Checking VAT returns post-Brexit

A lot of year-end accounts work is carried out in December and January due to a combination of the self assessment deadline for sole traders and partnerships on 31 January 2022 and calendar year ends for many limited companies. The end of December was also the anniversary of the end of the EU transition period. So, it is probably a good time for advisers to check that clients with international transactions are submitting accurate VAT returns to HMRC.

Three boxes are zero

For a GB-based business, three out of the nine boxes on the return are now zero, namely boxes 2, 8 and 9.

Box 2 was previously used to account for acquisition tax on goods purchased from EU suppliers and boxes 8 and 9 were used to record the value of goods sold to or bought from VAT-registered customers and suppliers in the EU. There is no longer such a thing as an ‘acquisition’ or ‘dispatch’ for a GB business – assuming it does not have a branch in Northern Ireland (NI) – because all arrivals of goods are now imports and all sales abroad are classed as exports. There is no different treatment for EU and non-EU supplies.

The reason why these boxes are still included on the VAT return is because they are relevant to a business in NI. The province is still part of the EU as far as trading in goods is concerned because the Northern Ireland Protocol is intended to ensure a smooth trading border with Ireland.

Postponed VAT accounting (PVA)

A big win for all importers of goods since 1 January 2021 has been the introduction of PVA, which means that VAT-registered businesses can defer paying VAT to HMRC when goods arrive in the UK from anywhere in the world – or outside the EU in the case of an NI business – and instead account for VAT by doing a reverse charge calculation on their next return.

• All importers should have a GB economic operators registration and identification number (EORI) number – HMRC usually issues them within three days once an application has been received.
• Importers should register with HMRC’s Customs Declaration Service (CDS) so that they can download postponed import VAT statements (PIVS) each month, so they know how much VAT to include on their returns with PVA.

Example

Bob is VAT registered in the UK and trades as a florist. He imports all his flowers from the Netherlands and has elected for PVA. The total value of his imports in October 2021 was £50,000.

Bob will make the following entries on his VAT return that includes October:

• box 1: output tax – £10,000
• box 4: input tax – £10,000. This figure would be lower if any of the flowers were used for exempt, private or non-business purposes. That is not relevant for Bob; and
• box 7: inputs – £50,000, based on purchase invoices received from Dutch suppliers.

Note: there will be no Dutch VAT charged by the suppliers because they are exporting goods from an EU country to a non-EU country (ie, making a zero-rated sale).

Input tax on imports – C79 certificates

A business does not have to register for PVA; it is an election made by the customs agent acting for the importer on each shipment of goods. In some cases, the importer will deal with the paperwork process themselves rather than use an agent.

It makes sense for business owners to tell their agent to elect for PVA on all imports of goods from anywhere in the world (ie, as the default position). It is a win-win outcome. The election is made by ticking payment option G on the relevant customs documentation.

However, if PVA is not adopted on a shipment, for whatever reason, and VAT is paid to HMRC on arrival, then all is not lost. The VAT-registered importer should receive a C79 VAT certificate in the post from HMRC, enabling it to claim input tax in box 4 of its next return. This is the only acceptable evidence to support an input tax claim.

Buying and selling services

The situation with services is easier: services purchased from abroad by a UK business have always been subject to the reverse charge, so there is status quo post-Brexit. In other words, a business makes the same entries on their VAT returns for services purchased from EU suppliers as they did before 1 January 2021.

The main difference between accounting for VAT on services purchased from abroad compared with imported goods is that a business buying services must also make an entry in box 6 for outputs. It is therefore boxes 1, 4, 6, and 7 for services, but only boxes 1, 4, and 7 for imported goods.

Example

Bob has used the services of a Dutch computer consultant. The consultant issued a sales invoice for £30,000 in October 2021 and correctly did not charge Dutch VAT.

Bob will make the following entries on his VAT return that includes October:

• box 1: output tax – £6,000, because computer consultancy services are standard rated under UK law;
• box 4: input tax – £6,000, because he is using the services for his florist business (ie, the expense is wholly relevant to his taxable sales);
• box 6: outputs – £30,000. Although the supply relates to a payment, an entry is still made in this box. The logic is that the Dutch supplier would have made an entry in box 6 of a UK VAT return if they were registered for UK VAT; and
• box 7: inputs – £30,000, to record the purchase invoice received from the consultant.

Input tax restriction

In the case of Bob’s imported goods and services, the box 4 input tax entry is the same as the output tax declared in box 1. However, this will not always be the case. For both goods and services, the box 4 input tax entry will go through the same tests as a purchase invoice received from a UK supplier, with a reduction for any private, non-business or exempt use.

Example

Apple Golf Club is a members’ golf club run by a committee, so is partially exempt for VAT purposes. It has imported some grass seed for the course with a value of £10,000 and some drinks for the bar for £10,000. It has elected for PVA in both cases. All the club’s playing income is exempt from VAT, but the bar income is taxable.

The club will account for output tax of £2,000 in box 1 in both cases because the goods are standard rated, but will only claim this amount in box 4 for the drink purchases. The box 4 entry for the grass seed is input tax blocked with partial exemption because it is wholly linked to exempt supplies.

Conclusion

All exports of goods from GB are now zero rated, but proof of export must be retained by the seller to support the zero rating. The only entry on the VAT return will be in box 6. For an NI business, only sales of goods to non-EU countries are classed as an export.

Overall, post-Brexit VAT returns are probably easier now for a GB-based business. This is because only six boxes are relevant instead of nine, and the zero figure in box 2 means that box 3 is always the same as box 1, so that makes five. Happy days.

About the author

Neil Warren, CTA (Fellow), ATT, an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997