European VAT Changes from 1st January 2021
The UK left the EU officially on 1st January 2021, when new rules will come into force. Businesses will have to comply with these rules in order to import or export goods from EU member states.
From 1st January 2021 Acquisitions and Dispatches will now be called Imports and Exports and they will be treated as if they were coming in from another country that is not located in Europe. HMRC is advising that UK businesses hire a customs agent to deal with their customs for imports and exports, as this is usually a complicated and time-consuming task.
If you are not using an agent to deal with the customs declarations, there is a staged approach to help importers/exporters adjust to changes due to Brexit. The staged approach will run from the 1st January 2021 to the 30th June 2021.
Under the staged approach traders can use one of three methods of declaring goods entering the UK:
- Traders who import standard and non- controlled goods from the EU to GB can use existing UK custom controls to complete a standard customs declaration at the point of entry to the UK.
- Entry in Declarants Records (EIDR). Making imports without prior authorisation in advance, this means the trader can avoid a full or simplified declaration in order to release the goods. They would make a declaration into their own records and may have to provide a full declaration at some point. This is only available for standard goods.
- Simplified Declaration Procedure (SDP). This can be used for standard goods and some controlled goods. This procedure has more customs requirements but is still simpler than making full customs declarations.
After the staged approach ends on the 30th June 2021 declarations must be made by the fourth working day of the following month regardless of which you are using EIDR or SDP.
If the trader decides to use the Simplified Declarations, there are some steps to complete.
- Make sure you have an EORI number (Economic Operators Registration and Identification Number) These were issued earlier last year but if you haven’t received one you can apply online with HMRC.
- Apply for a DDA (Duty Deferment Account) with HMRC
- Register for Simplified Declarations scheme (EIDR or SDR)
- Ensure you have customs compatible software if not using an agent
Simplified Import VAT Accounting (SIVA)
Simplified Import VAT Accounting (SIVA) enables a company or trader to operate a VAT deferral account without a guarantee for the VAT element, therefore reducing the compliance costs to the trader. They will still have to have a 100% guarantee for the duty element of the import.
This will benefit smaller businesses without large bank balances to cover the customs deferral liability.
There are however strict approval criteria’s in place in order to be authorised for SIVA
- Business must be registered and continuously trading for 3 or more years, although businesses that have been trading less than 3 years may still be considered, providing they meet further financial checks
- Traders must not be in any debt with HMRC on application and have a clear debtor history
- Serious offences recorded by HMRC for the trader will not be considered
- If they have previously held a deferral account their payment history will be checked for the last 12 months
- Must have good VAT compliance
- No defaults within last 12 months
- Any transfer of going concern must have taken place 3 years prior to application
- Provide financial solvency and undergo a liquidity assessment
- Exceptional level of record keeping
- External credit checks will be made where needed by HMRC
HMRC will make a decision and issue a letter within 120 days of application
If approved the trader will be issued a DAL (Deferment Account Limit) the trader would be expected to trade within this limit. The guarantee would be less for import VAT using SIVA rather than using the bank guarantee of deferral.
Postponed VAT Accounting
Postponed VAT Accounting (PVA) will apply to all UK imports of EU and non-EU goods less than £135.00 from 1 January 2021. The PVA system for VAT aims to avoid the negative cash flow impact on businesses that are hit by an additional VAT bill and will avoid having goods held in customs until the VAT is paid.
Rather than physically paying import VAT and then reclaiming it on the subsequent VAT return, the VAT is entered as output and input VAT on the same return.
Currently import VAT is due at the same time as customs duties on goods imported from a non-EU country. On the 1st January 2021 import VAT will be due on all imports from the EU and non-EU countries.
Postponed VAT Accounting will be introduced on 1st January 2021 by HMRC to
- Account for import VAT on VAT return
- Help maintain the cash flow position of the business
- Provide a cash flow benefit to the business
NB if you are paying for VAT for goods at point of arrival to the UK, you do not need to use PVA as the VAT will already be paid.
Some examples are below in order for you to see the changes to the VAT return after 1st January 2021.
Receiving goods from EU countries
Currently if your business is registered for VAT in the UK and it receives goods from the EU you would account for the VAT through your VAT return as below.
As you can see above before 1.1.21 box 2 has VAT due on acquisitions from the EU and box 7 contains the total value of purchases and box 9 has total value of all acquisitions from EU states. Box 4 contains the VAT reclaimed.
From the 1st January 2021 you can see that box 1 and 3 are populated with the VAT due in this period and box 4 and 7 have the reclaimable input VAT and the total value of purchases from the EU, purchases are treated exactly the same as purchases from the rest of the world would be. This means boxes 2, 8 and 9 become irrelevant but will stay on the VAT return for NI use.
Sales to the EU
Before 1.1.21 box 6 is populated with the total value of sales and box 8 with total value of all supplies made to the EC member states. No VAT entered into Box 1 as the sale is Zero rated. After 1.1.21 box 8 is now irrelevant and no longer needs populating but you would still include it into your box 6 figure as with any other zero or standard rated sales.
Exports and Imports from the rest of the world
Imports from the rest of the world; see below for what it currently would look like.
Before 1.1.21 box 7 is populated with the total net figure. After 1.1.21 key differences are that box 1 is populated with the VAT due on the import, but then box 4 is also populated with the reclaimable VAT on the purchase and box 7 contains the net figure of the purchase.
Currently (pre PVA) import VAT already applies however this is payable on import and does not need to be included in the VAT return to be paid and then reclaimed against itself. With PVA the VAT is deferred until the customs declaration is made so it now appears on the VAT return.
The outcome in all is the same but the importer has avoided the immediate payment of import VAT.
Please note that sales to the rest of the world are not affected by PVA rules and will remain the same.
If you don’t use PVA and pay the VAT when the import is entering the UK then you only need to fill in box 4 and 7 and obtain a C79 report this will show all VAT paid at customs.
The VAT return figure under MTD regulations cannot be adjusted, the adjustments must be made in the main accounting software. The key to managing the postponement VAT is keeping up with the monthly online statements. However, the postponed VAT accounting report will only show imports that have been declared and won’t show imports that have been deferred.
Remember that import VAT should be calculated after any costs or other duties, therefore it is not reliable to estimate import VAT from a supplier invoice alone.
The PVA report will form a vital part of the accounting records, so downloading and keeping a record of this is important in case any information is no longer available online.
More details on Postponed VAT Accounting can be found here.
For sales made on or after 1st January 2021, you will not be able to use the UK’s VAT Mini One Stop Shop (MOSS) service to declare sales and pay VAT due in the EU.
The final return period will be period ended 31 December 2020. Sales made before 1 January 2021 in this return.
The return must be submitted by 20th January 2021. You can still access, view, amend or update anything in your MOSS account until 31 December 2024.
For sales made on or after 1 January 2021 client must register for either
- VAT MOSS in any EU state
- VAT in each EU member state where they sell digital services
The client must register but the 10th day after the first sale to an EU member state. No registrations can be made before 1st January 2021.