Impact of Brexit on VAT with Effect from 1 January 2021

Note: For full details of the impact of Brexit on VAT, we highly recommend that you speak to your accountant and review the documentation provided by HMRC.

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Background

With the Brexit transition period ending on 31 December 2020, new VAT and custom rules has been introduced which affect how VAT-registered businesses in the UK trade with the EU and the rest of the world.

The UK government has introduced a new model for the VAT treatment of goods arriving into Great Britain from outside of the UK. According to the government, this is to ensure that goods from EU and non-EU countries are treated in the same way and that UK businesses are not disadvantaged by competition from VAT-free imports.

In order to address these changes, AccountsPortal has introduced 3 new VAT Rate codes relating to the purchase or sale of Goods:

• 1: Postponed VAT Accounting
• 2: Standard Rate Reverse Charge
• 3: Zero Rated Income (UK to EU)

Please note that the treatment of VAT or how you account for the movement of goods between Northern Ireland and the EU has not changed and the codes above are not generally intended for use by Northern Ireland businesses. Businesses in Northern Ireland can, however, still use Postponed VAT Accounting for imports from non-EU countries.

1. Purchase of Goods from outside UK – Postponed VAT Accounting (PVA)

From 1 January 2021, controls will be placed on the movement of goods between the EU and the UK. There will no longer be any difference in the VAT treatment of imported goods from European countries and the rest of the world. To manage this change, HMRC has introduced a new process called Postponed VAT Accounting (PVA).

PVA gives you the option to account for and recover VAT on your imported goods using the same VAT Return form. It’s a faster and more efficient way to complete your VAT Returns, and means you won’t have to pay your VAT upfront and recover it at a later date, which will help you manage your cash flow. 

You can choose to use PVA if you:

• have a UK business that is registered for VAT
• import business goods to the UK valued at more than £135 (exclusive of VAT)
• elect to use PVA on the customs declaration
• use your own VAT registration and EORI numbers on the customs declaration

How to use PVA in AccountsPortal

Select the Postponed VAT Accounting VAT rate when purchasing goods from EU or from non-EU countries. The result for Standard VAT reporting is:

Box 1 - Includes the VAT due in this period on imports accounted for through Postponed VAT Accounting.

Box 4 - Includes the VAT reclaimed in this period on imports accounted for through Postponed VAT Accounting.

Box 7 - Includes the total value of all imports of goods included on your online monthly statement, excluding any VAT.

Note that if the amounts don’t match your HMRC Monthly Postponed Import VAT Statement (MPIVS), you may need to adjust the box 1, 4 and 7 values. In AccountsPortal, you can do this after you have saved your VAT report (but before submitting it to HMRC) via the "Other Options" button followed by "Edit Values".

Businesses Opting Out of PVA

If you don’t use PVA and instead pay the VAT immediately when the imported goods enter free circulation, you will need to complete Boxes 4 and 7 only. At present in AccountsPortal you will need to treat the supplier as if they are Outside the EU and follow the guidance in our help document on How to Enter Customs and Duty Invoices.

2. VAT on imports £135 and under

UK 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.

There are a number of key changes to be aware of:

• The £135 value applies to the entire value of the consignment, and not to each individual item within it.
• Where goods are sent as part of a single consignment with other goods, and the customs value of the consignment exceeds £135, the consignment will not be subject to the new measure.
• Normal rules apply for the tax point, which will usually be the invoice date.
• 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.
• Online marketplaces (OMPs), where they are involved in a sale, will be responsible for collecting and accounting for the VAT.

When carrying out these transactions, the seller must add a note to the invoice it issues to the UK business customer to make clear that the customer needs to account for VAT. They should also include a reference to "Reverse Charge" on the invoice, for example, "Reverse Charge: customer to account for VAT to HMRC".

If a business recipient of the goods is not VAT registered or does not provide the seller with a valid UK VAT registration number at the time of purchase, then the seller should treat the supply as a business-to-consumer, rather than a business-to-business, sale and account for VAT accordingly. Note that there is no obligation on the seller to verify that the customer is in business - they should treat the sale as a business-to-consumer sale unless the customer provides a valid VAT registration number.

Note that the Low Value Consignment Relief, which relieves import VAT on consignments of goods valued at £15 or less, has been abolished.

How to record VAT on imports under £135 in AccountsPortal

In AccountsPortal, you can now use the new Standard Rate Reverse Charge VAT rate to achieve the correct Reverse Charge outcome on your VAT Return. For Standard VAT reporting, this will affect Boxes 1, 4, 6 and 7 on your VAT return.

3. VAT on exports to the EU

As of 1 January 2021, when it comes to exporting goods to EU countries, the VAT situation has also changed. Exports to EU countries are treated like those to non-EU countries - they should be zero-rated for UK VAT. This does not mean that you can simply forget about VAT - instead it means that you apply a 0% VAT rate. No VAT is payable but you still have to include the exports as part of your VAT accounting.

How to record VAT on exports to the EU in AccountsPortal

In AccountsPortal, you should use the new Zero Rated Income (UK to EU) VAT Rate to achieve the correct outcome on your VAT Return. For Standard VAT reporting, this will include values in Box 6 only.

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Further Reading

Spring Statement 2022: What it means for small businesses

How to manage the final hospitality VAT rate increase in AccountsPortal

Ten Purchases You Didn't Know Were Tax-deductible