The UK ended 2020 having confirmed a new free-trade agreement with the EU after months of difficult negotiations and many businesses will have started the year with questions about the steps needed to comply with the new trade rules.
There are more than 1,000 pages of the post-Brexit trade agreement under scrutiny at the moment. From the initial review, these are the key points you may wish to consider which may affect you and your business as we start 2021.
From 1 January 2021, the process for importing and exporting goods has changed.
In its latest guidance, the Government has laid out the principles for the ‘Core Model’, which relates to all goods imported and exported, regardless of which means of transport are used to move the goods.
The guidance covers the core processes of:
- customs declarations
- import VAT
- safety and security declarations.
To help businesses adapt, HMRC will introduce the new border controls in the Core Model in three stages up until 1 July 2021. The first of these stages took place on 1 January 2021 and will be followed by two more stages on 1 April and 1 July 2021.
A full breakdown of the different Core Model stages and the steps businesses need to take can be found by visiting the official Government guidance here.
To help prepare for these changes, businesses should:
- Acquire a GB EORI number if you intend to import or export from the EU (If your business makes declarations or gets customs decisions in an EU country, you’ll need to get an EU EORI from the customs authority in the EU country where you submit your first declaration as well)
- Prepare to pay or account for VAT on imported goods, we recommend using a VAT deferment account to improve cash flow
- consider commercial arrangements and terms of trade
- determine the customs value of goods
- confirm rules of origin
- consider how customs declarations to HMRC systems will be made and the use of a customs intermediary.
Tariffs will not be charged where goods meet the rules of origin requirements. Rules of origin refers to the ‘economic nationality’ of goods being imported and exported i.e. where they have been produced or manufactured, not just where they have been shipped or bought from. Under the agreement, goods must be locally sourced, or for have had sufficient work carried out on them in the UK.
From 1 January 2021, in order for business to benefit from preferential tariffs when importing into the UK or EU, they will need claim preference on their customs declaration and declare they hold proof that the goods meet the rules of origin.
A proof of origin is used by the importer to demonstrate that the goods qualify as originating and are eligible to claim preference. This can take the form of a statement on origin completed by the exporter on a commercial document, or knowledge obtained and held by the importer that the goods are originating.
The UK and EU have agreed a 12-month grace period. This means that until 31 December 2021, businesses do not need supplier’s declarations from business suppliers in place when the goods are exported but they must be confident that the goods do meet the preferential rules of origin. Businesses may be asked to retrospectively provide a supplier’s declaration after this date.
Businesses in certain industries may also need to check:
- What export licences or certificates they require
- The marking, labelling and marketing standards for food, plant seeds and manufactured goods
- The rules for exporting or importing alcohol, tobacco and certain oils.
If you move goods into Northern Ireland or via it into the EU, then you can sign up for the Government’s free Trader Support Service and you should acquire an ‘XI’ EORI number.
This free-to-use Trader Support Service is available to businesses of any size moving goods into Northern Ireland, providing guidance, training, a digital declaration support service and support from customs experts.
Goods that move into the UK from the EU from 1 January 2021 onwards will be considered imports, meaning import VAT will be payable and customs declarations will need to be made.
Businesses must account for VAT on all goods imported using a postponed accounting system. This means that import VAT on goods is accounted for and paid via a company’s usual VAT return rather than paying it immediately at the point of entry.
In reality this means that rather than physically paying import VAT and then reclaiming it on a subsequent VAT return, VAT is accounted for as input and output VAT on the same return.
Postponed VAT accounting, therefore, prevents an immediate impact to a businesses cash flow when importing.
In fact, if a business already imports from outside the EU then it might see cash flow benefits too from the new system, because it removes the need to account for the import VAT typically due.
This applies to all goods imported by VAT registered importers to the UK from anywhere in the world if they’re worth more than £135, including those from the EU. In most cases, import VAT should be recoverable by businesses.
Accounting for import VAT on your VAT return
Businesses have to account for import VAT via their VAT return under the postponed accounting system if the goods they import are for use in their business.
A business must include its EORI number starting with ‘GB’ on its customs declaration and its VAT registration number if it is needed.
If you haven’t yet applied for a ‘GB’ EORI number then it doesn’t take long and is an essential part of importing and exporting goods. You may also need an EU or XI EORI number as we have outlined above.
It can then account for import VAT on its VAT return when it submits a declaration that releases those goods into free circulation from one of the following special customs procedures:
- customs warehousing
- inward processing
- temporary admission
- end use
- outward processing
- duty suspension.
A business can only account for import VAT on their VAT return once they release excise goods for use in the UK – also known as ‘released for home consumption’.
If the business imports goods that are not controlled into Great Britain from the EU, between 1 January and 30 June 2021, they must also account for import VAT on their VAT return.
Controlled goods are goods that must have a license to import, or excise goods like alcohol or tobacco, which have additional duties on them.
This rule still applies even if you delay the customs declaration i.e. if you decide to record the information for your own purpose now and tell HMRC up to six months later.
UK import VAT duty deferment
Businesses that import goods regularly can set up a Duty Deferment Account that allows them to delay paying most customs charges, including import VAT.
Through this account, a business can make a single payment each month via direct debit instead of paying for each consignment separately as would be expected under the usual system of postponed accounting of import VAT.
Under this system, you can pay the duties and Import VAT you defer during one calendar month as a total sum, either:
- on the 15th of the next month; or
- on the next working day after it if the 15th is not a working day
This means that you can defer duties and Import VAT for between two and six weeks – offering an average of 30 days credit.
The scheme is open to importers or customs agents and freight handlers that work for importers and have an approved deferment guarantee or waiver in place.
Regardless of the method of accounting for VAT on imported goods, checks to ensure that the data on the customs declarations is accurate will continue to be highly important for VAT purposes, for all imports.
For more information on UK import VAT duty deferment, please click here.
Postponed accounting vs VAT deferment
With postponed accounting, the only differentiator from the previous system is that you record and pay for VAT on a return, rather than at the border, which helps with cash flow. But you must do this for each consignment that comes in. This system is automatic for all import VAT now.
With Duty Deferment, all consignments are combined into a single payment via direct debit and it allows import VAT to be deferred for potentially longer than postponed accounting. This system is really intended for those exporting regularly and handling a large number of consignments. Primarily this will be for customs agents or larger businesses and you must apply for an account before you can use it.
Consignments of value below £135 (€150)
Imported goods in a consignment not exceeding a value of £135 (€150), excluding specific excise goods and gifts, will not be subject to import VAT at the border and will be subject to sales (supply) VAT instead.
This will end the £15 (€22) VAT exemption thresholds previously known as low-value consignment relief and VAT will now be charged on the goods as if they were supplied in the UK and accounted to HM Revenue & Customs on the UK VAT return.
This means that businesses selling goods to be imported into the UK with a value not exceeding £135 (€150) will be required to charge and collect any VAT due at the time of sale.
For UK VAT registered businesses importing goods in a consignment not exceeding £135 (€150) in value that has not been charged VAT at the time of purchase they can account for this VAT on their VAT return under the usual reverse charge method.
Online marketplaces (OMPs), where they are involved in facilitating the sale, will be responsible for collecting and accounting for the VAT.
For goods sent from overseas and sold directly to UK consumers without OMP involvement, the overseas seller will be required to register and account for the VAT to HMRC.
Business to business sales not exceeding £135(€150) 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.
Also, with effect from 1 January, the distance selling rules are also no longer applicable as the UK is no longer part of the EU. There is no VAT registration threshold for businesses established outside the UK so businesses will be required to register for VAT on any value of sales where you become liable for VAT under these new measures.
The EU is implementing new rules to create an import scheme for distance sales made to EU consumers from third countries such as the UK.
This scheme has been delayed to 1 July 2021 due to the pandemic, but when implemented is designed to prevent the need for non-EU businesses registering all over the EU by allowing a business to register in just one EU member state (although certain EU Member States have indicated they may not recognise registration in other member states).
The scheme will be called the Import One Stop Shop (IOSS) and will work similarly to the current Mini One Stop Shop (MOSS) for digital services to simplify VAT.
It is being introduced as a result of the removal of the import VAT exemption limit (de-minimis) on low value goods from July.
This relates the abolition of VAT de-minimis for goods worth up to £15 (€22). While goods valued at up to £15 (€22) are currently exempt from VAT, import VAT will be applicable after this date.
In contrast to that, import VAT and customs duties for goods of up to £15 (€22) and £135 (€150) remain the same after the July date. This means that import VAT will be applicable on all imported goods valued below £135 (€150).
Businesses facing import VAT in multiple EU member states may wish to take advantage of IOSS to reduce the need for registration across a number of countries.
Place of supply
Businesses must determine the country where a supply takes place for VAT purposes so that they know where VAT due is payable.
Businesses should be aware that they may continue to create VAT liabilities in other EU Member States. This may mean that businesses in the UK require multiple EU VAT registrations within each member state that they trade within, unless they take advantage of the Import One Stop Shop (IOSS).
Reclaiming VAT in the EU
Currently, UK firms incurring VAT in EU countries can claim VAT back (subject to national rules) via HM Revenue & Custom’s dedicated refund portal.
That arrangement will remain in place until 31 March 2021, after which time, there is currently no provision in place to claim for VAT incurred in 2020, under the terms of the Withdrawal Agreement.
Impact on services
Post-Brexit there should be minimal impact on the supply of services. Business to business services are treated as though they are supplied where the customer belongs and that customer must account for the local VAT.
This will mean that for UK service suppliers they will continue to not charge UK VAT. For business to consumer supplies, UK VAT generally applies and this will also remain the same.
When receiving services, UK businesses may still have to apply a reverse charge to the receipt of services from non-UK suppliers. This ensures that there is no competitive advantage from sourcing services via non-UK suppliers.
Goods and services
The trade agreement sets out the rules for goods crossing borders. There is no “mutual recognition of conformity assessment” in the agreement, which means checks on product standards is going to be more difficult.
If you want to sell your product in both the UK and the EU, you may have to get it checked twice, to get it certified.
On other border issues, there is also no agreement on recognising safety standards for exporting food of animal origin, which means potentially, costly checks for products going into the EU single market.
There will, however, be some measures which cut technical trade barriers, and the mutual recognition of trusted trader schemes stay in place, which will make it easier for large companies to operate across borders.
There is a “check for barriers to trading and investing abroad” digital service. The new tool, found here, will allow companies to check for regulations imposed by other countries, as well as enabling companies to monitor when such restrictions have been removed.
Both the UK and EU want data to flow across borders as smoothly as possible, but the agreement also stresses that individuals have a right to the protection of personal data and privacy and, to quote a line in the agreement, that “high standards in this regard contribute to trust in the digital economy and to the development of trade.”
The EU has agreed to a period of four months, extendable by a further two months, in which data can be exchanged in the same way it is now, as long as the UK makes no changes to its rules on data protection.
UK nationals will need a visa if they want to stay in the EU for more than 90 days in a 180-day period.
Your European Health Insurance Card remains valid until its expiry date and the plan outlined in the agreement is to replace these with a UK Global Health Insurance Card. There is more information to come on overseas health insurance in the coming months.
You do not need an International Driver’s Permit to drive in the EU as a UK citizen.
Working in the EU
UK professional qualifications won’t be recognised automatically in the EU, which will make it more difficult to work in the EU, especially for those in the service sector.
It appears that UK citizens will need to apply to the individual country in which they wish to work to get any professional qualifications accepted. This may change as the agreement suggests a framework of mutual qualification recognition in the future.
There are measures which commit both the UK and the EU to maintain common standards on worker’s rights, as well as many social and environmental regulations. The UK does not have to follow EU law, but they do have to be seen to protect the rules of “fair competition”.
European Court of Justice (ECJ)
The ECJ will remain as the ultimate arbiter of European law, however, the EU has agreed that the ECJ should NOT play a direct role in policing the governance of the agreement in future.
The ECJ will remain as is in Northern Ireland, which has a special status under the terms of the Brexit withdrawal agreement.
Northern Ireland will also remain subject to the EU’s single market and customs union rules, which means the ECJ will remain the highest legal authority there.
The UK and Canada have agreed transitional measures to maintain the flow of goods between the two territories now that the transition period has ended.
The agreement adds to several post-Brexit trade deals struck during 2020, with countries such as Mexico, Singapore, Vietnam, Norway, Iceland and Switzerland agreeing to maintain the free flow of goods and services between them and the UK.
Under the temporary measures agreed with Canada, it is understood that tariff-free trade will be maintained for UK and Canadian businesses exporting goods eligible for preferential treatment under the Transitional Canada Agreement [TCA], access to Tariff Rate Quotas will be maintained for products covered in the TCA, and Rules of Origin that enable EU content and processing will count as originating in the UK as set out in the TCA.
We highly advise that you visit the following links to gain a greater understanding of the points covered in this update:
How we can help
More information about new trading arrangements valid from 1 January can be found by visiting the Brexit pages on our website.
For help and advice on related matters, please get in touch with our advisory team today.