Cashflow and administrative impact of Brexit-related VAT rule change

25.11.2020
Rob Geary
Brexit, News, VAT

In the latest of our series of weekly Brexit Blogs, Rob Geary explains how Brexit will result in changes to VAT rules which will affect any business importing or exporting goods.

Whether there is a deal or not, a new model for the VAT treatment of goods arriving into the UK will be introduced on 1st January – and for low-value goods in particular, the change will have a big effect both on cashflow and time spent on administering the new system. 

Currently, under the Low Value Consignment Relief (LVCR) a UK business importing goods from outside the European Union of a value below £15 is not required to pay import VAT.

The government has confirmed this relief will be withdrawn from 1st January 2021 once the Brexit transitional period ends, meaning import VAT will be charged on all imports where there is no relevant separate relief (for example, the existing zero rating for sales of children’s clothes).  There will be no changes to the way customs duty is implemented and paid. 

For example, this change would mean the sale of an item valued at £14 would now cost the importer £16.80, with a new VAT charge of £2.80 (at 20% VAT).  Although the eventual VAT liability will be the same, the implications for businesses selling into the UK is to register for VAT and make use of the postponed VAT accounting measures that HMRC are introducing. 

In addition, the government has now announced a new £135 VAT-at-point-of sale regime (similar to the EU’s €150 scheme). This means that for consignments not exceeding £135 in value (excluding VAT), the point at which the VAT is collected will move from the point of importation to the point of sale, resulting in UK supply VAT, rather than import VAT, becoming due on these sales.  

So overseas sellers will be required to register and account for the VAT to HMRC unless they use an online marketplace such as Amazon or eBay, in which case the marketplace itself will be responsible for collecting and accounting for the VAT.

The EU itself will also be withdrawing the relief from 1st July 2021.  Between January and July next year, UK suppliers will be able to take advantage of the relief on sales to the EU, as suppliers from a non-EU country. 

After July 2021, UK suppliers will be required, for sales valued below €150, to register to use the EU’s new VAT declaration the ‘import one-stop shop’ (IOSS).  Registration for IOSS can be completed in any EU member state, and will cover the entire EU. 

For anyone other than a VAT specialist, this sounds extremely confusing – because it is.  But with online selling resulting in a considerable increase in transactions between sellers in one country and consumers in another, it will be increasingly important to get it right.  As ever, leaving the single market is introducing new complications into the procedures, not to mention increased costs, at least in terms of cashflow. 

Some sellers of low value goods are probably unaware of the impact this will have on their business; given the extra costs involved in accounting for VAT on low value items, it’s possible that some will decide not to sell into the UK market at all.

Read more on our Brexit hub

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