Beyond Brexit: trade in goods Contents

Chapter 7: VAT

VAT in the TCA

160.There is no explicit provision in the TCA for VAT charges, but since the UK’s departure from the EU’s VAT area on 1 January, the rules have changed for VAT on imports from and exports to the EU (see Box 5).

Box 5: Changes to VAT after the transition period

EU goods imported into the UK are now treated by HMRC in the same way as non-EU imports, rather than as intra-EU movements (which were previously classed as ‘acquisitions’ for VAT purposes). Where goods are sold directly to UK consumers from overseas, the overseas seller is required to register and account for UK VAT. Import VAT, rather than ‘acquisition’ VAT, is now due. For imports with a consignment value of £135 or lower, VAT is applied at the point of sale.224

EU Member States will treat goods entering the EU from the UK the same as goods entering from other non-EU countries, and import VAT is due when these goods arrive in the EU.

These changes do not mean VAT rates themselves have increased. Instead, as Liam Smyth of the British Chambers of Commerce told us: “The change is mainly in relation to when and how VAT is collected on the importing of goods.”225

161.The TCA includes a 65-page Protocol on combating VAT fraud.226 This establishes a framework for UK-EU administrative cooperation and exchange of information on VAT, including combating fraud and allowing the recovery of unpaid customs duties or VAT.227 As the ADS Group told us, this “may help to affect a correct assessment of VAT, monitor the correct application of VAT, and combat VAT fraud”, as well as enabling cooperation in enforcing compliance.228

Postponed accounting

162.To mitigate potential VAT-induced cashflow problems for businesses, HMRC introduced a system of ‘postponed accounting’ on 1 January 2021. This allows VAT-registered traders to declare and recover import VAT on the same VAT return, rather than paying VAT upfront and claiming it back later.229 Anna Jerzewska of Trade and Borders explained: “If you opt for postponed VAT accounting, you can discharge your import VAT together with your normal VAT on a quarterly basis or whenever you normally do it. You do not have to pay it at the time of import; you can do it at a later point in time.”230 Postponed accounting applies to all imports, not just those from the EU.

163.This mitigation was praised by witnesses. Anna Jerzewska described it as “very helpful”, while Des Hiscock of ACITA and Customs Support said: “The postponed import VAT accounting gives a huge cash-flow advantage to many UK businesses. Bear in mind that it is not only EU goods but third-country goods that we used to have to pay VAT on up front and claim it back.”231

164.However, postponed accounting helps only VAT-registered importers, and those that are not VAT-registered have experienced cashflow problems. The Crafts Council told us non-VAT registered businesses “are being charged up to 25% VAT on imports, plus 10% handling charges and increased shipping costs”.232

The administrative burden

165.Despite the mitigation of postponed accounting, we were told, in the words of Allie Renison of the Institute of Directors, that traders had found VAT “one of the biggest headaches” since the end of the transition period.233 Witnesses highlighted new administrative burdens arising from the UK’s departure from the EU’s VAT area, affecting smaller businesses in particular. The LEP Network said there had been “increased administrative burdens for companies trading with the EU in terms of accounting for and collecting VAT”, which is “largely a serious issue for SMEs”.234

166.Other administrative burdens have been caused by differences between EU Member States in the application of VAT, with UK exporters now facing the same obstacles as those from other non-EU countries. Des Hiscock explained: “One of the biggest problems we have with VAT is that customs law might be completely harmonised across the 27 EU member states but VAT law is not. It is down to the individual national Administrations.”235 Similarly, Allie Renison told us that firms were now “accounting for VAT in 27 different jurisdictions, many of which require a fiscal representative”—with the roles of these representatives also differing from one Member State to another.236

167.Anna Jerzewska highlighted the impact of the loss of VAT ‘triangulation’, a facilitation under the EU VAT area which simplifies supplies of goods between three VAT-registered traders in three different EU Member States.237

168.We were told that some EU importers are requesting that UK exporters account for VAT due on goods moving into the EU. Liam Smyth described the additional administrative tasks as “really vexing” to many traders. He told us they include obtaining an EU Economic Operators Registration and Identification (EORI) number, registering for VAT in the EU, establishing a business enterprise in the country of destination, and hiring both a tax accountant and a customs agent.238

Awareness and understanding

169.Several witnesses highlighted that the complexity of new VAT requirements has contributed to a lack of trader awareness or understanding. The LEP Network said this extended to the customs intermediary sector as well as traders themselves:

“There are still some issues around UK freight forwarders not being familiar with new rules about import VAT, and how it can now be shifted to a VAT return declaration. Instead they are continuing to code import entries as last year, resulting in physical VAT charges before goods can be released by HMRC.”239

170.Des Hiscock warned that such misunderstandings mean that “people will fall foul of the law”. For example, “A lot of people are purchasing goods on a delivered duty paid basis but, under VAT law, the wrong person then owns those goods when they cross the border into the UK, which could jeopardise their input VAT claim.”240 He also highlighted the lack of understanding of incoterms (see Box 6), warning that “not aligning your international trade terms with your actual transactions could prove to be a huge risk further down the line once you have a VAT audit”.241

Box 6: Incoterms

Incoterms are a set of internationally recognised trade terms that describe the practical arrangements for the delivery of goods from sellers to buyers, and allocate the obligations, costs and risks between the two Parties. The purpose of incoterms is to ensure that responsibilities are clearly defined.242

Financial implications

171.The new VAT requirements have had financial implications for many companies. Liam Smyth told us that the impact upon profit margins was such that companies might end up passing on the costs to the consumer.243

Box 7: Case Study: Jellyworks Healthcare Ltd

  • Jellyworks Healthcare Ltd is a London-based company which sells children’s first aid products and exports these products to six EU Member States. In January, Jellyworks told us that Brexit’s VAT implications “have permanently destroyed our EU export business”.244 In supplementary evidence submitted in March, it told us it had still “not landed one order in an EU country” since the end of the transition period.245
  • Jellyworks cited the costs of VAT management as a major problem: “We have been quoted initial costs of £11,905 with recurring annual costs of £9,549 for managing VAT services in the states we export to … Jellyworks has insufficient margin to absorb the VAT management costs.”246 It also provided evidence that over €3,000 of orders delivered into the EU have been placed on hold with FedEx, the delivery services company, pending correct EU VAT information. More recently, it employed the services of a VAT reclamation company, but this too is expected to incur significant costs.247
  • Jellyworks also said that the fragmentation of EU VAT law puts it “at a disadvantage to our main competitor, who are EU based. They must only apply for one UK VAT number and GB EORI. We must apply for 6 and absorb management costs in 6 states.”248
  • In response to these and other problems, Jellyworks said in January that it was “considering relocating to Spain, which would become our main tax base. The UK would become a subsidiary arm that we ship to. This is a viable model for us.”249 As of March it had not taken this step, but had also explored the option of establishing a business in the Netherlands.250

The Government’s position and the need for better support

172.We asked Paymaster General Penny Mordaunt MP about the issues arising from VAT. She said the Government was “very aware” of the issues and had been encouraging businesses to use customs brokers and freight forwarders for technical support, but her answers gave little indication of whether these were short-term or long-term problems, or of what the Government could or would do to resolve them.

173.The approach of redirecting businesses to intermediaries for customs and VAT support will be insufficient to resolve the issues at hand. As we heard from the LEP Network, some freight forwarders have themselves struggled to understand the new requirements.251 Moreover, as discussed in Chapter 6, there is a general lack of capacity in the customs intermediary sector, making it difficult for many businesses to find a suitably qualified intermediary.

174.Des Hiscock told us that VAT has been one of the weak points of Government support to date: “We have found the response from Government on VAT to be nowhere near what it is on customs.”252 Given the administrative difficulties for traders of dealing with up to 27 different VAT regimes, the need for good Government support is particularly pressing in this area, and the shortcomings to date particularly disappointing.

175.We welcome the Government’s introduction of postponed accounting for VAT, which has mitigated some of the cashflow issues and, by dint of applying to non-EU trade as well, has even given some UK businesses a competitive advantage internationally. We recommend a programme of support for businesses to become VAT registered to enable more traders to benefit from these important mitigations.

176.Government support for promoting awareness of VAT implications has, to date, been poor. We call on the Government to take action to improve the understanding of VAT among traders and the customs intermediary sector alike.


224 HM Revenue & Customs, ‘Changes to VAT treatment of overseas goods sold to customers from 1 January 2021’ (3 December 2020): 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 [accessed 4 March 2021]

225 Q 35 (Liam Smyth)

226 Trade and Cooperation Agreement, 24 December 2020 (Protocol on Administrative Cooperation and Combating Fraud in the Field of Value Added Tax and on Mutual Assistance for the Recovery of Claims Relating to Taxes and Duties.)

227 Trade and Cooperation Agreement, 24 December 2020 (Protocol on combating VAT fraud, Articles 1, 7–14, 25)

228 Written evidence from ADS Group (FUU0015)

229 HM Revenue & Customs, ‘Check when you can account for import VAT on your VAT Return’ (11 February 2021): https://www.gov.uk/guidance/check-when-you-can-account-for-import-vat-on-your-vat-return [accessed 4 March 2021]

230 Q 46 (Dr Anna Jerzewska)

231 Ibid.

232 Written evidence from the Crafts Council (FUU0009)

233 Q 25 (Allie Renison)

234 Supplementary written evidence from the Local Enterprise Partnership Network (FUU0021)

235 Q 46 (Des Hiscock)

236 25 (Allie Renison)

237 Q 46 (Dr Anna Jerzewska)

238 Q 35 (Liam Smyth)

239 Supplementary written evidence from the Local Enterprise Partnership Network (FUU0021)

240 Q 46 (Des Hiscock)

241 Ibid.

242 Department for International Trade, ‘International trade contracts and incoterms’, (10 January 2020): https://www.great.gov.uk/advice/international-trade-contracts-and-incoterms/ [accessed 4 March 2021]

243 Q 35 (Liam Smyth)

244 Written evidence from Jellyworks Ltd (FUU0002)

245 Supplementary written evidence from Jellyworks Ltd (FUU0025)

246 Written evidence from Jellyworks Ltd (FUU0002)

247 Supplementary written evidence from Jellyworks Ltd (FUU0025)

248 Written evidence from Jellyworks Ltd (FUU0002)

249 Ibid.

250 Supplementary written evidence from Jellyworks Ltd (FUU0025)

251 Supplementary written evidence from the Local Enterprise Partnership Network (FUU0021)

252 Q 47 (Des Hiscock)




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