Practical guide: completing VAT returns post-Brexit
As the first anniversary of the UK leaving the single market and customs union approaches, it is a good time to look at how businesses trading with the EU need to report their VAT. What changes should they have made with the nine boxes on the returns?
The two major changes following Brexit both relate to businesses trading in goods with the EU.
Imports. All imports of goods into GB are now subject to VAT and possibly customs duty when they arrive - there is no longer any difference between imports of goods from EU and non-EU countries. The old phrase of “acquisitions” as far as EU arrivals were concerned is no longer relevant. Until 31 December 2020, goods shipped into GB from the EU were not subject to customs declarations because GB was part of the EU single market.
Exports. All exports of goods from GB are now zero-rated for VAT purposes - for both EU and non-EU sales. Until 31 December 2020, sales of goods to EU countries were only zero-rated if the customer was VAT registered in their country. Shipments to EU countries were known as “despatches” - that phrase no longer applies either.
The situation is different for a business based in Northern Ireland - they are still part of the EU as far as trading in goods is concerned, but not services.
So how do these changes affect post-Brexit VAT returns?
Boxes 2, 8 and 9 - nil entry required
As an opening test of business' post-Brexit VAT returns is that Boxes 2, 8 and 9 should have been recorded as “nil” since January 2021. Boxes 8 and 9 were previously used to record the value of sales and purchases of goods to and from EU customers. The Box 2 entry related to acquisition tax payable on VAT-free EU purchases that they used in their business.
It is possible that busineses made some entries in these Boxes for their March 2021 return, i.e. for goods that arrived in December 2020 or earlier but where the paperwork was delayed until 2021.
GB businesses will no longer be submitting either EC Sales Lists for their sales to VAT registered EU customers or Intrastat despatch returns. However, Intrastat acquisitions reports are still needed until at least the end of 2021 to help HMRC with the recording of trade statistics.
Postponed VAT Accounting
The biggest post-Brexit change is that businesses can ask their customs agent or representative to postpone the payment of VAT when a shipment of goods arrives in GB by electing for postponed VAT accounting (PVA). This means that instead of paying VAT on the value of standard-rated and reduced-rated goods at the time of import, the VAT payment will be deferred and the business will instead declare it on their next return by making a reverse charge entry. PVA is a cash-flow winner because it is better to not pay tax in the first place, rather than pay it on arrival and wait up to three months to claim input tax.
Example. Marie sells ladies’ handbags from her shop in Birmingham. She has imported a shipment of high-quality handbags for £200,000 from Italy. Instead of paying VAT of £40,000 to HMRC when the goods arrive in GB and claiming input tax on her next VAT return, it makes sense for her customs agent to tick “payment option G” on the customs declaration form that relates to the goods in question and elect for PVA.
- Marie will account for £40,000 VAT in Box 1 of her next return because handbags are standard-rated in the UK.
- She will claim the same amount as input tax in Box 4 because she is using the handbags for taxable purposes, i.e. selling them to her customers.
- If there is any exempt, non-business or private use of the imported goods, her Box 4 input tax entry will be less than £40,000, i.e. subject to a restriction.
- The net value of the purchase will be recorded in Box 7 of her return, based on the invoice issued by her Italian supplier.
The key message with PVA is that a business must be clear that the Box 1 entry on their VAT returns is not always the same amount as the input tax claimed back in Box 4 because of possible private, non-business or exempt use. Care is needed to get things right.
PVA can be used for worldwide imports of goods into GB, not just for EU imports. For an NI-based business, it will only be relevant for imports from outside the UK and EU.
PVA statements issued by HMRC
HMRC has acknowledged that there have been teething problems with the issuing of PVA Statements to UK importers by its Customs Declarations Service (CDS). Businesses that import goods should have registered with the CDS so that they can download the statements in the middle of a calendar month, which will show the amount of VAT deferred on imports for the previous month. The amount of VAT will then be recorded in Box 1 and Box 4 as explained above, to give a complete audit trail.
If a business has encountered problems downloading their statements, HMRC’s advice is that they should estimate their VAT return entries. In other words, the total value of the import, including any customs duty, insurance or freight costs, will be used as the basis for calculating 5% or 20% VAT to be declared on the relevant return. If the statements are available at a later date, the estimated amounts can be adjusted on the next return.
It is important to make the PVA entries for the period when the goods arrive into GB. This means that the entries will also coincide with purchase invoices issued by overseas suppliers, so there will be a direct link between Box 4 and Box 7 entries on their return.
The above analysis has assumed that the business will always use PVA for their imports. This is sensible because it is a “win-win” outcome. However, if they paid VAT on arrival for some shipments, then the relevant document they will need in order to claim input tax is the C79 certificate issued by HMRC. This is the only acceptable document for input tax purposes - an invoice issued by a customs agent or freight forwarder is not acceptable.
Buying and selling services
The situation with services is much easier. Services purchased from abroad by a UK business have always been subject to the reverse charge, so the treatment on post-Brexit VAT returns is the same as it was before.
The main difference between accounting for VAT on services purchased from abroad compared to imported goods is that the business must also make an entry in Box 6, the outputs box, for services. So, it is Boxes 1, 4, 6, and 7 for services but only Boxes 1, 4, and 7 for imported goods.
Example. Marie from the previous example also uses the services of an Italian computer consultant to help with IT issues. The consultant invoiced her for £10,000 on 30 September 2021 and correctly did not charge Italian VAT. Marie completes her returns on a calendar quarter basis. Marie will make the following entries on her September 2021 return:
Box 1. £2,000 - because computer consultancy services are standard-rated under UK law.
Box 4. £2,000 - because she is using the services for her taxable business purposes, i.e. as a retailer of handbags. So, she can fully claim input tax, subject to the same tests as for PVA for restrictions for private or exempt use. The difference is that HMRC won’t issue a supporting document.
Box 6. £2,000 - this is the unusual entry - an entry in the outputs box, even though it relates to a payment. The logic is that the Italian supplier would have made an entry in Box 6 of their own return if they had registered for UK VAT.
Box 7. £2,000 - to record the invoice from the Italian supplier as a purchase.