7 April 2020
VAT regime following Brexit
1. Clarification prior to 1 January 2021. When a UK business supplied goods to individual consumers within the EU there was previously a requirement for UK VAT to be charged until the value of the goods sold to an individual country exceeded the distance selling threshold, at which point a requirement to register for VAT in that country arose. For example, if the value of sales to individuals in Italy were to exceed their threshold in a year, there would be a requirement to register for VAT in Italy and to begin charging Italian VAT to the customers. The distance selling thresholds vary from country to country, but are generally approximately €35,000.
2. E-commerce involves the supply of goods, so VAT should be considered as for the supply of goods.
Online sales goods from UK to EU from 1 January 2021. UK VAT
1. For the six months between January and the end of June 2021, if goods sold online are shipped from the UK, whether to customers in the EU or non-EU countries, they will be treated as exports from the UK and will be zero-rated for VAT purposes (we will need to retain evidence). That means UK VAT is not charged at the point of sale.
2. However import VAT will be due on arrival in the EU member state where the customer belongs.
3. EU Distance Selling Thresholds (DSTs) no longer applicable to UK sales. Between 1st January 2021 and 30th June 2021, UK businesses selling goods from the UK to EU consumers directly will no longer count these sales as distance sales. Instead, they will be counted as UK exports and zero rated for UK purposes.
4. Threshold 22 EUR. If the value of the package is less than €22, then it will be exempt from VAT and duty under the existing low value consignment relief in those member states applying LVCR.
5. For packages with a value of more than €22 or in those member states without LVCR, import VAT and duty will be payable. The seller can make (or arrange to make) the necessary declaration and payments rather than the customer, to avoid delays (in the same way it may already do for supplies to non-EU countries).
6. UK ecommerce sellers face hard choices on taxes and customs if they want to keep selling to EU consumers in 2021 following the end of the Brexit transition period. UK sellers can also no longer rely on the EU distance selling thresholds - they must register immediately if they are selling goods to EU consumers.
Below are four options for sellers. A further issue is where to clear the goods into the EU if you chose importer of record in the below options.
Scheme after Brexit | Contains |
Make your EU customer the importer of the record | Your EU customers will have to pay the freight delivery company the import VAT. |
You clear the goods into the EU at sale | You will have to VAT register in the EU country of your customer. Remember – there are no more distance selling thresholds after Brexit. You then pay the import VAT to clear the goods into the country (see comments below on country choice). You then sell the goods to your customer at the local VAT rate. You then offset the import VAT and sales VAT in the foreign VAT return. You’ll also have to make a customs declaration and pay any tariffs. Your freight forwarder can help with that. If you are importing into the EU, you must be a resident business with an EORI for certain Customs issues, including the declarations. You may require an import customs representative. |
EU customer clears but you pay import VAT any tariffs | A mix of 1. and 2. Legally, you make your customer the importer of record. But you pay any customs and import VAT via the freight forwarder. This is sometimes called'DDP with agent' or 'Buyers Agent'. |
Hold cleared goods somewhere in EU | You ship and clear some of your popular goods into the EU, and hold in rented warehouse space as a fulfilment centre for your EU sales. |
7. Therefore, VAT taxation can be placed “inside the European Union” in some cases.
8. Goods sent by post. You can zero rate goods you send by post to an address outside the UK, unless they are being sent from Northern Ireland to an EU country. You’ll need to use form ‘Certificate of posting goods form 132’ or ask the Post Office for a certificate of posting. If you’re using Royal Mail Parcel Force, you will be given a dispatch pack with accounting documents, a customs export declaration and a receipt copy. The dispatch pack goes with the goods. For sales from Northern Ireland to EU customers you do not need to fill in a customs export declaration form. If you use courier or fast parcel service provider, they’ll normally give you an airways bill number for each shipment, which proves the good have indeed been shipped overseas.
9. EORI number. From 1 January 2021, the UK company needs an EORI [Economic Operator Registration Identification] number that starts with GB to move goods in or out of the UK. The UK company needs an EU EORI number if business will be making customs declarations or getting a customs decision in the EU. You can get this from the customs authority in the EU country when the first declaration is submitted or request the first decision.
Online sales goods from UK to EU from 1 January 2021. UK VAT
1. The EU is to introduce two measures to assist e-commerce, two “one stop shop” procedures, which will allow e-sellers to consumers to account for VAT, without the need for multiple EU VAT registrations. The seller can choose either of the two simplifications described below or alternatively can register for VAT in each member state where they sell.
2. One stop shop (OSS). For UK businesses selling goods to EU consumers, the OSS return will allow them to file a single quarterly return declaring and paying output VAT at the appropriate rates on these sales to consumers in all 27 member states. The tax authority will distribute the tax to each member state as declared on the return. This OSS return is an extension of the existing EU MOSS system for digital services. The OSS return cannot be used for UK businesses who hold stock inside the EU or use the Fulfilment by Amazon (FBA) programme.
3. Import one stop shop (IOSS). UK businesses selling goods from outside the EU to private consumers valued at less than €150, can register for IOSS in just one EU state. They will be issued a unique IOSS identification number which should be listed on all packages sent to the EU. This will indicate to Customs that VAT is being properly declared and help ensure speedy customs clearance. Like the OSS, IOSS will be a quarterly filing submitted to a tax authority in one nominated EU member state. It will declare import VAT due in all EU countries.
4. In case of IOSS Import VAT will then be payable in accordance with the VAT rate in the customer’s member state (using the delivery address) in a quarterly return submitted in the member state where registered. This is different to a normal EU VAT registration as it provides for VAT due in every member state to be reported and paid through a single return. On these consignments below €150, the seller can instead use simplified customs declarations which requires about 1/3 of the data needed for normal declarations. Please note, that the duty exemption for consignments less than €150 is expected to remain in place.
5. A further alternative for consignments less than €150 would be for the postal service/ courier to act as the declarant (as in 2 above), collect the import VAT from the customer and pay it to the relevant tax authority on a monthly basis.
6. For consignments greater than €150, normal customs declarations and payment will be required (either by the seller or its agent – including postal service). Duty will also be payable.
7. Finally, in certain circumstances, EU marketplaces facilitating sales to EU consumers (such as Amazon) will become responsible for the VAT on the third-party supplier’s behalf so if selling products through such marketplaces, the VAT will be taken care of at the point of sale by the marketplace provider.
VAT import/export additional changes/provisions after Brexit
- For imports of goods from outside the UK in consignments not exceeding £135 in value (which aligns with the threshold for customs duty liability), VAT is to be collected at the point of sale. This means that UK supply VAT, rather than import VAT collected at the border, is due on these consignments, however customs declarations are still required for non-fiscal purposes.
- The new arrangements also involve the abolition of Low Value Consignment Relief which relieves import VAT on consignments of goods valued at £15 or less.
- The postponed import VAT accounting. This is a result of Brexit and means cash no longer needs to be paid upfront when importing goods into the UK. Instead, the import VAT can to be declared and recovered on the same UK VAT return (vs current approach of VAT payment at the point of importation).
- VAT invoicing obligations apply. The person liable to account for the VAT is required to provide the customer with a VAT invoice at the point of sale - this obligation falls on either the seller (for sales not facilitated by an OMP) or the OMP, where it is facilitating the sale and so acting as deemed supplier for VAT purposes. The normal rules for the content and format of VAT invoices apply, so the invoice can be in paper or digital form and covered by the existing concessions for simplified invoices.
Import tax/VAT
VAT applies to the imports of goods from outside the EU. For VAT purposes, Italy consists of the territory of the Republic of Italy excluding the municipalities of Livigno and Campione d’Italia and the Italian waters of Lake Lugano.
The VAT rate for such supplies will be 22%. The reduced rates for phones or other electronic goods in such case will not be applied.
Procedure: Brexit export goods GB to EU
1. Determine who will be the exporter of record and therefore responsible for the UK customs paperwork and export clearance, transport, insurance and other issues relating to the goods movement. This is contained in the International Commercial Terms (Incoterms) agreed in the sales contract. Typically, it is the GB supplier. They may also take responsibility of the customs clearance and import VAT for the goods into the EU.
2. Obtain a UK EORI number. As mentioned above, the exporter will need a UK Economic Operator Registration Identification number from HMRC.
3. Export sales are exempt from UK VAT. However, to be entitled to this relief, the exporter will need proof of the departure of the goods from GB. This could include sales invoice, customs declarations, bill of lading documents and transport documents.
4. As an exporter you may complete customs export declarations and processes yourself, or appoint an intermediary:
- Complete your own customs export process. You can purchase commercial declarations software. This will enable you to complete your declarations and file with the UK National Export System (NES). You will need to apply to HMRC to register for NES and for a ‘badge’ for HMRC's online customs systems: CDS and CHIEF
- Use customs intermediary. The following parties are usually approved by UK HMRC to represent exporters: Freight forwarders; Customs agent or broker; Fast parcel operators.
5. Irrespective of who completes the export paperwork, you will need to compile the following information:
Commodity code for the product, which identifies the digits that identify a product, its materials and production method. The EU uses the six-digit global Harmonised System, or HS Code, and adds a further two digits 'CN heading'.
Departure point and destination
Consignee and consignor
Nature, amount and packaging of the goods
Transport method
Any certificates and licences
An exporter statement of origin to allow your importer to qualify for zero tariffs.
6. At the same time, the EU import processes must be completed to ensure your freight forwarder and transport provider will accept the shipment. If supplying on DDP (Incoterms). This will includes:
Applying for an EU EORI number. This is because they are now non-resident within the EU Customs Union.
Having the exporter's statement of origin to qualify for EU zero tariffs under the 'rules of origin' requirements.
Completing EU customs import declarations for the EU member state of import, and this is filed with the relevant country’s customs system
Applying for deferred VAT / Postponed VAT to ensure you do not have to pay import VAT.
If you are clearing the goods, consider an EU VAT registration with Fiscal Representation obligation.
VAT regime if deliveries are made only from an Italian company
Selling goods to the final consumer in another EU country (not Italy). If you sell goods and send them to consumers in another EU country via the internet, you need to register your business there and charge VAT at the rate applicable in that country - unless the total value of your sales to that country within the respective tax year falls below the limit set by the country.
If you are only active in Italy, everything is still relatively simple. You use a Italian VAT number, you submit your declarations in Italy, and use the Italian rates.
For other European countries. For that situation there are VAT rules on cross-border trade of goods to private individuals. As a result, you must register separately for VAT in each of those countries, at least if they exceed certain turnover thresholds in those countries (the so-called distance selling thresholds, at the moment, there are two thresholds, €35,000 euros and €100,000 euros per country). And you often must follow the VAT obligations of those other countries. From submitting VAT returns to keeping VAT accounts.
New regulation from 1st July of 2021. There will be a uniform turnover threshold of €10,000 euros for the entire EU. As a distance seller, under the new rules, you will start charging foreign VAT to your customers much faster than now, which would also mean faster foreign VAT obligations.
The second amendment provides for the "one stop shop" to be extended to consumer goods, as mentioned above.
The final one is that the VAT exemption for low-value shipments will disappear. The current threshold is €22 euros.
DTA provisions
1. The default position will be to rely on Double Tax Treaties between the UK and each individual EU Member State. Whilst the UK has an extensive treaty network, in some cases the treaty will not reduce the Withholding Tax (WHT) rate to nil as under the Directive. There is a Convention between UK and Italy.
2. The term "permanent establishment" means a fixed place of business in which the business of an enterprise is wholly or partly carried on. This includes especially a branch (Art.5 of Convention).
3. However, the term "permanent establishment" shall not be deemed to include: the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise or the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display, or delivery (Art. 5 of Convention). Thus, the location of an office in Italy should be analysed in terms of these provisions to determine if there is a permanent establishment.
4. In addition, we draw your attention to the fact that the UK and Italy have signed the MLI1 convention. At the same time, of all the provisions of the convention that relate to a permanent establishment, the UK and Italy agreed to apply only the provisions of article 13. In fact, in your case, this does not change the essence of the relationship between the British company and the Italian branch. We presume that the Italian branch will not act as an independent agent or only perform a function of preparatory or auxiliary character, which means that the permanent establishment will be established for tax purposes.
If you have any other questions or comments, don’t hesitate to ask us.
For further information on any of the points above contact
Mikita Makayou at mikita@lexefiscal.com, or
Dr. Frank at clifford.frank@lexefiscal.com.