Brexit: Key Tax points

The EU and the UK negotiating teams have agreed the terms of a detailed post-Brexit Trade and Cooperation Agreement (the “TCA”) which has been given effect from 1st January 2021.  This article is part of a series of three articles which outlines the implications of the TCA and Brexit on UK taxation, now that the transition period has ended.  

The TCA and Tax

As noted in the first of our series of articles on Brexit tax implications, a fundamental impact of the TCA in respect of tax is the requirement for complex rules of origin to be met in order to secure zero UK / EU tariffs when trading in goods.  Those rules require that goods must largely originate from the EU or UK which will depend on a range of factors.  Further details are outlined here.  In addition to the TCA’s impact on tax, there are several key tax implications which should be highlighted as a result of the UK’s exit from the EU and the transition period having now ended.

Indirect Taxes

VAT and custom duties 

Here is our summary of key tax points for UK trade in goods and services from 1 January 2021:

Goods	Services
EU VAT rules no longer apply in Great Britain (GB). All movements of goods between the EU and GB will be considered as imports or exports subject to customs formalities and controls. This includes consignment stocks and the like – now treated as imports on arrival.  This also means a number of EU VAT simplifications such as for call-off stock are now lost for GB businesses. For example, a GB VAT registered trader can no longer use its GB VAT number in a supply chain triangulation simplification. However GB businesses can still use an EU VAT number in a triangulation even if it does not involve Great Britain.  However, certain transitional rules will apply for supplies or movements of goods (including call-off stock) and services which span/straddle 31 December 2020.  For example, HMRC states that if a movement of goods from an EU supplier to a GB VAT-registered business started before the end of the transition period, but the goods arrive in GB afterwards, that transaction should still be an acquisition liable to UK acquisition VAT (if any). The UK’s fulfilment house due diligence scheme will now apply to GB fulfilment houses that hold stock on behalf of EU businesses.	The supply of services by a UK business to an EU business will still, as a general rule, be subject to VAT where the customer is established, and the business customer will be liable to account for that VAT under a reverse charge.  EU VAT registration numbers remain the best evidence that an EU customer is in business, although alternative evidence can be accepted. Similarly, the supply of services by an EU business to a UK business will still, as a general rule, be considered as supplied outside the EU and therefore not taxable under EU VAT rules but subject to the UK reverse charge for the UK business customer. However, UK businesses are no longer required to complete an EC Sales List when supplying services to businesses located in the EU (and vice versa for EU businesses).  Supplies of services involving Northern Ireland will remain subject to UK VAT rules.
Imports into the EU / Great Britain (GB) will be subject to the payment of import VAT when applicable. Different VAT and customs arrangements will apply in respect of Northern Ireland (see our article on Northern Ireland). Deferment of import VAT payments, postponed VAT accounting allowing recovery through VAT returns, or zero-rating may be possible, depending on the circumstances, and UK transitional rules should also be considered; for example, these allow for import VAT on goods on which acquisition VAT has already been paid before 31 December to be reduced. Intrastat requirements will still apply for imports to GB from the EU (in 2021) and generally, to NI-EU trade.   To assist with cash-flow, the UK has introduced postponed VAT accounting for UK VAT registered businesses.  This allows importers to account for the import VAT due on a deferred basis i.e. to declare it on their VAT return and then reclaim it on that same return rather than paying it upfront to HMRC, subject to normal rules on VAT recovery (akin to a reverse charge). However, and in particular, it must be noted from HMRC guidance that only owners of the goods can reclaim the UK import VAT due (see below).  Businesses do not need to be authorised to use postponed VAT accounting (which is optional in most cases subject to certain exceptions), they can select that they will be using postponed VAT accounting in their customs declaration.  When applicable, businesses need to ensure they have a UK and EU EORI number for customs declarations purposes in order to move goods into the UK/EU.  The importer’s EORI number and VAT number must be stated in the customs declaration where required.   Returned goods relief (which provides relief from import VAT for goods returning to the UK, if they have not been modified, changed or sold) will be available for a further period of one year, for goods that left the UK more than 3 years before the end of the transition period and are currently in the EU subject to certain conditions being met. Goods must have been previously in free circulation before they were exported.	UK / EU VAT rules for where B2C services should, in general, be taxed, and most of the exceptions to those general rules, such as for digital services, remain unchanged by Brexit.   This means that UK businesses would remain liable to account for EU VAT due on the supply of certain services (e.g. digital services) to EU consumers (see further below). However, one particular change is for B2C services of a professional, technical, intellectual or other intangible nature – when these are supplied from the UK to EU consumers, they will now be outside the scope of UK VAT.   It is expected that such supplies to UK individuals by EU-based businesses should also fall outside the scope of EU VAT based on similar EU VAT rules.
The EU and UK have agreed in the TCA that no export duties or taxes should be imposed on the export of goods to and from the UK and the EU, and any internal tax or other charge (such as VAT and excise duties) cannot be higher than that applicable to domestic goods.  Goods exported to GB should therefore be EU VAT free, although businesses must be able to prove that the goods have left the EU. EU countries generally base this proof on the exit certification given to the exporter by the customs office of export.  Similarly, sales of goods shipped from GB to EU businesses/consumers should be UK VAT zero-rated exports under the UK’s normal rules for export.  Evidence of such movements will need to be kept by the GB seller (though an EC Sales list requirement no longer applies for GB-EU B2B exports). GB businesses should however be alert to changes in EU customs rules requiring the exporter to have an EU establishment when exporting EU goods, and the implications this may have for their overseas supply chains.  GB businesses may need to assess their Incoterms e.g. ex-works and contractual arrangements with EU sellers to ensure e.g. the EU seller acts as exporter or to look at other options for export (e.g. EU group entity or third party EU logistics provider).	Services supplied from the UK that come under the UK’s use and enjoyment rules and which are effectively used and enjoyed outside the UK (rather than outside the EU, as previously) will be outside the scope of UK VAT e.g. hire of goods (including means of transport).  On the other hand. supplies of these types of services to customers outside the UK (i.e. now including the EU) but “used and enjoyed” in the UK may now be subject to UK VAT, for example, leasing an asset to an EU entity which is used in the UK.
EU businesses without a UK establishment will need to appoint an indirect customs representative in the UK for UK importation purposes.	Services supplied from the UK that come under the UK’s use and enjoyment rules and which are effectively used and enjoyed outside the UK (rather than outside the EU, as previously) will be outside the scope of UK VAT e.g. hire of goods (including means of transport). On the other hand. supplies of these types of services to customers outside the UK (i.e. now including the EU) but “used and enjoyed” in the UK may now be subject to UK VAT, for example, leasing an asset to an EU entity which is used in the UK.
As the TCA includes a Protocol on VAT and mutual assistance, GB businesses carrying out taxable transactions in an EU Member State should not now be required to appoint a tax fiscal representative for EU VAT registration/compliance purposes, though this should be confirmed locally. However UK importers of goods into the EU will need an EU-based customs intermediary (an indirect representative) for importation to the EU. Both UK / EU importers must also consider the TCA’s rules of origin requirements in order to secure preferential i.e. zero duty tariffs for their imports as noted in our first article on the TCA and tax mentioned above.	Subject to transitional rules, UK businesses can no longer use the UK’s VAT mini-one-stop-shop (MOSS) regime in the UK to report and account for EU VAT on B2C digital services to EU customers, and the current EU-wide VAT threshold for supplies of digital services to consumers will cease to apply to UK businesses. This means that EU VAT will be due on all supplies by UK businesses of digital services to EU consumers, regardless of the value of the sales.  Similarly, EU suppliers will not be able to use the EU VAT MOSS system to report and pay UK VAT due on B2C digital sales in the UK and instead will have to register for VAT in the UK.  UK suppliers will have to switch from the UK’s VAT MOSS system to make use of the “non-Union scheme” in an EU Member State, unless they have an EU establishment, in which case they should move their Union VAT MOSS registration to that EU Member State.  The existing MOSS will be extended in the EU from July 2021 to a One Stop Shop to cover other B2C supplies of services taxable in the EU. UK suppliers who supply those types of services in scope to final consumers in the EU may opt to make use of the “non-Union scheme” and register for that purpose in one of the Member States unless they are also established elsewhere in the EU (so eligible for the Union scheme instead).
No more EU distance selling rules for B2C sales of goods between the EU and UK (save in respect of EU-Northern Ireland trade when applicable/until EU rules change in July 2021).  Note that EU suppliers can become liable to register and account for UK VAT on B2C sales of goods (for which no UK VAT registration threshold applies) under new VAT rules involving sales direct to UK consumers and/or through an online marketplace (see further below). In addition, no more B2B acquisition VAT reporting (save under certain transitional rules and in respect of Northern Ireland)	The UK’s Tour Operators Margin Scheme will continue to apply to tour operators located in the UK.  From 1 January 2021 the margin on designated travel services which take place inside the EU will be zero rated in line with the current treatment of supplies that take place outside the EU. The margin on those enjoyed in the UK will remain taxed at the standard rate.
For GB businesses, all VAT refund claims (for goods and services) will need to be made using the 13th VAT Directive process. Transitional rules will apply for VAT incurred in 2020 up to 31 March 2021.  NI businesses can continue to use the EU VAT refund system to make a claim for a refund of the EU VAT incurred, where it is incurred solely in respect of goods - the EU VAT refund system will not be available to NI businesses when the EU VAT relates to services, in which case a 13th Directive claim would be required as for GB businesses. This process varies across the EU. UK businesses may be required to provide a certificate of (trading) status in order to get a refund.	VAT incurred on costs used to make certain supplies of finance and insurance services from the UK to EU persons (not just non-EU persons) will now be recoverable, improving the VAT recovery for finance businesses.

E-commerce sales

Overseas e-commerce sellers now must comply with new UK VAT obligations, meaning that many more will fall within the scope of UK VAT, presenting compliance and enforcement challenges for HMRC. 

This is because a new model for the VAT treatment of goods arriving into the UK from overseas now applies as of 1 January 2021, which moves VAT collection away from the border and places responsibility to account for the VAT due (depending on the circumstances) on the seller or on an online marketplace where they facilitate the sale, or on the UK recipient if they are VAT registered.  

Broadly, consignments of goods with an intrinsic value of £135 or less (“low value consignments”), that are: 

(i) outside the UK and sold to GB consumers will have UK supply VAT charged at the point of sale instead of at the point of import, irrespective of when title passes (so UK import VAT will not be paid at the border); and

(ii) outside the UK and EU and sold to NI consumers will have import VAT charged; however, the seller (or online marketplace, depending on the circumstances) will be liable to account for this VAT on their VAT return instead of at the border.  

Low value consignments which are outside GB at the time of sale and imported and sold to a UK VAT registered business will be accountable by that business customer via a new UK reverse charge rule, or through postponed VAT accounting (Northern Ireland).   This new reverse charge rule will not apply in other circumstances, (e.g. for consignments exceeding £135 or for B2B sales of goods located inside GB at the time of sale). 

Where an overseas seller sells goods directly which are already within GB at the point of sale, irrespective their value and irrespective of whether or not sold to a UK VAT registered business, the overseas seller will have to register for UK VAT in order to account for UK VAT on such sales.  This position only changes if the goods are sold B2C via an online marketplace (see below). 

Certain exceptions to these new measures will apply e.g. for excise goods, and sales made by those who are not in business (e.g. gifts and consignments sent from consumer to consumer), and new B2C (full) VAT invoicing obligations will now also be required from sellers or OMPs depending on the circumstances (subject to some exceptions).  

The £135 limit aligns with the UK’s threshold for relief from customs duty, which means that the UK will not charge UK tariffs/customs duty on these low value consignments, irrespective of their origin.  The limit applies to the value of a total consignment that is imported, not the separate value of individual items that are in a consignment. The consignment’s “intrinsic value” is based on the sale price of the goods excluding any separate transport or insurance costs not included in the price and any other identifiable taxes and charges.  Low value consignment relief (LVCR), which was an import VAT exemption for consignments of goods valued at £15 or less, has been removed for goods arriving in Great Britain (and for mail order goods/goods ordered remotely in respect of Northern Ireland), although UK gift relief from duty/VAT for non-commercial consignments i.e. gifts valued up to £39 will remain.  For GB consignments subject to these new measures, HMRC states that customs declarations will still be required for non-fiscal purposes, with a focus on consignment valuation checks, even though no customs duty and no UK import VAT will be chargeable.  However, in recognition of the changed role of the customs declaration for these consignments, several facilitations, including the use of reduced data sets and bulk declarations, should be available.

Consignments valued above £135 limit will remain subject to UK import VAT and normal customs rules and processes – which also means they will be liable to customs duties/tariffs unless the goods originate from the EU under the TCA’s requirements for rules of origin. As noted above, from 1 January 2021, UK VAT registered businesses (i.e. who own the goods at the time of import) will be able to use postponed VAT accounting to account for import VAT on their VAT return.

If a business sells its goods through an online marketplace (OMP) facilitating such sales, which terms are widely defined, OMPs (whether UK or overseas) themselves will also face a greater UK VAT compliance burden as they can become deemed sellers for UK VAT purposes in respect of B2C sales to GB/NI customers under certain circumstances, requiring OMPs to charge and account for UK VAT at the point of sale.  This applies in respect of low value consignments which are sold to GB consumers by any seller (UK or overseas) via the OMP when the goods were located outside the UK at the point of sale, and in respect of B2C sales of goods to GB consumers via the OMP, of any value, by an overseas seller (i.e. established outside the UK), when the goods were already located inside GB at the point of sale.  In those latter circumstances, the overseas seller would be treated as having made a zero-rated sale to the OMP, entitling it to register for UK VAT so that it may reclaim import VAT costs incurred in the course of previously importing the goods, subject to the normal rules for VAT deduction.  Overseas sellers will remain responsible for B2B sales of goods already in GB at the time of sale.

An OMP will be also be held liable for under-declared VAT if they cannot show they have taken reasonable steps to make sure the correct VAT was charged.  This is in addition to existing UK VAT obligations for OMPs, for example, to display verified VAT numbers of their sellers, to remove non-compliant sellers from their website after notification from HMRC and to address the risk of joint and several liability (based on OMP knowledge) in respect of unpaid VAT due from non-compliant sellers operating on their marketplace.  

These new rules are therefore complicated and the outcome will vary depending on a number of important factors which affected businesses will need to monitor:  where the seller is established and whether it is UK VAT registered, where the goods are held and whether the goods are located inside GB or NI or outside the UK at the time of sale, whether the sale is destined for GB customers or NI customers, whether the consignment value of the goods falls below or above £135 and how this is valued, whether the sale is to a VAT registered business or a consumer, whether an online marketplace (OMP) is facilitating the sale and if the seller is overseas and making a deemed zero-rated sale to the OMP, and who will issue the requisite B2C VAT invoices (seller or OMP).  All sellers will have to distinguish their sales via OMPs from direct sales to ensure they apply the correct VAT treatment.  Importers and their agents will need to ensure their systems can identify consignments that are inside/outside the scope of the new model and HMRC expects vigilance around consignment valuation generally. It should also be noted however that similar rules will apply within EU Member States from July 2021. 

As there is no minimum VAT registration threshold for non-UK established sellers, the effect of these new rules is to require most overseas sellers to register and account for UK VAT where they sell goods directly for import to GB consumers. The one limited exception to this would be where overseas sellers only sell goods that are outside the UK at the time of sale to UK VAT-registered businesses. 

In the case of Northern Ireland, unique rules will apply – for example, overseas sellers will remain responsible for the UK VAT due on sales of goods to customers in Northern Ireland which are located in Northern Ireland at the point of sale, irrespective of any OMP involvement  and further special rules apply for Northern Ireland sales of low value goods involving movements from Great Britain to Northern Ireland (see our article on Northern Ireland here).  As the arrangements for Northern Ireland are particularly complex, a grace period to April 2021 has been given from the requirement to complete customs formalities for movements of goods parcels valued under £135 from GB to NI-based consumers. 

HMRC’s policy is that only the owners of goods should import goods into the UK and reclaim UK import VAT.  A wide range of supply chains are affected including leasing but not agents who act in line with section 47 of the UK’s VAT Act 1994 (i.e. in their own name) – they can still reclaim the import VAT as input tax, subject to the normal rules.  Where leased goods are imported, HMRC’s view is that the lessor/owner should act as importer on the customs declaration as only they are entitled to recover the import VAT, either under the owner’s UK VAT registration or under the 13th VAT Directive as implemented in the UK.  This may present practical challenges for many businesses and their overseas supply chains. For example, where goods are imported on a ‘sale or return’ basis by a business customer where title does not pass at import, or retailers using customs warehousing when sourcing overseas goods - HMRC’s guidance advises such retailers that they will need to take ownership of the goods prior to the goods being removed from the warehouse and prior to entry into free circulation, rather than at the time of delivery to retail premises, to allow the retailer to both act as importer of record and recover the import VAT. Businesses must ensure that they are mindful of this rigid approach by HMRC and clarity in contract terms including the appropriate use of Incoterms will be essential as to who takes responsibility for customs clearance, payment of duties and who will act as importer and reclaim the import VAT.  

Social security

A new Protocol on Social Security has been agreed in the TCA, covering the social security position of cross-border workers who move between the UK and EU and their employers.  The Protocol aims to prevent double charges to social security and gaps in coverage.  The starting point is that social security contributions will be due in the country in which the employee is working but there are special rules for “detached workers” (as opposed to “posted workers”).  For further details, please see our latest Brexit briefings on Employment & Immigration.

Direct Taxes

EU tax directives

The March 2021 Budget revealed that from 1 June 2021, domestic legislation that implements the EU Interest and Royalties Directive will cease to have effect. From that date, interest and royalty payments between UK resident and EU resident associated businesses may therefore be subject to withholding taxes payable at source, depending on the withholding tax provisions in the double tax treaties between the UK and the relevant EU Member State. In some cases, payments will be exempt from withholding tax under the relevant treaty. In other cases, withholding tax will be deducted at source by the UK on outbound interest and royalty payments and by the relevant EU Member State on inbound payments. In addition, the terms of some double tax treaties may require a new or revised claim to be submitted to HMRC and / or the tax authorities of the EU Member State in question, i.e. relief will not be automatic.

Other EU direct tax directives (for example, the Mergers Directive and Parent Subsidiary Directive) also cease to apply in relation to UK businesses. Similar to interest and royalty payments, the treatment of inbound dividend payments from EU resident businesses to UK resident associated businesses is now dependent on the relevant EU Member State's domestic laws and double tax treaty provision with the UK. As such, withholding taxes on inbound dividend payments from EU resident businesses might arise. Conversely, the UK does not impose a withholding tax on dividend payments, meaning that there is no risk of such tax arising on outbound dividend payments from UK resident businesses to businesses registered in any EU Member State, or any other country.

Conclusion

As noted in our first article, the end of the transition period for the UK's exit from the EU on 31 December 2020 has brought about certain immediate and fundamental changes from a tax perspective.  Businesses should, to the extent they have not already done so, urgently review their tax position, seek to understand and monitor the new VAT, customs and other tax rules and developments, and prepare for the additional administration and changes that have arisen from 1 January 2021.