20 January 2020
Once the European Union (Withdrawal Agreement) Bill 2019-20 passes Royal Assent at the end of January, the UK will leave the EU in a legal sense, but enter a transitional period ending on 31 December 2020, unless an extension is agreed. This means that UK businesses will need to comply with EU rules until at least 1 January 2021.
Significant changes to the VAT requirements on intra-EU trade in goods took effect from 1 January 2020. These are designed to combat fraud, and the UK is bound by these until 1 January 2021, although a pragmatic approach to enforcement from HMRC is hoped for. Businesses also need to start planning for trading with the EU under the proposed framework of a Canada-style free trade agreement, which involves complex VAT procedures and applications.
Recent changes to VAT rules for intra-EU trade in goods
The existing intra-EU VAT rules will apply throughout the transitional period, as the UK will be treated as an EU member state and within the Customs Union until 1 January 2021. Major VAT changes on intra-EU trade in goods came into force on 1 January 2020 and UK businesses need to be aware and take action to be compliant.
The EU VAT system exempts goods (otherwise known as zero-rating) dispatched from one member state to another, and from one taxable person to another, provided certain conditions are met. The system was designed to facilitate economic integration while combating fraud. HMRC has now published its interpretation of the new EU rules, which will apply to the UK throughout the transitional period.
1. Evidence requirements for proof of transport for intra-EU supplies of goods
From 1 January 2020, all member states will harmonise their evidence requirements for zero-rating intra-EU sales. Suppliers must hold evidence such as airfreight invoices, a signed consignment document or note, and receipts from a relevant warehouse, among other forms of documentation, and in the right combination, in order to qualify for zero-rating.
2. Mandatory VAT ID number verification for zero-rating of intra-EU supplies of goods
Currently some EU member states, including the UK, allow an intra-EU supply of goods to be zero-rated even when the customer does not hold a valid EU VAT number, as long as they can prove they are in business in other ways. From 1 January 2020, in order to zero-rate a transaction it will be mandatory for suppliers to:
- obtain the customer’s valid EU VAT registration number to include on their sales invoices; and
- declare the transaction on their EC Sales List.
3. Harmonisation of the EU cross-border call-off stock rules
Call-off stock occurs when a supplier sends goods to a client's premises in another EU member state. The client then stores the goods and has full control over them, but does not take title to the goods until he decides to use them and draw them from stock.
The current rules on call-off stock arrangements vary between EU member states and create uncertainty as to whether call-off stock gives rise to a VAT registration requirement for supplying goods domestically in the country of the customer. From 1 January 2020, new rules will be introduced to align VAT treatments of call-off stock across the EU to prevent suppliers from having to VAT register in the customer’s country when selling under these arrangements. The recipient will be required to account for the VAT in the member state of destination as an EU acquisition.
4. Harmonisation of the EU cross-border chain transaction rules
Chain transactions occur when goods are sold between multiple businesses but there is only one intra-EU movement of goods. The current EU rules surrounding these types of transactions means that it can sometimes be difficult to know which business is making the zero- rated intra-EU supply, and which is selling domestically.
From 1 January 2020, EU member states will implement new rules harmonising VAT treatments for businesses involved in chain transactions. The new rules will clarify which business is making the zero rated intra-EU supply, to prevent businesses from having to register in multiple jurisdictions.
Leaving the EU and Customs Union
Businesses need to start planning for new trading arrangements with the EU, which could come into force as early as January 2021. You could consider a variety of schemes such as AEO (Authorised Economic Operator) an internationally recognised quality mark important for secure supply chains; and IPR (Inward Processing Relief), which enables goods to move across a border and to be subject to processing or manufacturing without triggering customs duty or VAT.
Access to the customs warehousing scheme allows goods to be imported into the UK without being subject to customs duty or VAT until they leave the warehouse. For example: this would allow import of goods from China, and then a movement of the same goods to the EU, but only paying customs duty and VAT once.
This will be essential for facilitating imports from the US or China which are for onward sale to the EU, and for those businesses who trade with Southern Ireland using Northern Ireland as a logistics route. The applications for all of these schemes are complex and have a long lead time.
No-deal is still a possibility
The no-deal emergency measures have been shelved for now, but the amendment to the EU (Withdrawal Agreement) Bill 2019-20 to prohibit an extension of the transitional period raises the potential risk of a no-deal situation arising again at the end of 2020. Most trade experts are of the opinion that 11 months to negotiate and finalise a free trade agreement is extremely optimistic, and without the ability to extend, no-deal is still a possibility.
This means those companies signed up to the TSP (Transitional Simplified Procedures) implemented by HMRC to make imports into the UK easier for the first year of a no-deal situation, should keep these on file in case no-deal raises its head again. However, businesses in TSP do not need to set up a duty deferment account as this is not a requirement for the time being.