03 December 2020

At 11pm GMT on 31 December 2020 (midnight in Brussels), the transition period brought about by the European Union (Withdrawal) Act 2018 will end. Subject to any agreement reached between the UK government and EU, exports and imports between the UK and EU member states will be treated in a broadly similar way for customs and VAT purposes to transactions between the UK and other non-EU countries. The rates and codes published in the summer are looking increasingly unlikely to be changed before 1 January 2021, although it is always possible that a late agreement will be reached.

At the moment, no customs duties apply to goods transferred within the EU and movements of goods between the UK and EU member states are covered by special VAT regimes. After the transition period ends, the UK becomes a 'third country' from an EU perspective. Businesses transferring goods between the UK and the EU will need to pay duties and VAT, and implement new compliance processes. They may also want to rethink supply chains arrangements and contracting terms.

Trade with non-EU countries will also be affected by changes in duties and excise. At the moment, the UK continues to be covered by the EU’s trade agreements with non-EU countries. Those agreements will no longer apply in 2021, so new duties and excise arrangements will also apply to transactions with these countries. The actual effect for duties and excise will depend on World Trade Organisation arrangements or deals with individual countries arranged under the trade agreement continuity programme. For VAT purposes, however, it appears that there will be no significant change in relation to cross border supplies of goods to and from non-EU countries, other than a change to the administrative arrangements for imports which will give a cashflow advantage.

Businesses which already export to, or import from, non-EU countries will be familiar with the processes involved in the new rules. For those which have only dealt with EU businesses before, there will be significant changes of substance and process to undertake.

The ability of businesses to use EU arrangements allowing reclaims of VAT incurred in other EU states will change as well. For amounts incurred after 1 January 2021, claims will have to be made in the relevant EU state. For amounts incurred before the 1 January 2021 the ability to make recovery claims for all member states in the UK, to save making a claim in each state separately will terminate on 31 March 2021, so the scope for claims should be reviewed in order to meet the deadline.

The impact of the changes will need to be considered on the pricing of contracts, as well as in terms of compliance. Some businesses may want to set up an EU establishment for exports, or a UK establishment for imports, in order to mitigate the consequences of the changes, or to reassess use of customs warehouses.

Please be aware that this article covers the position of imports of goods into the UK. The position of exports of goods and cross border supplies of services is explored in separate articles.

Special rules are expected to apply under the Northern Ireland protocol: the general comments below about other parts of the UK do not apply to, and references to a UK supplier or supply to the UK do not include, Northern Ireland.

The new arrangements have not yet been fully provided for. The government has published its border operating model, and a tax policy paper has been issued on changes to VAT treatment of overseas goods sold to UK customers from January. However, full detail on some aspects is still lacking, so the summary below involves some interpretation and the latest position should be carefully checked and monitored pending full legislation.[1]

Imports of goods to the UK from 1 January 2021

Customs duties

Currently all goods arriving in the UK from outside the EU are subject to the Common External Tariff ('CET'). From 1 January 2021, the UK will apply the UK Global Tariff ('UKGT') to imported goods, replacing the EU’s CET. This is not all bad news: it has been estimated that 47 per cent of products will be tariff-free, compared to 27 per cent under the CET, and average tariffs will be reduced from 7.2 per cent under the CET to 5.7 per cent under the UKGT. On the other hand, absent any EU/UK trade deal, a default to World Trade Organisation terms would mean that only around 44 per cent of imports from the EU would be tariff free, compared with 100 per cent currently.[2] This will impact pricing.

There will however be a transitional regime for imports from the EU for the first 6 months of 2021:

  • Most importers will be able to defer all paperwork and duty payments for the import of most goods from the EU until July 2021. Controlled goods are an exception, and the arrangement can be refused to businesses which HMRC considers have a poor compliance record.[3]
  • After 1 July 2021 importers will be required to make customs declarations at the time of importation of goods from the EU and pay duties and excise.

Those businesses which have previously dealt only with EU countries will need to equip themselves with the means to do this (including assessing whether simplified declarations can be made and obtaining software to access the CHIEF system) or will have to engage an agent or to make freight arrangements which cover this responsibility. The CHIEF system is due for replacement but the timescale for this is unclear.

Regular importers may want to apply for a duty deferment account, allowing payment once a month by direct debit, to include import VAT.[4] 

Most goods with a value of up to £135 will continue not to require payment of duty, although customs declarations will still be required. 

Import VAT

Broadly the rules for import VAT will remain the same other than for consignments with a value of up to £135. So for businesses which already deal with these rules for goods from non-EU territories, the arrangements should be familiar. 

However, the position will change for goods from the EU. The current basic rule is that where goods are transferred to a UK VAT registered business, there will be a 'dispatch' by the supplier (which can normally be zero rated) and an 'acquisition' by a UK VAT registered recipient, under which the recipient is required to account for VAT in the UK at 20 per cent on their next VAT return (but with scope for offset against output tax).

Under the new import VAT regime, the principle is instead that import VAT is paid with duties on entry of the goods, unless the importer has a duty deferment account. The VAT treatment for the supplying business in the EU will also change. Certain arrangements applicable to more complex transactions, such as triangulation, will no longer be available. 

However, as part of Brexit preparations it has been announced that arrangements known as 'postponed VAT accounting' will be available for imports to the UK from both the EU and non-EU countries, to prevent a cashflow hit to businesses.

Imports by UK businesses from the EU – consignments with value in excess of £135

Special rules apply to imports with a consignment value of up to £135 or via an online marketplace (such as Amazon or eBay), and these are considered further below.

From 1 January 2021, an EU supplier of goods to a UK business will normally zero rate the supply of the goods in its home state (as this will be treated as an export outside the EU), and will need to comply with the formalities required for zero rating. Here, UK import VAT will need to be paid by the importer but, rather than paying this immediately on import, a VAT registered importer can opt to declare the VAT in the VAT return that includes the date of the goods’ arrival in the UK. This 'postponed VAT accounting' will mean it can be recovered against output tax for that period, rather than being paid immediately on the goods’ arrival. This means that while the formalities and return requirements are significantly different, the cashflow and cost implications should not differ materially for the UK recipient businesses in most cases.

However, there is no VAT equivalent of the deferral of customs duty payments and returns until 1 July 2021. VAT will still need to be accounted for, either on the standard basis on import or under the postponed VAT accounting system through VAT returns, using estimated figures if necessary.[5] Intrastat returns will also still be required for imports by businesses over the £1.5m import threshold, or which sell more than £250,000 of goods to VAT registered customers in the EU (although Intrastat returns are not required for exports – see below).

Purchases by UK consumers and non-VAT registered businesses from the EU – the practical implications of abolition of the distance selling regime for imports

The EU distance selling regime will cease to apply to the UK. This changes the position for UK businesses selling to EU consumers and EU businesses selling to UK consumers. It should not impact VAT registered businesses, but non-VAT registered businesses (which includes some businesses which make largely exempt supplies as well as those with supplies below the VAT registration threshold) could be affected.

There are at the moment three strands to the distance selling rules for intra EU sales, typically covering cross border sales of goods by mail order, phone or website:

  • the rules applicable to supplies of goods which are “transported by or on behalf of the supplier”[6]: for these the basic provision is that they are treated as supplied where the goods are received – so until January 2021, a distance seller from (say) France to the UK is required to register and pay VAT in the UK at the applicable UK rate;
  • a special threshold which modifies the normal arrangement in (a) where sales in a particular EU jurisdiction will be less than a specified threshold which, in the UK, is £100,000 – the seller can still choose to VAT register in the UK but can also treat the supply as being made in its home jurisdiction of (say) France and pay French VAT at the applicable French rate; and
  • the rules applicable to other supplies, which are treated as supplied where the goods start - there has been concern that some suppliers have deliberately attempted to manipulate the effect of the rules here by separating transport of goods from the sale of goods themselves so that they do not need to register in other member states.

Unfortunately, while the UK becomes a third country at the end of the transition period from 1 January 2021, the established form of these rules for intra-EU transactions is in any case changing from 1 July 2021. The relevant changes will impact UK exporters after Brexit and these changes are considered in a separate article.

However, from 1 January 2021, there will be four options for goods transferred from the EU to UK consumers and non-VAT registered businesses:

  • the new limited value consignments rules apply because the consignment is worth £135 or less (see below);
  • the EU selling business arranges for the payment of import VAT either as itself the importer of record (this matters in a number of contexts and is discussed below) or through an agent;
  • the recipient pays import VAT; or
  • a special rule or regime applies – including for approved tax warehouses, small value gifts and sales through online marketplaces.

Import VAT on imports from suppliers outside the EU

In a levelling of the playing field between EU and non-EU imports:

  • postponed VAT accounting is being extended to imports from non-EU countries. From 2021, instead of VAT being due on the arrival of the goods at the UK port of entry, the postponed VAT accounting system can be used instead by VAT registered importers; and
  • the new low value consignments rules will apply to non-EU as well as EU importers.

Otherwise, it appears that there will be no significant changes for non-EU supplies. However, questions about who is the importer of record and how the supply chain is managed will continue to be relevant.

Limited value consignments – imports from both EU and non-EU suppliers

The details of the proposed arrangements here are still not fully developed in some areas, as we are reliant on a policy paper and draft legislation is not yet available.[7] The position should therefore be monitored and may evolve. However, it is intended that there will be specific arrangements for both EU and non-EU suppliers selling low value goods into the UK where the supply is worth £135 or less. This limit applies per consignment, not to the value of each item in a consignment, but does not have an overall cap – so applies irrespective of the supplier’s volume of UK business. The current low value consignment relief for small value parcels of less than £15 will be discontinued.

The £135 limit is designed to align with the customs duty free limit of £135. The policy paper indicates that this is the intrinsic value of the goods (excluding the incidental and transport costs and customs duty which normally form part of the import VAT value).

If the goods are outside the UK at the point of sale, import VAT will not apply but:

  • for sales to a UK VAT registered business customer which provides a VAT number to the seller, the business customer will have to account for VAT under a reverse charge mechanism (even if the sale was through an online marketplace), though it should be able to recover the VAT as input tax if it is a fully taxable business;
  • online marketplaces will need to charge VAT on sales made to consumers (and register and issue invoices accordingly) and the supplier will be able to zero rate its supply to the online marketplace; and
  • direct sellers (not using online marketplaces) to consumers or to businesses that do not provide a VAT number will need to register for and charge UK VAT on the sale, with no threshold or de minimis applicable.

This effectively restricts the freedom of the parties to modify the arrangements by contract (even if these consignments form part of a much more substantial overall trading relationship). It puts the burden clearly on business recipients – although as ordinary VAT it appears that this should not create a cashflow or cash tax cost for fully taxable businesses – and on the suppliers for distance ordering by consumers. This will help make sure, from a competitive perspective, that UK business is not undercut by prices from overseas suppliers that appear lower than local supplier prices because the recipient is intended to pick up import VAT. It appears for the time being that if a business buyer declines to provide a VAT number, the seller will need to treat the buyer on the same basis as a consumer. 

However, it means that cross border suppliers to UK consumers will have to register for UK VAT, in addition to any arrangements made under the new one stop shop arrangements for supplies within the EU which will take effect from 1 July 2021.

If the goods are already inside the UK at the time of sale the special rules only apply to sales by an overseas seller which are facilitated by an online marketplace and which are to a consumer or business not registered for VAT. In this case, at the point of sale the overseas business is treated as making a zero rated supply of goods to the marketplace, allowing recovery of the import VAT already incurred, provided it registers for VAT. The online marketplace needs to charge and account for VAT on the sale.

Other sales of goods inside the UK are subject to the normal rules.

VAT on export of goods, refunds and VAT on cross border services from 1 January 2021

These rules will also change and the implications are summarised in separate articles. At the moment however there are some key points on which there is continuing uncertainty about the approach to be adopted by the UK and confirmation from HMRC or HMT is still awaited. 

Key practical actions for businesses to prepare for 1 January 2021

We have set out below some key points and actions for different types of businesses involved in cross border imports of goods from 1 January 2021. 

There are also specific issues to address where goods may be in transit at 11pm on 31 December 2020. If this is likely to arise, the position should be separately considered.

Some of the actions are administrative, others affect the supply chain, but all businesses should review their contracting arrangements and work out:

  • who will be responsible, under the current contract, for dealing with changes in VAT and customs duties;
  • what cost changes/profitability and customer impact there will be;
  • whether the current contracting arrangements need to be modified and how new compliance requirements will be discharged; and
  • whether more substantial supply chain changes are needed – for example the set up of an EU hub or use of customs warehousing.

Summary of key points for importers

For a summary of key points for importers, please click here.

How we can help 

If you would like further guidance on the tax implications for imports post-Brexit, please contact Rebecca Rose in our Corporate Tax team.

This article was written by Rebecca Rose.

[1] HMRC Brief 5 2020

[1] At present see https://www.gov.uk/government/news/government-publishes-updated-gb-eu-border-operating-model and https://www.gov.uk/government/publications/changes-to-vat-treatment-of-overseas-goods-sold-to-customers-from-1-january-2021/changes-to-vat-treatment-of-overseas-goods-sold-to-customers-from-1-january-2021.

[2] https://blogs.sussex.ac.uk/uktpo/2020/05/20/new-tariff-on-the-block-what-is-in-the-uks-global-tariff/.

[3] A list of these controlled goods is set out at https://www.gov.uk/guidance/list-of-goods-imported-into-great-britain-from-the-eu-that-are-controlledkui.

[4] https://www.gov.uk/guidance/apply-for-an-account-to-defer-duty-payments-when-you-import-or-release-goods-into-great-britain. A financial guarantee may not be required.

[5] https://www.gov.uk/guidance/complete-your-vat-return-to-account-for-import-vat

[6] For the purposes of Article 14 of VAT Directive 2006/112/EC

[7] Policy paper 'Changes to VAT treatment of overseas goods sold to customers from January 2021' updated 5 October 2020 as at the time of writing.

[8] HMRC Brief 5 2020

Key contact

Ian Carnochan

Ian Carnochan Partner

  • Tax
  • Corporate Tax
  • Real Estate Tax

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