An Overview of UK VAT Rules After Brexit

When the UK decided to part ways with the European Union (EU), it brought about a whole new set of rules regarding trade and taxes. One of the most significant shifts has been in how VAT (Value Added Tax) operates between the UK and EU nations. Prior to Brexit, VAT was managed under a unified system throughout the EU, which made life a lot easier for businesses that engaged in cross-border trade. Now, however, the UK has established its own VAT regulations, which no longer match up with those of the EU.

This change has introduced additional steps, more paperwork, and a variety of new rules for businesses that either purchase from or sell to EU countries. Whether it’s importing goods or providing digital services, many routine business operations are now impacted by these new regulations.

Whether you’re selling physical products to customers in the EU or sourcing supplies from European partners, understanding VAT after Brexit is important for any UK business that trades internationally. It ensures you charge the correct tax, stay compliant with the law, and avoid mistakes that could lead to unexpected bills or delays.

What Changed with VAT After Brexit?

Since the UK left the EU, it’s no longer part of the EU VAT system. This shift means that UK businesses can’t treat EU countries as a single VAT area anymore. The previous rules that simplified cross-border VAT have been replaced with distinct processes for the UK and the EU.

End of the EU VAT Regime for UK Businesses

Before 1 January 2021, the UK followed the same VAT regulations as other EU nations, which allowed goods and services to flow freely across borders without needing import VAT or customs checks. After Brexit, the UK is treated as a 'third country' by the EU. Goods moving between the UK and the EU are now classified as imports and exports, rather than intra-EU transactions. Consequently, UK businesses have to handle VAT differently when trading with the EU.

No More EU-Wide Distance Selling Thresholds

Previously, UK sellers could take advantage of distance selling thresholds that were applicable throughout the EU. This meant they only needed to register for VAT in an EU country if their sales to that country exceeded a certain limit. Those thresholds are no longer in effect for UK businesses. Now, if a UK business sells to EU customers, particularly consumers (B2C), it may have to register for VAT in each country it sells to, depending on local regulations.

Introduction of UK VAT on EU Imports

Another significant change is how the UK applies VAT on goods imported from the EU. Before Brexit, businesses didn’t have to pay import VAT on goods coming from the EU. That’s no longer the case. Now, all goods entering the UK from the EU are treated like imports from the rest of the world. UK import VAT is charged at the border, and businesses may need to fill out customs declarations.

To ease cash flow, the UK has introduced a system called Postponed VAT Accounting (PVA). This allows VAT-registered businesses to record import VAT on their VAT Return instead of paying it upfront at the border.

New Rules on Imports, Exports, and Cross-Border Services

One of the most significant updates is how VAT is now applied to goods moving between the UK and the EU.

Imports from the EU to the UK: When goods are imported from the EU to the UK, import VAT is charged as soon as they arrive. However, businesses that are VAT-registered in the UK can take advantage of postponed VAT accounting. This means they can declare and recover the import VAT on the same VAT return, rather than having to pay it upfront at the border.

Exports from the UK to the EU: On the flip side, exports from the UK to the EU are now zero-rated for VAT. This means that no UK VAT is applied to these goods, but the buyer in the EU might still have to pay import VAT and customs duties when the goods reach their destination.

Cross-border services: Cross-border services are also seeing some changes. While many of the business-to-business (B2B) service rules remain largely the same, there have been some shifts in how business-to-consumer (B2C) services are treated, particularly for digital services.

Here's a brief overview of the VAT changes occurring after Brexit:

VAT on Exports from the UK to the EU:

• EC Sales List: Previously, UK VAT-registered businesses that met specific conditions and were supplying goods to VAT-registered customers in the EU had to complete an EC Sales List. This is no longer required.
• Distance selling threshold: Starting from 1 January 2021, UK sellers can no longer take advantage of the distance selling thresholds.

VAT on Imports from the EU to the UK:

• Abolition of Low Value Consignment Relief (LVCR): The LVCR, which relieves import VAT on goods valued at £15 or less will no longer apply to goods imported into the UK, or for goods supplied to Northern Ireland from outside the UK and EU.
• Postponed VAT accounting: Starting from 1 January 2021, UK VAT registered businesses importing goods from locations worldwide into the UK can use a new system known as postponed VAT accounting.
• The £135 threshold: Starting 1 January 2021, the point at which VAT is collected on imported goods valued at up to £135 is moved from the point of importation to the point of sale. UK supply VAT-not import VAT-will be charged at the point of sale.

EU VAT Registration Number Validation service:

• UK businesses will be able to continue to use the EU VAT number validation service to check the validity of EU businesses, but UK VAT registrations will cease to be included.

VAT Flat Rate Scheme:

• The scheme no longer applies to any sales a seller makes through an online marketplace, where the OMP is liable to account for VAT.

EU VAT Refund System:

• UK businesses can no longer reclaim VAT incurred in other EU countries using the electronic EU VAT refund system.

Further details on the above mentioned changes can be found in our VAT guide for ecommerce businesses.

There are additional VAT changes implemented that do not apply to ecommerce merchants. These include:

• The VAT treatment of the supply of services to the EU
• The abolition of the £8,818 annual threshold for cross borders sales of digital services to EU consumers
• Businesses are no longer able to use the UK's MOSS scheme to report and pay VAT on sales of digital services to consumers in the EU. The new rules regarding the registration for the VAT MOSS non-union scheme in an EU member state will impact UK and non-UK businesses.

VAT on Services After Brexit

Brexit didn’t just shake up the VAT rules for goods; it also brought some changes for services, particularly those involving EU customers. Whether VAT applies and how it’s managed really depends on whether the customer is a business (B2B) or an individual (B2C).

B2B Services: Place of Supply Rules Stay Mostly the Same

For most business-to-business (B2B) services, the place of supply rule remains pretty much unchanged from before Brexit. Essentially, the service is taxed based on where the customer is located, not where the supplier is based.

So, what does this mean?

• If a UK business provides services to an EU business, they won’t charge UK VAT.
• Instead, the EU business will handle the VAT in their own country, often using the reverse charge mechanism.

The UK supplier needs to keep records proving that the customer is a VAT-registered business in their country.

B2C Services: VAT Treatment Changes for EU Customers

When it comes to providing services directly to consumers (B2C) in the EU, the VAT treatment has shifted a bit since Brexit. In some instances, the service is now taxed where the customer resides, which might mean the UK business has to register for VAT in the customer’s country.

This change often impacts services like:

• Renting out goods.
• Certain digital services.
• Event admission services.
• Telecommunications and broadcasting.

Each EU country has its own VAT rules for these services, so UK businesses should verify if they need to register for local VAT before offering services to consumers.

Digital Services and the Need for EU VAT Registrations via OSS

One of the most significant changes affects digital services such as e-books, online courses, music downloads, and mobile apps sold to EU consumers.

Before Brexit, UK businesses could take advantage of the EU’s Mini One Stop Shop (MOSS) system to report and pay VAT for these sales. Now, they must register for VAT in an EU country and use the One Stop Shop (OSS) system instead.

The OSS allows businesses to report all their EU digital service sales through a single VAT return in one EU member state, which simplifies the process significantly.

To do this, a UK business must:

• Appoint a VAT representative (if the EU country requires one).
• Register for OSS in an EU member state.
• File quarterly VAT returns covering all digital sales to EU consumers.

This system helps simplify VAT reporting for businesses selling digital services to multiple EU countries, though it still requires separate VAT arrangements from those used in the UK.

To keep up with these changes, it’s wise to regularly check the latest guidance from HMRC and maintain clear records for all your cross-border sales and purchases. Each EU country has its own VAT rules and thresholds, which means businesses operating in multiple locations might have additional reporting responsibilities.

For those trading internationally, dealing with VAT rules post-Brexit can be quite tricky. Errors can result in extra costs, penalties, or even delays in delivery. That’s why it’s a smart move to consult with accountants who specialise in both UK and EU VAT systems.

A knowledgeable accountant can take a look at your setup, clarify which rules are relevant to your business, and manage VAT registrations or returns for you. This not only saves you time but also minimises risks, allowing you to trade seamlessly with customers both locally and internationally.