Hang on, VAT doesn’t work that way

Previously, when the UK was in the EU and during the transition period, Moss and other small businesses did not charge VAT on customers in other EU countries. But EU rules on third countries dictate that VAT must now be paid before goods are received from the UK.

Moss could not believe what was happening. Loyal customers were being told to pay around 20% extra on top of the quoted price for his goods before they could get hold of them. Of course, if this continued, they would look elsewhere for cheaper suppliers. What could he and other business managers do?

Moss had three options – and none would be easy. First, he could bite the bullet and pay the VAT himself on behalf of customers in the EU. But this would mean running at a huge loss and was not possible for the long term. Second, he could stop all exports to the EU – but this would reduce the size of his business overnight and mean that years of hard work finding customers abroad had been for nothing. Or third, he could set up and register a company in the EU, ship all his goods out once a week to avoid the delays and individual Brexit-related payments, and distribute his goods from there. The European branch of his company could then pay the VAT and claim it back from the government of whichever EU member state it was based in.

It’s not a 20% difference. It’s a cashflow timing difference.

If VAT is charged along the way then it is reclaimable by the customer – they’re all going to be businesses here. This story has got very garbled somehow. Being in or out of the EU doesn’t determine whether VAT is chargeable overall, it might though change the timing of when it is.

26 thoughts on “Hang on, VAT doesn’t work that way”

  1. “Moss did not charge VAT on customers in other EU countries”

    Has anybody told the Tax Man? A clear case of tax evasion. Fraud even! Thirdly, fourthly and fifthly!

  2. Hang on, is VAT still pan-european? If I in the UK sell something to someone in Germany ( who is a business) I charge then 20% VAT, and come next tax return I pass that on to HMRC. Hans in Germany has a UK issued VAT invoice showing 20% VAT, can he use that to claim the VAT he paid from the German Vat man? If so the UK tax man is up and German one is down. Is that how VAT works post Brexit?

  3. Or third, he could set up and register a company in the EU

    How would exporting to a subsidiary in the EU differ from exporting to a customer in the EU?

  4. I don’t understand the third option as his European company still has to pay VAT on the goods upon arrival, and reclaims it by charging VAT to its customers. So how is that saving anything?

    The timing is a pain, but in the context of the total godawful mess that VAT is this is a really minor niggle.

    When you receive goods from a non EU country, the courier charges you the VAT and any import duties on delivery. If customs aren’t happy that your carton of squirrel suits conforms to the relevant directive, or is going to be used exclusively for moral and edifying purposes the consignment gets diverted to a customs office, and they invite you to come and discuss it with them, including payment of relevant import duties and VAT, in a procedure it will shock you to learn is exceedingly time consuming and employs 3 bureaucrats to do the work of 1. Its a good idea to have cash ready.

  5. @Jim

    I think if you are both VAT registered that Hans simply gives you his VAT Nr (DExxxxxxx)and you waive the VAT.

  6. UK should solve all of our VAT problems by abolishing VAT . This will help our prices fall and let others see how much better off they would be without it themselves.

  7. Bloke in China (Germany province)

    Ecksy, everyone should abolish VAT because it’s a godawful mess, expensive and bureaucratic for businesses to administer, and costs them a lot in payments, interest, and fines, when an honest mistake is made in interpreting the hundreds of different rules.

    Unfortunately our dear leaders would have less money then, and would have to do something like raise income tax to over 50%, upon which the people would rise up, overthrow the oppressors, and institute a small-government liberal …

    No, I was just dreaming.

  8. @Jim

    If Hans is a VAT registered business, no VAT is charged by the UK business. It’s handled by way of a reverse charge. Hans would charge himself VAT on the import and immediately be able to claim it back.

  9. It is FUBAR here…

    People ordering from Amazon in the UK are being charged duty on the (UK VAT paid) price of goods, then Cyprus VAT (19%) on the goods, duty and shipping charges….

  10. If he didn’t pay VAT on goods from the EU then that would have been a fantastic 20% off perpetual sale. I’m sure we’d have all heard about it at some point.

  11. BiG – but in the context of the total godawful mess that VAT is this is a really minor niggle

    +1000000000000

    Papers are still trying to drum up outrage over “Brexit chaos” (i.e. annoying but minor hassles which bear no resemblance to the food riots, medicine shortages and tsunamis we were promised) when the only reason millions of people haven’t joined official unemployment stats yet is because the government is still paying their employers to pretend they have a job to go back to.

    Incidentally, anybody know the current number of people on furlough? Government stats give a total figure of 9.9 million (!!!!) as of mid-December, but I’m hoping that’s a cumulative total and not the actual number of actively inactive employees.

    Looks like I picked the wrong decade to stop sniffing glue.

  12. Perhaps someone with more VAT experience then me (Andrew C?) could tell me if, now we’re out of the EU, could we just abandon the VAT Reverse-Charge mechanism at no fiscal cost?

  13. P.S. Something very similar also appears in the Times Ireland sexton this morning. The “20% VAT” on online goods sourced in the UK (does Ireland have any other sort of online goods?) is of course the Reverse-Charge. The Irish view is the Brits should sort this out and quickly. Never a thought that it might be their own government imposing it!
    Of course, if it pisses off the Irish, it’s worth leaving alone for a while.

  14. Bloke in China (Germany province)

    Iron,

    Not an expert but I think the only options are to register in the country you are selling to (mandatory if you meet the threshold) and do your own returns there, or ship without charging VAT and let customs in the receiving country deal with it, usually involving the recipient having to pay in cash upon taking delivery.

    Incidentally the waiver for low-value packages (€22?) is being eliminated this year. Obviously the threshold was subject to massive abuse, but applying VAT on receipt to every parcel is going to be interesting to see in practice. It will definitely need a Great Reset to sort out.

  15. Whilst still in the EU, suppliers sending goods shipped from UK to other EU Countries and to an end-user were required to charge destination Country VAT. If goods went to a VAT registered distributor/retailer, then they were sent free of VAT but quoting the recipient’s VAT number, who then reported it/paid it to his local VAT unit.

    In the UK, imports from the USA, for example, had UK VAT applied on entry which had to be paid at point of entry, unless deferment had been arranged, and then reclaimed in the VAT returns. Some EU Countries allowed automatic deferment on imports from non-VAT Countries, others operated like the UK. It was not an EU rule (unless things have changed in recent years), it depended on rules in individual Member States.

  16. The rules depend on whether you are selling to businesses (B2B) or consumers (B2C). Prior to January for B2B sales you would simply quote the customer’s VAT number on the invoice and then zero rate the VAT. At the other end the customer would use a reverse charge procedure known as the acquisitions tax to both pay the VAT due to their own authority at their own rate and simultaneously reclaim it if eligible. For most customers the net effect was that there was no VAT to pay. On the VAT return it was simply a grossing up exercise with no net effect.

    After January, UK to EU sales are no longer part of the EU VAT framework so VAT is due upon import subject to whatever rules the EU impose. I’m no expert on the EU side of things but the equivalent process in reverse for a company importing from outside the UK has essentially three options. (1) you pay the VAT upfront via the courier. (2) you use your own VAT deferment account to settle the VAT at the end of the month or (3) you use the new “postponed VAT accounting” scheme. In the first two cases you may well have to fork over the cash earlier than the period you can reclaim it so there is a cash flow impact. The third option was introduced by the UK post brexit to address that exact issue. Where the customs declaration postpones the VAT then you account for it on the VAT return by both paying it and reclaiming it in much the same way as the EU Acquisitions tax operated. This negates the cash flow impact. As a nice Brexit bonus, the new method can also be applied to imports from outside the EU as well so there is a potential cash flow benefit for imports from say China that wasn’t available before. One would assume that if they haven’t already, the EU will implement a similar scheme for imports into the EU.

    B2C is a bit different. Pre January you either charged UK VAT or if you were over the distance selling threshold for a particular country, you registered for VAT there and charged their VAT instead. Post January there is no such thing as distance selling as that is an EU concept so you don’t charge UK VAT at all. You may, however have to register for VAT in the destination country.

    We’ve seen a lot of reports complaining about B2C sales into the UK because HMRC have changed the rules. The situation now appears to be that if you want to sell something worth less than £135 then the seller has to register for UK VAT and charge it at the point of sale, whereas if it is more than £135 the seller does not charge VAT but HMRC instead charge it at the point of import alongside the duty that might be due as well. It does seem fairly absurd to have a split system like that so I’m sure I’ve missed something along the way.

    In the case of the chap in the article it appears his customers simply don’t want the negative cash flow impact of having to pay the VAT upfront. If they are in business, they should still be able to reclaim it. If they are not in business then they should have been paying VAT anyway. There isn’t a new expense. As said above, we have procedures to mitigate the cash flow impact. Whether the EU do I’m not sure.

  17. “In the case of the chap in the article it appears his customers simply don’t want the negative cash flow impact of having to pay the VAT upfront. If they are in business, they should still be able to reclaim it. If they are not in business then they should have been paying VAT anyway.”

    I think a lot of the latter has been going on. The BBC had an article on their website which detailed a woman in the UK who had ordered clothing from an EU supplier (as a consumer not as a VAT registered business) and was ‘shocked’ to be charged VAT and duties by the courier upon its arrival in the UK, which ‘hadn’t happened before Brexit’

    This little tale was of course presented as ‘Awful Brexit messing with people’s lives’ when in reality it was more a case of ‘Tax evaders get caught out by Brexit changes’.

    https://www.bbc.co.uk/news/business-55734277

  18. I’m not sure it is necessarily even a case of tax evasion. If a company was under the distance selling threshold they would (or at least should) have charged their own VAT (say French VAT). If that was part of the advertised price online then would a customer even notice that they had been charged VAT?

    The difference now is that it isn’t the seller who is necessarily charging the VAT. It might be the seller or it might be HMRC but as it is now dependent on the customer being outside the EU, the VAT doesn’t appear until checkout whereupon it comes as a shock to people.

    I wouldn’t be surprised to find that a lot of foreign vendors are not reducing their advertised prices by the amount of the say French VAT they would have previously paid before adding the UK VAT they now have to pay. It’s a great way to increase your margin and blame Brexit.

  19. everyone should abolish VAT because it’s a godawful mess, expensive and bureaucratic for businesses to administer, and costs them a lot in payments, interest, and fines, when an honest mistake is made in interpreting the hundreds of different rules.

    There are two things being confused here. The concept of VAT and a bureaucratic mess. The two do not go together.

    NZ has VAT (called GST). It is a flat rate for everything except rents and property basically. That makes it extremely easy to administer. My wife knows that every single thing in her shop has GST at the flat rate, in and out. One calculation and she pays the money per month. It is the cheapest tax to administer nationally, so the most money for the lowest overhead.

    Your VAT with it different rates and exemptions is an idiotic tax, I agree. But not because it is a VAT. But because HMG choose to make it a mess.

  20. Here in New Zealand I quite like the import GST (VAT) timings. If I import goods on my deferred payment account then I claim the import GST in my month-end GST return, but don’t actually pay it to Customs until 20th of the following month. So a decent 20 day improvement to my working capital, funded by the NZ bureacracy!

  21. NZ has VAT (called GST). It is a flat rate for everything except rents and property basically. That makes it extremely easy to administer. My wife knows that every single thing in her shop has GST at the flat rate, in and out. One calculation and she pays the money per month. It is the cheapest tax to administer nationally, so the most money for the lowest overhead.

    Your VAT with it different rates and exemptions is an idiotic tax, I agree. But not because it is a VAT. But because HMG choose to make it a mess.

    Totally agree! Having worked in a London Big 4 tax practice, where there was an enormous indirect tax team taking up floors of our various offices, it was a bit of a surprise moving into an Auckland Big 4 tax practice and seeing that the entire, national, indirect tax team consisted of 5 people!

    Now that the UK is out of Europe HMRC should hire a couple of NZ policy wonks and get them to totally overhaul VAT rules! Although I can imagine the screams from the left of the heartless Tories putting VAT onto fresh fruit and vegetables (ignoring the fact that doing so means that you can lower the rate and ensure that the overall tax take is no different to before).

  22. @ James in NZ
    The “heartless Tories” introduced VAT because it was a condition of joining the EEC which seemed a good idea at the time (and actually was until Delors was put in charge and used the Brussels bureaucracy to introduce socialism in France by the back door as the French electorate had disobediently refused to accept socialism through the front door) but had a zero rate for essential items to protect the poor and newspaper magnates/journalists.
    Two rates 20% and 0% are not a big problem – the intermediate rate for domestic fuel and difference between cakes and biscuits are an unnecessary nuisance and should be eliminated but all we need is an intelligent schoolboy rather than importing a wonk from the other side of the globe.

  23. Chester,

    The problem is really in the EU in that an EU-imposed tax is administered in 27 different ways in 27 different countries. A single market should have worked out by now that it needs uniform rules, rates, and a single authority doing the collection, not the need for any business operating cross border to register everywhere. It can’t happen for political reasons. The member states don’t want to give the EU tax raising powers (that it has wanted for decades) and I agree they should not as that will start a slippery slope. It would be preferable to abolish the tax.

    “It does seem fairly absurd to have a split system like that so I’m sure I’ve missed something along the way”

    Never assume incompetence when malice provides an adequate explanation.

  24. If the EU wanted a budget so that it could play, why not just charge countries an amount per head as some sort of membership subscription? £100bn / 500 mill people is £200 per head (circa £13-14bn for a country the size of the UK). That’s its income, nice and simple, job done. Then it can dish it out to its own special interest groups according to need.

    Not “progressive” enough? Doesn’t matter, the poorer countries (along with French farmers) are the special interest groups in any case, they will always be in credit.

  25. It does seem fairly absurd to have a split system like that so I’m sure I’ve missed something along the way.

    If it were uniform, then HMRC would have much more work dealing with the myriad <£135 purchases from abroad. What better than to push that workload onto foreign businesses.

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