Notice 700 The VAT Guide explains the basics of VAT administration.
Rate % of VAT What the rate applies to
There are currently 3 rates of UK VAT
Standard 20% Most goods and services
Reduced rate 5% Some goods and services, e.g. children’s car seats and home energy
Zero rate 0% Zero-rated goods and services, e.g. most food and children’s clothes
The EU does not stipulate a fixed standard VAT rate (it varies from 17 per cent in Luxembourg to 27 per cent in Hungary) but it does set guidelines. The minimum standard VAT rate is 15 per cent, and a maximum of two reduced minimum rates of at least 5 per cent that may be applied to prescribed goods and services. The UK has additional derogations in place allowing it to zero-rate specific products.
The normal VAT treatment of goods supplied between VAT-registered traders in different member states is as follows:
the supply in the member state of dispatch is zero-rated
VAT is due on the acquisition of the goods in the member state of arrival and is accounted for by the customer on their VAT Return at the rate in force in that member state
(how this applies in the UK is explained in more detail in Notice 725 – VAT and the Single Market)
There are various special rules that apply in particular circumstances. These are also explained in Notice 725
For supplies to unregistered customers, or private individuals, VAT is normally accounted for by the supplier as a domestic supply in the member state from which the goods are dispatched.
The UK is due to leave the EU on March 31st 2019 with a prospective transition period to 31st December 2020 or beyond but any extension has yet to be ratified.
The UK is bound by EU VAT law but depending on the result of any final agreement, the UK will have more flexibility on VAT principles in being able to set its own VAT rates and to adjust Zero-rating or exemptions.
The impact of the UKs exit from the EU it will become a 3rd country which may have a big impact on both importers and exporters in the form of;
20% import VAT on goods arriving from the EU. Without any mitigation in place this represents a considerable cash flow issue for companies doing business with EU member states
Customs duty due on EU imports and exports representing increased costs affecting profit margins
Customs declarations required for EU movement of goods. An average cost of £32.50 per declaration for both imports and exports is often overlooked as an additional expense
UK service companies may need to register in each of the member states they have customers due to the removal of the EU distance selling threshold simplification which will require a physical presence in that member state
Exporters contractually responsible for delivery direct to an EU customer (e.g. delivered duty paid) may also have to become VAT registered in member states in order to reclaim EU VAT.
The UK is currently a member of the common EU VAT area but whilst there is some uncertainty as to whether we can continue with membership, the likelihood is that it will not continue when we leave.
Possible Brexit solutions
There are a number of areas for consideration by business currently involved in intra-EU movements which may help mitigate some of the negative Brexit impacts
Authorised Economic Operator (AEO) status.
Becoming an AEO will provide maximum facilitation by HMRC, easier access to Special Procedures as a ‘Trusted Trader’ and reduce guarantee costs
Applying for Customs Warehouse, Inward Processing or any other suitable procedure may help cash flow for VAT and/or alleviate duty charges post Brexit
Duty Deferment account.
Set up a deferment account to help manage VAT and Duty payments
Simplified Import VAT Accounting (SIVA).
Remove the need to guarantee VAT on imports
There is still a lot to be decided by the UK Government on the solution it is seeking with the EU but businesses should now be considering their options and the potential impact Brexit may bring.