Authors: Kristina Hili, Tax Supervisor and Amanda Abela, Senior Tax Accountant

Date: 8 February 2021

The United Kingdom’s (UK) exit from the European Union on 31 January 2020 followed lengthy discussions and negotiations up until December 2020. The UK finally issued a Trade and Corporation Agreement (TCA) on 24 December 2020 which details the UK relationship with the European Union (EU). This article will summarise its implications from a VAT perspective.

With effect from 1 January 2021, the UK has become a third country. Cross-border trade in goods and services is governed by rules on applying VAT upon the import and export of goods (or provision of services) from / to third countries, with an exception for supplies of goods to Northern Ireland (NI), which will continue to be regarded as intra-community supplies, discussed in further detail below. Services are not covered by this exception.

VAT changes for cross-border supplies of goods
The main change for businesses that send goods to or receive goods from Great Britain (GB), is that such transactions are now considered as exports and imports. Goods entering the EU from GB will constitute an importation in the Member State (MS) where the entry takes place. Goods leaving the EU for GB will be exports. Moreover, goods entering GB coming from an EU MS will constitute an importation in GB and goods leaving GB destined for the EU will be exports.

Thus, post-Brexit, EU established businesses that are importing goods from GB are now dealing with customs procedures, VAT payments upon importation, custom duties (if goods are not of UK origin) and most likely cash flow problems. Pre-Brexit, no VAT was paid as VAT was accounted for by reverse charge and there were no custom dues. On the contrary, when EU businesses export goods to GB are now performing an export, rather than an intra-community supply and faced with customs procedures. As of 1 January 2021, all goods imported to GB will be subject to UK VAT, which previously with the low-value consignment relief, all goods having a value less than GBP 15 were not subject to VAT.

Distance sales implications
The rules applicable to business-to-consumer (B2C) sales of goods is now impacted by Brexit. Distance sales performed by EU businesses to GB are now considered as exports and the distance sales rules no longer apply. The individual customer is now exposed to UK customs procedures, a VAT payment which is payable at importation by the customer according to the new UK VAT code and customs duties (if goods are not of EU origin).

On the other hand, if a business established in GB performs a distance sale to EU, the customer is considered as doing an import in the EU, is exposed to EU customs procedures, is obliged to pay VAT in the MS of importation and customs duties (if goods are not of UK origin). Up to 30 June 2021, an exemption from VAT payment applies up to value of EUR 22. However, with effect from 1 July 2021 the exemption will be removed, and new Special Schemes will apply in the EU.

The EU is introducing a new special scheme for imports called Import One Stop Shop (IOSS) for goods up to EUR 150 in value and Non-EU businesses will have the choice to register for this scheme. The non-EU business will charge and collect VAT at the point of sale on products below EUR 150, when selling to EU customers. The VAT rate will be that of the customer’s local rate. This scheme is beneficial as the products will be treated as exempt from VAT upon arrival, meaning they will move faster through customs and it will reach the consumer in a very short span of time. UK businesses wishing to register for the IOSS must appoint an intermediary established in the EU. The intermediary shares the responsibilities for the supplier under the IOSS regime, which includes the submission of VAT returns and VAT payments.

However, if the IOSS is not used, UK businesses may benefit from a second simplification, also for goods of an intrinsic value up to EUR 150. The import VAT will be collected from customers by the customs declarant (such as postal worker, courier etc.) who will pay it to Customs via a monthly payment.

VAT changes for services
Although the main Brexit changes relate to goods there are some changes to services as well. The UK place of supply rules are to be applied. In principle, the place of supply would still depend on the nature of the service and the VAT status of the customer. UK established businesses that supply telecommunications, broadcasting, and electronic services (TBEs) to non-taxable persons in the EU are to register for the non-Union Mini One Stop Shop (MOSS) up to 30 June 2021, in a MS of their choice. Moreover, with effect from 1 July 2021, UK established businesses that supply services to non-taxable persons in the EU (i.e. taxable in the respective MS) can register under the Non-Union One Stop Shop (OSS) in a MS of their choice.

Transacting with NI
The agreement states that NI will remain part of the UK’s VAT area, but with NI’s VAT rules fully aligned with EU VAT laws and with access to the EU system. Consequently, NI shall be treated as if it were a MS of the EU. Goods being received in NI will be subject to EU Customs duty, however if it can be demonstrated that goods entering NI are not destined to the EU’s single market, no duty will apply.

In view of the exception for supplies of goods to NI, NI has been assigned a specific ‘XI’ identifier, which can be verified on the VIES system. Both the inclusion of NI as a territory of a MS and its identifier code have been included in the Fifteenth Schedule to the Malta VAT Act dealing with territories of the Community as has been amended by Legal Notice 477 of 2020.

Intrastat codes have also changed in this respect, wherein an ‘XI’ code has been introduced for Northern Ireland, same as for VAT purposes, and an ‘XU’ code, intended solely for the purpose of filling-in the state of origin in the UK excluding Northern Ireland.

VAT refunds post-Brexit
UK businesses incurring EU VAT on travel, hotel or other expenses are no longer able to use the 8th Directive online VAT reclaim system – Council Directive 2008/9/EC. This is because the 8th Directive is open to taxable persons not established in the MS of refund but are established in another MS. Instead, UK businesses may now use the 13th Directive VAT reclaim system – Council Directive 85/560/EEC, since this system caters for taxable persons not established in Community territory.

However, EU businesses can claim a refund of the VAT paid in the UK before 31 December 2020, under the 8th Directive through the online VAT reclaim system, by not later than 31 March 2021.

For any queries or assistance on any of the above, please feel free to contact