Export Advice Hub: VAT, duties and exports to Europe

Aug 17, 2022

Since Brexit, moving goods in and out of the UK has changed, particularly in reference to the European Union (EU). There are also new rules concerning movements of goods to Northern Ireland even though it is still part of the UK.


Geographical identities

The United Kingdom (the UK) is made up of England, Wales, Scotland and Northern Ireland.

Great Britain (GB) is made up of England, Wales and Scotland. Northern Ireland is not part of GB.

The European Union (EU) has 27 member states and is treated as a single entity for Customs matters and for the application of VAT rules relating to imports and exports. The Republic of Ireland is part of the EU.

Northern Ireland (NI) is a country within the UK but is not part of GB. There are different rules that apply to movements of goods in and out of NI to ensure that there is not a hard border between NI and the Republic of Ireland.

Customs duties

One of the biggest changes is that there is a potential for customs duties to be charged on the movement of goods between the EU and GB. In addition, VAT will be chargeable on imports from the EU. Prior to Brexit, no customs duties would be charged on the movement of goods within the EU (and the UK was in the EU). In addition, the VAT charged when goods were acquired from the EU was accounted for as acquisition VAT on the importers VAT return.

There have been no changes in respect of customs duties for the export or import of goods to or from countries outside the EU (such as the USA, China, Australia).

Free trade agreement

The UK and the EU came to a free trade agreement. This means that no customs duties are charged on the movement of goods to the EU from the UK or from the EU to the UK. Also, there are no quotas, no limits on the number of goods that can be moved. For this duty-free status to apply, however, the goods must originate in the UK (if moving to the EU) or originate in the EU (if moving to the UK).

This concept of origin is important to understand. Where a mistake is made regarding origin, it can mean duty becomes payable and goods are held up at the border. It is vitally important for all documentation and declarations show the correct place of origin of the goods. If goods, for example, move from the UK to the EU and they actually originate in another country (for example, the USA), then the goods could be subject to customs duties and may also be subject to a quota limit. A quota limit may allow a certain number of goods to enter the EU at a lower rate of duty or duty free; once the quota has been exceeded the full duty rate may apply.

Goods that are grown or wholly manufactured in the UK will be treated as originating in the UK. Indeed, goods that are substantially worked or processed in the UK will also be regarded as being UK goods. But where the goods originate outside the UK, they will be subject to customs duties (if any apply to that category of goods). Where goods are assembled in the UK, if a substantial proportion of the goods originate from outside the UK, the finished goods can also be subject to Customs Duty. In cases of doubt advice must be sought, this is a specialised and difficult area of tax.

VAT on imports by a business in GB

Goods imported into GB from the EU (or any other third country) must have VAT accounted for on the value of the goods. VAT and Duty needs to be calculated on the value of the goods (including shipping and insurance costs). Where the goods have been purchased from an unrelated third party the value will be the price paid, although some other costs such as royalties and commissions may also need to be included. There are special rules that relate to the value of goods when bought from a related party to ensure that they are not accounted for at an undervalue.

When calculating the cost for Duty and VAT, you need to determine the value of the goods and then add the cost of shipping and insurance. To this is added any duty that is payable. VAT is then chargeable on the duty inclusive price. For example, if goods that cost £500 are bought and imported, and the shipping cost is £50, and a duty rate of 8% is applicable, the total VAT payable is calculated as follows.

Cost£500.00
Shipping£. 50.00
Net£550.00
Duty at 8%£. 44.00
Sub total£594.00
VAT at 20%£118.80
Total£712.80

This VAT needs to be paid to HMRC on import (unless another arrangement is made) and can be reclaimed on the business’s VAT return subject to the normal VAT deduction rules. Note, the customs duties cannot be reclaimed.

The Duty and VAT can be calculated and accounted for by the customs agent used by the business. The business, if it is able to, can undertake this task themselves by making online customs declarations. Duties are normally paid using a process called duty deferment. This allows the duty to be deferred for up to six weeks (depending on when the goods arrive within the month). The payment then needs to be made utilising the business’s Deferment Approval Number (DAN). If import VAT is accounted for (paid) using the deferment system, it can be reclaimed on the business’s VAT return. To support the claim for import VAT, the business must be in possession of Form C79 which is issued by HMRC.

VAT is now more frequently paid and reclaimed using the Postponed VAT Accounting system and not on the Duty Deferment scheme. When this scheme is used no VAT is paid at import. To account for the VAT that is due, the VAT is declared on the next VAT return. Then, subject to the normal rules the VAT can be reclaimed on the same VAT return. This claim needs to be supported by the import documentation. The entries on the VAT return are as follows.

  • Box 1 — the import VAT due.
  • Box 4 — the VAT that can be reclaimed.
  • Box 7 — the VAT exclusive value of the import.

VAT on exports by a GB business

No UK VAT is chargeable on exports, and the supply of goods to the EU are now exports. The importer will have to account for VAT on the import of the goods. Proof of export needs to be retained to be able to prove to HMRC that the goods have been exported. There are specific rules for sales into the EU, as detailed below, for sales to final consumers.

The EU changed its rules on 1 July 2021 regarding low value goods and sales to final consumers (the public). This was not a change due to Brexit but does change the way VAT is accounted for. From 1 July, the €22 low-value goods VAT exemption for sales of goods into the EU was abolished. Import VAT now needs to be accounted for on these goods sold into the EU. In addition, from 1 July 2021 VAT on supplies of goods to final consumers of any value needs to be accounted for where the value of the goods does not exceed €150. To account for the VAT on these sales it is necessary to register for the Import One Stop Shop (IOSS). The business can register for IOSS in any EU member state and account for the VAT for all the sales made under €150 in all the EU member states. The seller will need to charge VAT at the applicable rate of their customer’s residence (if the customer is in France, French VAT needs to be charged). The IOSS cannot be used if the business is registered for VAT in the member state where the goods are being sent; VAT will be accounted for on the VAT return.

Where the IOSS is not used, or where the value of the goods exceeds €150, there are two alternatives for accounting for the VAT. Where the goods are sent duty unpaid (DDU), then the customer will need to account for any duty and VAT payable. Arrangements can be made for the courier to account for the VAT and collect the VAT from the customer (but will usually charge a fee for this).

Alternatively, the goods can be sent Duty Paid (DDP). The VAT and duty needs to be paid before the goods are sent, either by the business or by the courier. This needs to be correctly declared and the documentation needs to show this. The customer then does not need to account for any VAT (but will obviously be charged the VAT by the selling business).

Where a business is registered for VAT in the member state where the goods are delivered, the VAT will be accounted for on that VAT return.

The One Stop Shop (OSS) is for the sale of goods within the EU from one member state to another. The business will need an EU VAT registration and stock being held in the EU. The business can account for VAT on sales of up to €10,000 on its EU member state VAT return. Where sales into a member state exceed the €10,000 threshold the OSS mechanism must be used and VAT accounted for on the OSS return.

Northern Ireland

Northern Ireland has a unique position; it is part of the UK, but it is also treated as being a member of the EU. This has caused a number of problems and is why the EU is so concerned about the movement of goods from GB to NI. It does not want goods from GB getting over the border into the EU via NI.

When goods are moved between NI and GB the normal UK VAT rules apply. Goods that are seen by the EU as being at risk of crossing the border into the EU will be subject to customs duties on entry to NI. Essentially the border has been moved from the land boundary between NI and the Republic of Ireland and there may also be further phytosanitary or other checks on certain goods. Care needs to be taken to adhere to these extra rules and ensure the correct declarations are made.

When NI sends goods to the EU, or receives goods from the EU, it will act as if it is a member of the EU. The “old” EU VAT rules apply and the NI business will need to account for VAT on despatches to the EU and acquisitions from the EU on its VAT return. It will also need to complete EC Sales lists and Intrastat reports, something that business in GB no longer need to do.

Conclusion

The import and export of goods initially sounds very difficult and bureaucratic. Once the business gets used to the systems and options it becomes second nature. Where a business is new to imports or exports it can be prudent to seek specialist advice.

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