Under the TCA (EU-UK Trade and Cooperation Agreement) the European Union (EU) and wider European Economic Area (EEA) became third countries on January 1, 2021. So, in effect, they are treated the same way as the USA, Australia or any other non-EU state. Similarly, the UK becomes a third-party state to the EU and EEA countries.
How has invoicing changed?
Although most of the UK's VAT rules remain the same, there are new procedures when supplying services to an EU customer. The good news is that you no longer need to distinguish between EU and non-EU customers — all foreign countries are treated the same.
For most professional services, any customers outside the UK will not have to pay UK VAT, which will be a welcome cost saving for them. Plus, there are no transitional rules, so VAT will simply be determined based on if the ‘tax point’ was before or after January 1, 2021.
Also, UK businesses are no longer required to state an EU customer’s VAT registration number.
What is reverse charging?
When you reverse charge a phone call the recipient pays the bill, and it’s the same for reverse charging VAT — the buyer becomes responsible for the VAT part of the transaction. The process is aimed at reducing VAT fraud as the local tax authority deals with the local business, not the overseas supplier. Also VAT is charged at the relevant local rate, thus levelling the playing field for local and foreign suppliers.
Reverse charging only applies to reduced rated or standard rated services.
For supplies within the UK, sellers collect the extra 20% VAT from the customer and then pay it to HMRC, while the customer claims the 20% suffered back from the tax office. Reverse charging simplifies the process as the customer declares what is due and claims it in one step — the seller does nothing.
For example, if you have a VAT registered customer overseas, you just invoice them with no UK VAT added. The customer then calculates any VAT owed at their end and makes a claim — no cash in respect of VAT changes hands and the transaction is usually VAT neutral, although overseas VAT obligations may arise in some situations
Do I need to reverse charge EU customers?
From January 1, 2021, any goods supplied to countries outside of the UK, including the EU, will be classed as exports and zero-rated for UK VAT. Although you won’t declare VAT, you are still required to record the sales on a VAT return.
Reverse charging normally applies to business to business (B2B) sales of services, so the customer is responsible for the VAT. There are some exceptions covered by HMRC special rules, mainly concerning property, telecommunications, broadcasting and the arts.
Reverse charging applies to most services supplied by a supplier from outside the UK to a UK based business. Imported goods are dealt with under a different system.
What happens when I buy from the EU?
If your business buys services from outside the UK, then VAT reverse charging will most likely apply. Most overseas suppliers of services to UK businesses should not be charging overseas VAT, although certain services may require either overseas or UK VAT to be charged. Check the invoice to see that the tax rate and amount are correct, and, if the reverse-charge mechanism applies, the UK customer should declare the purchase and the sale on the VAT return.
You will need to convert the value of the services into sterling and calculate the amount of VAT due, and add this to your VAT return. Credit your VAT account with the amount of VAT due (as if you had supplied the services) and then debit your VAT account with the amount of VAT due.
Please note that any goods and services bought via reverse charging still count towards your VAT registration threshold.
What about importing goods?
If you wish to import goods into the UK you will need an EORI number, issued by HMRC, so you can complete a customs import declaration. As the ‘importer of record’ the UK company is responsible for paying any customs duty and import VAT.
There are new procedures for postponed import VAT accounting (deferring import VAT payments to the VAT return), when most businesses should be able to reclaim the VAT in full. In effect, this will be a cash neutral entry on the VAT return.
What else has changed?
Companies in Great Britain do not have to complete EC Sales Lists, but these will continue for firms based in Northern Ireland.
There is no longer a common VAT reclaim process for EU states. Now, any reclaims must be made directly to the local overseas tax authority. Each state will have its own VAT rates, thresholds and deadlines, so UK businesses either need to handle the paperwork themselves or employ the services of a tax agent.
With the changes to the VAT rules between the UK and EU, companies need to adjust their accounting systems. Although not all the new regulations affect professional services firms, it is still wise to identify the areas where changes need to be made and if you will be due unexpected costs.
The next step
To get the Brexit latest on VAT issues, please contact your usual UHY adviser.
