On 31st January 2020, the United Kingdom (‘UK') was officially withdrawn from the European Union (‘EU') after years of negotiations and uncertainty following the 2016 Brexit referendum. Then began a transition period which ended on 31st December 2020 during which the UK and EU negotiated their future relationship. During this period, the VAT rules and obligations remained relatively unchanged, but various changes took effect from 1st January 2021.
For VAT purposes, at midnight on 31st December 2020, the UK formally stopped being an EU country and became a third country. Therefore, if suppliers trade with the UK (subject to the conditions of the Protocol on Ireland and Northern Ireland) the VAT rules for trade with non-EU businesses started applying. Below is a summary of the changes in trading with the UK following the end of the transition period.
Supplies of goods from the EU to the UK, previously intra-Community Supplies (‘ICS'), are now considered exports to the UK. Suppliers previously had to submit Recapitulative Statements for all exempt ICSs of goods, however, now the exportation is deemed an exemption with credit so no submission is required.
On the other hand, supplies of goods from the UK to the EU, previously intra-Community Acquisitions (‘ICA') applying the reverse charge mechanism, are now considered imports from the UK, with VAT being due on importation.
Supplies of goods which are transported from the EU to UK non-taxable persons, previously satisfying the conditions of distance sales*, are now also considered exports to the UK, with VAT being due on importation by the customer in the UK according to the new UK VAT Code.
Supplies of goods which are transported from the UK to EU non-taxable persons, previously satisfying the conditions of distance sales*, are (following the end of the transition period) now considered exports to the EU with VAT being due on importation by the non-taxable person. A VAT exempt threshold on the consignment value of €22 will apply on imports until 30th June 2021. From 1st July 2021, new schemes will come into force which will be further explained in the One-Stop Shop section of this article.
*distance sales are sales of goods transported by an EU supplier to non-taxable persons in other EU states (provided some other conditions are met) and require the supplier to register for VAT in the EU state the goods are being transported to. However, if during that year or the previous year the total sales transported by that EU supplier to a particular EU state does not exceed the established threshold for distance sales (according to the legislation in that EU state – this threshold is €35,000 in Malta and was £70,000 in the UK), the EU supplier may charge his local rate of VAT and not register for VAT in the EU state the goods were transported to.
It is important to note that the above does not consider the impact these changes in VAT treatment will have on customs regulations and procedures. As of the 1st January 2021, the UK is treated as a non-EU country and as such customs regulations and procedures now apply to trade between the UK and the EU.
The end of the transition period brought less significant changes to the VAT treatment of services. Supplies of services between EU and UK businesses, previously deemed to take place where the business customer is located, has not changed. Whereas suppliers previously had to submit Recapitulative Statements along with their VAT returns, these are no longer required given the UK is now a non-EU country. The business customer previously applied the reverse charge mechanism for these expense invoices in their VAT returns, and this has also not changed. The changes relate solely to the particular boxes these invoices are reported in when submitting the VAT return.
Supplies of services from the EU to UK non-taxable persons, previously deemed to take place where the EU supplier is located, were subject to the VAT rate in the supplier's state. There is no change in this regard, aside from the following services to non-EU non-taxable persons (now also applying to UK non-taxable persons) which are deemed to take place outside the EU, and thus outside the scope of EU VAT:
- transfers and assignments of copyrights/patents/licences/trademarks;
- advertising services;
- services of consultants and consultancy firms/engineers/lawyers/accountants and similar services;
- data processing and the provision of information;
- obligations to refrain from pursuing/exercising a business activity or a right referred to in this item;
- banking/financial/insurance (including reinsurance) transactions except the hire of safes
- supply of staff;
- the hiring of movable tangible property except of all means of transport;
- provision of access to a natural gas system situated within the territory of the Community or to any network connected to such a system, to the electricity system or to heating or cooling networks, or the transmission or distribution through these systems or networks, and the provision of other services directly linked thereto.
Non-taxable EU persons receiving services (deemed to take place where the supplier is located) from UK suppliers will still remain subject to UK VAT, subject to any changes to UK VAT rules going forward.
Supplies of services from the EU to UK non-taxable persons mainly relating to telecommunications, broadcasting and electronically supplied services, deemed to take place where the non-taxable person is located, were previously using the Mini One Stop Shop (‘MOSS') Union scheme to charge, collect and pay VAT in the UK. These services are now outside the scope of EU VAT, but once again subject to any changes to UK VAT rules.
The changes in VAT treatment on the supply of services from the UK to EU non-taxable persons, deemed to take place where the non-taxable person is located, is further analysed in the One Stop Shop section below.
One Stop Shop (‘OSS')
As of the 1st July 2021, a number of changes to the EU VAT Directive relating to e-commerce will take effect. The existing MOSS scheme will be extended to various OSS schemes. One such scheme will be the Import OSS applicable to distance sales to non-taxable persons of goods imported from third countries, including the UK, for consignments with an intrinsic value of up to €150 (abolishing the €22 threshold). Under the scheme, suppliers will charge and collect the VAT applicable in the EU state where the non-taxable person is located. This VAT will be declared in the online returns submitted by the supplier, and paid to the Member State through the system. UK suppliers will have the option to apply for and use this scheme, resulting in the quick release to the customer of goods from customs.
With respect to services, UK suppliers of telecommunications, broadcasting and electronic (‘TBE') services to non-taxable persons in the EU may have previously (prior to the end of the transition period) been using the existing MOSS Union scheme to charge, collect and pay VAT to the relevant Member States. Following the end of the transition period, these suppliers will have to shift to the Non-Union scheme. From 1st July 2021, the Non-Union scheme will be extended to all types of services to EU non-taxable persons.
Protocol on Ireland and Northern Ireland
Brexit negotiations focussed on the unique situation of the island of Ireland, which is divided into the Republic of Ireland (EU Member State) and Northern Ireland (part of the UK). A solution was found in the form of this Protocol, avoiding a hard border between the Republic of Ireland and Northern Ireland.
In brief, the Protocol states that Northern Ireland is still subject to EU VAT rules relating to goods (the Protocol does not cover services) entering and leaving the country, whilst the UK will keep all VAT revenue generated by Northern Ireland. Thus, supplies of goods between Northern Ireland and the rest of the UK will be treated as exports/imports, whilst supplies of goods (including distance sales) between Northern Ireland and other Member states will be subject to normal EU VAT rules. This will be facilitated by the introduction of new VAT numbers for Northern Ireland companies to carry out EU transactions.
The Protocol also established that the EU rules for VAT refunds (discussed in the section below) relating to goods will continue to apply in and to Northern Ireland.
The EU VAT directive allows EU businesses to be refunded VAT (subject to satisfying certain rules and conditions) incurred in Member States where they are not registered. This is known as the EU directive 2008/09/EC (former 8th Directive) VAT refund procedure. Another directive, known as the EU directive 86/560/EEC (former 13th Directive) VAT refund procedure, allows non-EU businesses to be refunded VAT incurred in Member States where they are not registered. This is subject to the condition of reciprocity, where EU Member States may refuse to refund VAT under these directives if the country of the business requesting the refund does not grant similar refunds of VAT to businesses in that EU Member State.
Therefore, UK businesses previously claiming VAT refunds under the 8th Directive may now claim under the 13th Directive, subject to the reciprocity condition. EU businesses previously claiming VAT refunds from the UK under the 8th Directive may now claim VAT refunds under the new UK legislation regulating such refunds. EU businesses which incurred VAT in the UK before the end of the transition period can still make a claim for a refund of this VAT under the 8th Directive until 31st March 2021.
Originally Published by the Times of Malta on the 21st of February 2021
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.