Three months into the post-Brexit era, and trade between the UK and EU has certainly been ‘bumpy’ as businesses adjust to the new rules and regulations of importing and exporting goods and services. Previously, as part of the Single Market and Customs Union, UK businesses benefited from the EU VAT directives which effectively reduced or removed VAT liability on goods trading between EU countries. It also eliminated the requirement to have multiple VAT registrations if companies were not trading in specific countries, and most importantly there was no need to account for Import VAT when sending goods across the channel. With VAT rates as high as 21% in the most active importing countries, Brexit has left many businesses with increased costs of supply and with the difficult choice of whether these costs should be passed onto consumers, thus risking their customer base.
The changes post-Brexit also increase paperwork requirements and place additional administrative burdens on businesses who never had to consider Import VAT, Customs Declarations and multiple EORI numbers until now. Despite the elimination of most tariffs and quotas, shipping of goods and specifically larger bulk load items are still experiencing delays given the large number of documents that now need to be processed, not to mention compliance risk that leads to the missed opportunity of Import VAT reclamation.
Industries that need to move their goods quickly, especially if they are part of large supply chains and are required for completion of projects, do not have the ability to absorb time delays; during the transport process, this can be exacerbated by confusion over ownership of goods and financial responsibility of goods and related costs. Aligning on the Incoterms (the agreement between the supplier and customer) between supplier-buyer is vital to ensure that members of the FIS are not negatively impacted as a result of contracts that were not set up to take the new regulations into account.
Services and Qualifications
Members of the Finishes and Interiors Sector could also face issues around the removal of recognition of certain qualifications and licenses required between UK and EU. This unfortunately could mean that individual EU countries would impose their own rules and regulations for UK companies and individuals to work and supply services, depending on the sector. The construction industry is also affected by the removal of free movement which allowed professionals and workers to perform work across the EU with ease.
VAT on Construction
Apart from Brexit, legislation now requires all companies and individuals considered part of the Construction Industry Scheme to make use of the domestic reverse charge mechanism when accounting for VAT on the supply of building and construction services. This took effect on 1 March 2021. Reverse charge is mostly applicable to construction and physical property-related services, rather than the manufacturing of product used in those services. In other words, businesses who supplies certain types of services to other businesses (who are not the ultimate end users or ultimate customer) would not have to charge VAT, but rather account for it in their own VAT returns. What this means practically is that the company would report the normal Sales Tax (output VAT) and then show an Input VAT entry for the same amount, therefore in reality no additional cash changes hands. Whilst this is good from a cash flow perspective for both sides, it does mean that the finance team would need to be well-versed on the situations where this applies to avoid compliance issues.
VAT IT is the global leader in VAT compliance and corporate VAT reclaim, servicing 13,000+ clients (from SMB’s to Fortune 500 companies) across the globe. VAT IT recently launched a single, holistic supply chain solution, re:TRADE, to assist companies with overcoming the pain points of trade continuity after Brexit. Contact re:TRADE powered by VAT IT for a complimentary, non-binding consultation.