What upcoming VAT changes do accountants need to brief their clients on?
On 31 December 2020, the UK will leave the EU. What we’ll also be leaving are the Customs Union, Single Market and EU VAT regime. Until we know the terms of the Brexit deal (or no deal), exact processes are somewhat up in the air. However, most major changes to VAT have already been confirmed, regardless of whether the EU and UK sign a Free Trade Deal by 1 January 2021.
The changes to VAT will come into effect at midnight on 1 January 2021. Although we’ve had no representation as a Member State in the EU this year, all goods and services have still had EU regulations applied to them. On the back of such a turbulent year as accountants, making sure your clients are ready to take on board the new regulations is no doubt a priority. So, what will the main changes be post-Brexit and how can you help your clients prepare now?
The existing EU VAT Directive will no longer have to inform the UK VAT Act. This means that in theory we don’t have to apply a minimum 15% VAT to goods. However, our own rate is currently set at 20% so it’s unlikely that there will be any reduction. But what it means is that the UK will have control over its own reduced VAT rates as they will no longer be restricted by the EU Vat Directive.
If you service B2B clients, they’ll no longer have a zero-rate of VAT applied to products of services supplied to EU countries. So, all movements of goods will become imports or exports and subject to both EU and UK import VAT. The UK has moved to offer compensation for this by introducing a Postponed Accounting import VAT deferral scheme so that no cash VAT payment will be applied to imports in the UK.
Essentially, businesses will record these charges through a VAT return, instead of having to fulfil them in cash upfront. Unfortunately many EU countries haven’t offered the same schemes on British goods, so upfront costs are likely to be incurred.
B2B clients won’t experience much change to the VAT they pay on services for their transactions. They can still apply a reverse charge. However, it’s difficult to say right now what the future may hold in the UK with these rules. It’s possible that regulations will deviate from the current mechanisms in place, so keep an eye out for these.
UK businesses that use e-commerce to sell goods to EU customers will now have to account for import VAT. It may be wise to advise clients affected by this change to register in Europe immediately so they can avoid this scenario. And an e-commerce business registered in the EU that sells to UK customers under the £70,000 threshold should be advised to register in the UK.
If an e-commerce business has foreign VAT restriction in the UK they may have to appoint a VAT fiscal representative for their non-resident VAT returns. This has been introduced as a kind of ‘guarantor’ for the VAT a business is liable to pay. These representatives need proof of cash deposits or cash guarantees as they’re directly liable for any unpaid VAT. The list of countries that this will apply to is available here.
Currently, goods valued below £15 are exempt from VAT when they’re imported into the UK. This will change when we leave the EU. After Brexit, all goods worth £135 and under will have to have VAT applied to them. This can be a single item or a number of goods in a single package but excludes any additional costs such as delivery or transport.
Both UK and non-UK resident sellers will have to charge sales VAT at checkout on their websites. If a business uses an online marketplace to sell its goods then that marketplace will be responsible for applying VAT to the final sales price. In either case, a VAT invoice will have to be provided when they go through customs. However, if a customer is a UK VAT registered business, they qualify for zero-rating. If your customers buy goods from EU suppliers then make sure they know they can provide the seller with their VAT number to reverse the charge.
If your clients provide digital services, such as telecoms or electronic services to customers in the EU, then they must understand they’ll no longer be members of the EU single VAT return scheme. This is known as the ‘EU Mini One-Stop-Shop’ (MOSS) as it’s a convenient way to organise VAT payments. If they plan on continuing selling to EU consumers, they must register as a non-EU business in the relevant EU state. VAT will need to continue to be filed for their services in the EU.
If they’ve been using the UK MOSS registration then make sure they know to reapply for both MOSS and the EU under one regular UK return. They must have completed this in time for January VAT reporting if they’re a UK seller. And don’t forget that there’s no threshold for EU sellers to report VAT on quarterly sales to UK customers. HMRC will from January require all sales to be reported immediately from an EU seller.
It’s also important to note that VAT is applied to the rate of a customer’s country of residence, rather than the location at the time of sale.
Previously, UK businesses that had to pay VAT on travel or hotel stays in the EU could use the 8th Directive online to reclaim this VAT through HMRC. However, this will no longer be an option after we leave the EU. Instead, businesses must use the 13th Directive reclaim process which is filled out on paper. Each country a business wants to claim the VAT back from will need an individual claim. This will come into effect for all claims on charges that occurred from 1 January 2021.
Intrastat was introduced in all EU member states in the 90s and covers the trade statistics of goods crossing borders. For 2021, any businesses in Great Britain (so not businesses in Northern Ireland) will need to prepare their Intrastat reports every month on goods imported from the EU above the £1.5 million threshold.The UK will allow all importers to defer their import customs declarations between 1 January and 30 June 2021. HMRC is continuing to use Intrastat for this year as it’s seen as a useful way of monitoring and tracking imports in the country.
For exported goods to the EU, businesses won’t need to worry about Intrastat reports. Northern Ireland imports and exports to and from the EU will need to be filled through Intrastat until 2025 at the earliest.
If any of your clients are based in Northern Ireland, the regulations will be slightly different. Northern Ireland is going to remain within the UK VAT area but will track EU rules. These will include zero-rating for VAT on EU supplies across the Irish border. EU VAT imports into the Republic of Ireland from Northern Ireland will be collected by the UK.
Your clients may have enjoyed VAT deferral between March and June this year, but they’ve probably paid this off by now. The changes coming to VAT next year will be less easy to manage. It’s so important right now that accountants are as helpful as they can be to their clients, guiding them through the upcoming changes.
There will be extra costs involved in applying VAT where accountants and businesses haven’t had to before. This will create more administrative work to ensure everything is reporting correctly but once these issues are explained and set up, it’ll be business as usual. More than simply being on hand to answer questions, accountants need to be proactive with their SME clients. Think about how you can advise on changes so these clients can get ahead of the game and make as smooth a transition as possible. Prove your value as one of the most useful advisors a small business can have.