There is a gathering storm in the world of VAT. Melanie Lord highlights some of the issues you should be aware of.
Just when you thought life couldn’t get more difficult, VAT in 2021 is brewing up the perfect storm. There is so much happening right now that it seems impossible to think anyone will be left unaffected. It follows that everyone should be doing something without delay.
The elements coming together in this perfect storm are:
- The knock-on effects of Covid with deferred VAT from Spring 2020 falling due at the end of March 2021, unless the new deferral scheme is agreed to spread the original deferral so this will need early attention.
- Brexit and the Northern Ireland protocol, business to consumer (B2C) trade and B2C digital services are causing so many headaches. Very many of the scenarios that we are seeing point towards the need for at least one EU VAT registration which can be time-consuming and frustrating to organise not to mention expensive to run.
- The much-postponed Domestic Reverse Charge seems set to be imposed from March 2021 with changes affecting all VAT and CIS registered businesses across the construction industry. Systems are not geared up for dealing with this and confusion reigns.
- Phase 2 of the Making Tax Digital regime hits in March 2021 and there are still many organisations who have been in denial about these changes affecting them.
Standing back, we might separate these trials and tribulations into being either internal or external. Internal in that they affect accounting, documentation, procedure and reporting. External in affecting trade, cash, profits and basically the future of the business.
Brexit is the tsunami
For any business where trade is not solely within the UK, Brexit continues to be a huge challenge. B2C traders are by far the hardest hit. EU trading arrangements are not helped by B2C EU rules currently being within a hiatus period until July 2021 when the Import One Stop Shop should make such trade easier. Even then at least one EU VAT registration is going to be needed so planning for EU trade needs to be addressed now.
The immediate problem for EU B2C trade of goods is that sales between January and June 2021 could very easily lead to the UK supplier having to VAT register in every EU state where they have a customer. This is serious stuff and there are really no easy answers. Many businesses have simply switched off the EU button on their websites until July and while this is a radical step, it is a pragmatic and easy solution compared to the multiple registration or European hub options that we have considered in the past.
The main problem everyone is having with EU trade – B2B and B2C alike – is deciding how to handle the import itself and making workable arrangements. The former free flow of goods within the EU shielded businesses from these obstacles. Now we have the requirement that someone – whether that is the seller or the buyer – has to act as the importer of record. That person is then liable to pay the import VAT that will arise and, depending on the value and whether it is B2B or B2C trade, two further questions then arise.
i) Is the import VAT recoverable – if so how and by whom?
ii) Where does the supply take place? If the seller acts as the importer then the sale is treated as happening after the import, which means the seller is trading outside the UK and must register for local VAT. These are non-optional rules. It is just what happens now that we are not in the EU.
Allied with import arrangements are new considerations attaching to the actual movement of goods. As well as export documentation and potential licensing requirements, of special note here are IncoTerms and Tariff Classification. Both play a vital role in dictating such things as where the supply is treated as taking place; who acts as importer and whether duty is payable. This latter also hinges on origin rules, which is an old concept last in regular use before the Single Market rules were introduced in 1993. In a nutshell customs duty will apply to EU trade unless the supplier can confirm the origin of the goods meets the preference requirements. This is a big topic all on its own so needs to be thoroughly addressed by anyone trading with the EU.
The Northern Ireland Protocol
Any comment on Brexit would not be complete without reference to the Northern Ireland Protocol. Two key changes are that NI EU trade must now use a new EORI with a ‘XI’ prefix and import VAT will be due on goods that enter NI from England, Scotland and Wales and vice versa. What causes difficulty is that the same rules will continue to apply to EU movements of goods involving NI while at the same time NI remains part of the UK’s VAT system – so NI is in the UK for some things but in the EU for others. This table might help distinguish treatment in different scenarios:
|Goods moving from/to||VAT treatment|
|GB to EU||Importation in the Member State|
|EU to GB||Export from the Member State|
|GB to NI||Importation in NI|
|NI to GB||Export from NI|
|NI to EU||Intra-EU transaction|
|EU to NI||Intra EU transaction|
The immediate danger arising from internal factors is the Domestic Reverse Charge, which brings a sea-change to VAT accounting in the construction sector. It is hardly any wonder with everything everybody has been facing that these new provisions have not been at the forefront.
Nevertheless, all construction industry businesses will now need to inform their suppliers on construction projects whether they are an end user and establish whether their customers should be charged VAT or the reverse charge be applied.
• Melanie Lord, AVS VAT. If you have any VAT ‘issues’ then contact Melanie on 01438 716176 or by email – email@example.com.