a Government Gateway ID and password. The Community System Provider (CSP) is an alternative. Businesses can use their own import/export software to access their system, and CHIEF registration. However, there will be a fee.

Export licences

Some goods require export licences, and there are additional rules specific to alcohol, tobacco and certain oils, and for controlled goods. 

Incoterms

Businesses should review the commercial terms of trade (Incoterms) in contracts relating to delivery of goods for export. These will show who is responsible for customs duties, import VAT and any additional insurance and transportation costs.
Additionally, they determine when risk and liability passes from seller to buyer.

Transporting goods

Businesses can utilise commercial goods transportation services, which is certainly the easiest option, or opt to use their own transport. Operator licences and permits will be required and the driver will need to be eligible to drive abroad (and will need to ensure they carry the correct documents), and there might be rules for certain goods that need to be transported.
Businesses that export a lot of goods might want to apply for authorised consignee and/or consignor status to avoid the need to use customs offices to start and end transit of goods.

Trade tariffs

Customers in the EU may now have to pay tariffs when importing from UK businesses. This may affect pricing calculations and impact demand.

How to calculate VAT after the Brexit transition period ends

In this section, discover how VAT will be changing (and what won’t change), learn about VAT on imports and exports, and find out how Northern Ireland will be affected.

How will VAT change after Brexit?

Domestic VAT rules remain the same following the end of the transition period. However, VAT rules relating to imports and exports to and from the EU will change.
Before Brexit and during the transition period, the UK was part of the EU VAT regime. This means a UK business doesn’t have to register for VAT in each EU country, and instead applies a common set of rules concerning VAT.
UK businesses were able to use various VAT simplifications such as distance selling thresholds and online VAT refund process. However, as of 1 January 2021, UK businesses will need to treat EU countries like they already do countries outside the EU.
The VAT terminology will change accordingly. Trade with EU countries will cease to be called dispatches and acquisitions, and will instead be referred to as imports and exports – again, in line with trade with non-EU countries.

In broad terms, VAT will be payable upon import, although the UK government has introduced the postponed VAT payment system to avoid cash flow issues. This lets businesses import goods into the UK account for the VAT on their next VAT Return, and means the goods can be released from customs without the need for VAT payment.

Nothing will effectively change from a cash flow point of view, although there will be new administrative requirements.
Note that the rules for Northern Ireland again differ, and are explained separately below.

Import VAT

Before Brexit/end of the transition period, VAT-registered businesses applied VAT through the EU reverse charge on intra-community acquisitions. Goods imported from anywhere in the world have to account for import VAT. And as of 1 January 2021 this will include the countries within the EU.

This only applies if the value exceeds £135. For imports beneath this amount you must use the new e-commerce rules (even if the goods were not traded via e-commerce).

VAT is applied at the point the goods are to enter free circulation, the VAT tax point. This might be at the port of entry but could be when goods are released from customs warehousing if customs special procedures are used.

However, businesses need to collect evidence from HMRC regarding the point the goods entered free circulation for your VAT records. VAT can be paid at the tax point, in which case monthly C79 reports should be obtained from HMRC, as when importing from outside the EU.

Most businesses are likely to make use of the postponed VAT accounting system.

Similar to the existing reverse charge mechanism, import VAT is not physically paid upfront and then reclaimed on the subsequent VAT return. Instead, it’s accounted for as input and output VAT on the same VAT return.

Although postponed VAT accounting is optional, it’s mandatory if you defer the submission of customs declarations. It’s worth remembering that postponed VAT accounting can now be used for all imports outside of the EU too. This represents a change from how VAT was accounted for prior to the end of the transition period, and is likely to provide a cash flow boost for businesses that import from outside the EU.

A new online monthly statement will be available as part of the postponed VAT accounting system. It’ll show the import VAT postponed for the previous month on a transactional basis and when you should include it in your VAT Return (that is, the correct tax point).

When it comes to VAT on services, as a general rule following Brexit/end of the transition period, sales of cross border purchases of services from one business to another (B2B) will remain subject to tax in the country of the customer (with some exceptions). Therefore, the tax is generally accounted for as reverse charge in the destination country by the recipient of the service.

VAT on imports £135 and under

Alongside the end of the transition period on 1 January 2021, the UK is introducing additional measures for overseas goods arriving into Great Britain from outside the UK:

• Low-Value Consignment Relief (LVCR) is being removed. Previously, this exempted imports with a value below £15 from import VAT.
• Online marketplaces (OMPs), where they are involved in facilitating the sale, will be responsible for collecting and accounting for the VAT.
• VAT on imports with a consignment value of £135 or lower will have VAT applied at the point of sale, rather than applied as import VAT at customs. For B2C transactions this UK VAT will be charged and collected by the seller but for B2B transactions, the VAT will be reverse charged to the customer.

Essentially, this means foreign sellers sending goods into the UK will need to charge UK VAT and apply to be part of the UK VAT system when supplying goods with a value of £135 or less to end consumers (that is, non-VAT-registered individuals).

Businesses who receive goods of £135 or less will have to account for the VAT as part of the reverse charge procedure, declaring the VAT on their next VAT Return. Normal rules apply for the tax point, which is to say, it will usually be the invoice date.

Additionally, the recipient business should ensure the seller knows their VAT number, or the seller will have no choice but to treat it was a B2C sale and apply VAT. The UK measures in some respects mirror those due to be rolled out in the EU from July 2021 under the EU 2021 VAT e-Commerce Package.

VAT on exports

The VAT for exporting goods to EU countries also changes. Exports to EU countries are treated like those to non-EU countries, which is to say, they should be zero-rated for UK VAT. This will apply regardless of whether you’re exporting goods to a consumer (B2C), or to a business (B2B). In other words, there’s no longer any need to observe distance selling regulations or to verify the VAT status of the recipient business.

Businesses selling B2C to the EU may need to register for EU VAT and appoint fiscal representatives depending on the requirements of the countries in which they sell.

It’s important to understand zero-rate goods for VAT does not mean businesses can simply forget about VAT. It means you apply a 0% VAT rate. No VAT is payable but you still have to include the exports as part of your VAT accounting.

When it comes to purchasing services, rather than goods cross-border, things continue much as they did before 1 January 2021.

Under the place of supply rules, B2B sales of services will continue to be generally subject to tax in the country of the customer and administered through reverse charge, with some exceptions. B2C sales of services will continue to be generally subject to tax in the country of the seller, again with some exceptions.

However, UK businesses that use the Mini One-Stop Shop (MOSS) system will need to register for the non-union MOSS and will no longer benefit from a €10k threshold before having to apply the place of supply rules.

This means many more businesses may be liable to VAT in the countries they sell digital services to and will need to register for non-union MOSS.

Northern Ireland VAT and customs after 1 January 2021

When it comes to customs and VAT after the end of the transition period, Northern Ireland isn’t like the three other countries that comprise the UK. It will use the Northern Ireland Protocol, which is part of the Withdrawal Agreement between the UK and EU that aims to avoid a customs border (known as a hard border) between Northern Ireland and the Republic of Ireland (ROI).

There are different rules for the supply of goods and services, and this is what is currently proposed by the government:

Goods

Northern Ireland will remain part of the EU customs and VAT regime when it comes to trade with the Republic of Ireland and the rest of the EU. From a customs perspective, moving goods from Northern Ireland to Great Britain won’t change. There will be no additional processes, paperwork, or restrictions.

From a VAT perspective, these movements will continue to be treated like domestic sales and purchases as they are today. This means that, among other things, there won’t be import VAT due on movements.

Services

Services are excluded from the Northern Ireland Protocol, so sales of services between Northern Ireland and the Ireland/EU from 1 January 2021 will be treated like Third Country supplies.
As already mentioned, this results in very little change from a VAT perspective. Similarly, nothing will change for supplies of services between Great Britain and Northern Ireland, and they will continue to be considered domestic supplies.

Trader Support Service

The UK government will run a new Trader Support Service for businesses moving goods to and from Northern Ireland. This will provide free support to businesses buying and selling between Northern Ireland and Great Britain. The support service will also be help if you bring goods into Northern Ireland from outside the UK.

However, negotiations are still taking place between the UK and EU to decide how goods will be moved between Northern Ireland and the UK with regard to customs and VAT. The rules above could be altered.

Conclusion on customs and VAT after Brexit

The UK government has taken measures to try and minimise disruption for businesses. However, the new customs and VAT requirements represent a significant upheaval for all businesses. Businesses  should immediately review supply chains and assess the potential implications, such as the need for EORI numbers, changes in VAT reporting obligations and payments.

Additionally, companies need to ensure they meet the evidence requirements for VAT zero-rating exports. Systems and software changes may be required. Businesses may need to seek professional help with customs or invest in new IT infrastructure if they intend to do-it-yourself via the CHIEF badge system.

Suppliers of any invoicing or accounting software can advise on any changes or upgrades to ensure that Brexit-related changes will correctly be applied.

Questions about VAT and customs after brexit? Get in touch with us to book a consultation at info@acuaccounts.com or call us directly on 0203 907 9027.