Customs and VAT after Brexit: What happens for UK businesses?

Editor’s note: This article has been updated in light of the UK-EU trade deal that was agreed at the end of 2020 and is now in place.

Since 1 January 2021, businesses in the UK have had to consider imports and exports in a new way.

Customs procedures apply to England, Wales and Scotland when it comes to trade with European Union (EU) countries, and when moving goods to Northern Ireland too.

And the way VAT is accounted for has also changed. For importing, this VAT change affects trade with both EU and non-EU countries.

However, the UK government has introduced a number of measures that should ease the administrative load and reduce the impact on cash flow.

We provide a high-level overview of these below – but this is no substitution for specific expert or legal advice for your situation and needs.

What was Brexit – and what does it mean for businesses?

The UK officially left the EU on 31 January 2020, and most of 2020 was spent in the transition period.

This ended on 31 December 2020, and new rules were implemented on 1 January 2021.

Until the end of the transition period, businesses didn’t have to make any changes in order to continue day-to-day business.

The UK remained within the EU customs and VAT systems, for example. This meant there were no trade borders between the UK and EU countries, and therefore no customs formalities.

However, significant adjustments are now required for businesses that import or export to the EU.

The government’s advice is that you hire a customs broker, freight forwarder or similar operative to help with customs relating to importing and exporting – although these agents are unlikely to help with VAT, for which you will need your own knowledge, perhaps with the help of an accountant.

But customs and VAT issues can be complicated, especially if you’ve only experienced seamless movement across EU borders until now.

Throughout this blog we sometimes refer to Great Britain, which is the geographical territory comprising England, Wales and Scotland. This is separate from the United Kingdom, which comprises England, Wales, Scotland and also Northern Ireland.

This distinction is important because, in terms of imports and exports, Northern Ireland is treated differently compared to the rest of the UK. See the heading towards the end of this blog: “Northern Ireland VAT and customs after 1 January 2021”.

This is a comprehensive article and as such is split into three parts:

• Part 1: Importing from the EU to the UK following Brexit (after 1 January 2021)
• Part 2: Exporting from the UK to the EU following Brexit (after 1 January 2021)
• Part 3: What Brexit means for VAT in your business

To easily navigate the article, click on the links below to find the information you require:

Part 1: Importing from the EU to the UK following Brexit (after 1 January 2021)

• Delaying customs import declarations for up to six months
• EORI number
• Commodity codes
• Applying tariffs
• Customs declarations
• Duty deferment account
• Import licences
• Incoterms
• Transport logistics

Part 2: Exporting from the UK to the EU following Brexit (after 1 January 2021)

• EORI number
• Commodity codes
• Export declarations
• Export licences
• Incoterms
• Transporting goods

Part 3: What Brexit means for VAT in your business

• How has VAT changed after Brexit?
• Import VAT
• VAT on imports £135 and under
• VAT on exports
• Northern Ireland VAT and customs after 1 January 2021

Conclusion on customs and VAT after Brexit

Part 1: Importing from the EU to the UK following Brexit (after 1 January 2021)

Here’s a high-level overview of what you need to know, or set up, before importing goods from the EU to the UK.

Delaying customs import declarations for up to six months

In the immediate aftermath of the Brexit transition period ending, delayed customs declarations is one of the biggest aids for businesses that import from the EU.

If you make use of it there is, for most goods, no need to make immediate import declarations for goods at the UK border, or get authorisation in advance. Instead, you can wait 175 days, or six months. This also means you can delay any customs payments until then too.

You can defer declarations for up to six months, up to and including 30 June 2021.

The exceptions are if the goods are controlled (such as alcohol, tobacco and hydrocarbon products), or if HMRC explicitly says you can’t use vital elements of the scheme when you apply. This might be the case if your business has a poor record in other areas of compliance.

There are a handful of qualifying factors for use of the system:

• Your business must be in Great Britain. The Northern Ireland Protocol means Northern Ireland has its own rules (see the Northern Ireland VAT and customs after 1 January 2021 section).
• The goods must have been in free circulation in the EU prior to import to the UK.
• Because you will make a supplementary rather than full customs declaration within six months of the import date, you’ll need to have been authorised by HMRC to use simplified declarations. Most businesses will rely on their customs broker or freight forwarder to make the customs declarations. But if you do this yourself, rather than via a third party, you’ll need to be registered for the CHIEF system (known as getting a CHIEF badge), and have CHIEF-compatible software.
• Since simplified declarations require a duty deferment account, you’ll also need to apply for this with HMRC.

To use this system, and as mentioned earlier, you’ll need to use simplified declarations.

This can mean making a simplified frontier declaration for each import, known as Simplified Declaration Procedure (SDP), or you can make an entry in your own records for each import, known as Entry In Declarant’s Records (EIDR).

You have to choose which scheme to apply for depending on the needs of your business, and the way it operates.

The use of EIDR means you should record the customs import information in your commercial records.

As mentioned above, for either of the two simplified options above, you’ll also need to make a supplementary declaration within six months of the import. You might have to make an Intrastat declaration too.

EORI number

An Economic Operators Registration and Identification (EORI) number is a way of identifying businesses or operators who export or import to the EU.

It’s now a necessity for both customs and VAT documentation.

UK businesses must have one or more of three different types of EORI number as depending on where they import and export:

• Business in Great Britain: To trade goods with EU countries, you need an EORI number that starts with GB. However, if your business only moves goods between Northern Ireland and the and the EU, including the Republic of Ireland – and nowhere else – then it won’t usually need to use an EORI number.
• Businesses moving goods to or from Northern Ireland: If you move goods to or from Northern Ireland (outside of moving goods to and from the EU), you need a second EORI number that starts with XI.
• Businesses making declarations or getting customs decisions in EU countries: If your business makes declarations or gets customs decisions in an EU country, you’ll need to get an EORI from the customs authority in the EU country where you submit your first declaration, or request your first decision.

If you previously used an EORI number from the days of the UK’s membership of the EU, you may need to apply for one or more additional EORI numbers.

However, if you already have a number starting with GB and don’t now declare customs in the EU or deal with Northern Ireland, this will be sufficient.

Starting in late 2019, HMRC began automatically issuing new EORI numbers that begin with GB to UK businesses it believed need them.

If you haven’t received one, you can apply now. HMRC says it can take a week for the application to be completed.

Furthermore, in December 2020, HMRC began automatically issuing EORI numbers that begin with XI to businesses it believed needed one.

You can apply for one yourself too. However, you won’t be able to have one unless you already have an EORI beginning with GB.

Commodity codes

Customs relies on the correct classification of goods so the correct tariff and quota can be applied (or for preferential treatment to be used – see below).

Different parts of the world call the classification code different things.

But fortunately they’re all based on the same Harmonised System (HS) maintained by the World Customs Organisation (WCO) – numeric codes that in theory can be applied to every kind of import or export to describe and classify them.

Within the EU and UK, these codes are known as commodity codes (CC). They’re required for import and export documentation, and they decide the tariffs and VAT (if any) that you’ll have to pay.

Therefore, it’s important to use the correct commodity code.

Commodity codes are eight digits long for goods you export and 10 digits long for goods you import.

The UK continues to use the same code system as is currently used in the EU. You’ll need to know which code applies to the goods you wish to import – the government offers a free look-up tool online.

Applying tariffs

Tariffs are a form of tax paid on imports, applied by the country to which the import is made.

In other words, tariffs in the UK are payable to HMRC. Also referred to as duty, tariffs are calculated at customs based on the commodity code.

The UK Global Tariff (UKGT) has now replaced the EU’s Common External Tariff following Brexit. It will apply to all imports from countries for which the UK does not have a free trade agreement.

You can check the tariff for an import using the government’s website look-up tool.

However, as has been widely publicised in the media, the UK and EU agreed the Trade and Cooperation Agreement (TCA) just before Christmas 2020. This is a free trade agreement referred to colloquially as the trade deal (see our general Brexit FAQ).

The TCA presents two key considerations for businesses that import/export between the UK and EU:

• Preferential treatment: The UK and EU agreed that goods that formerly moved freely during the UK’s membership of the Common Market are now 0% tariff and not be restricted by quotas. This is referred to as preferential treatment and means there won’t be any customs duties or limit to the quantity of goods that can be imported or exported between the UK and EU. It doesn’t mean there won’t be customs formalities and documentation, though. There are conditions attached, though, one of which are rules of origin.
• Rules of origin: Traders can only claim preferential treatment if the rules of origin are met. These are very complex, and fill entire annexes of the TCA. But in summary, the rules of origin say that the goods (or originating materials used to make them) must originate in either the UK or EU. More than this, you must prove this is the case by obtaining a supplier’s declaration or equivalent documentation. This is known as a statement on origin for imports and it provides importers with what’s called ‘importer’s knowledge’.

If preferential treatment isn’t used then the goods can still be traded. However, the World Trade Organisation’s Most Favoured Nation (MFN) rules will apply.

This means goods coming into the UK may have customs duties applied according to the UK Global Tariff.

Goods exported from the UK to the EU might have the Common External Tariff applied. There might be quotas that will limit the quantity of goods that can be traded at a given time.

It’s a mistake to assume preferential treatment is always the best route to take.

Using MFN rules means the rules of origin don’t apply, which can provide more freedom on where you source products or materials used to make them.

And you may find the customs tariffs are low or even zero, while there may be quota allowances that won’t be exceeded by your trade.

Customs declarations

If you’re using delayed declarations when 1 July 2021 arrives, when the scheme is due to end, you can either continue using simplified customs procedures as described earlier, or switch to making a full customs import declaration for goods that enter the UK from other countries including the EU (unless they’re going into temporary storage).

It would make sense to continue using simplified procedures if they meet your business needs. If so, you will need to provide the supplementary declaration by the fourth working day of the following month following the date of import and can no longer delay for 175 days.

But if you wish to prepare a full customs declaration, it will require a number of pieces of information including the EORI, commodity code, customs procedure code (CPC), the value of goods, the weight or size and country of origin.

This information can normally be obtained from your supplier and is often provided as a commercial invoice (which normally includes additional information not provided on a tax invoice but does not “crystalise” when VAT is due).

Import declarations can be complicated and require software that can integrate into the government’s Customs Handling of Import and Export Freight (CHIEF) system.

Eventually, this will be replaced with the Customs Declaration Service, or CDS, which already must be used for goods moving to or from Northern Ireland (including goods moving between Northern Ireland and England, Wales or Scotland).

But as of now, the CHIEF system remains in use, and should be used for most imports and exports.

Due to the complexity, the government suggests businesses may want to use a freight forwarder, customs agent, or fast parcel operator to advise on and complete import declarations.

Duty deferment account

If you import regularly, paying customs duties, VAT and excise duty monthly might make more sense, rather than doing so immediately upon import.

A duty deferment account lets you do this.

Until recently a bank or an insurance company had to be willing to act as an approved guarantor on your behalf, but this has been waived in light of Brexit.

A duty deferment account is a necessity for the simplified frontier declaration system, as described above, and the six-month window in which you can make deferred declarations is from 1 January 2021 to 30 June 2021.

Import licences

You may need to apply for licences to import certain goods into the UK, and some goods might require an inspection fee be paid.

Incoterms

Review the commercial terms of trade (Incoterms) in your contracts relating to importing goods.

These will help you to understand who is responsible for customs duties, import VAT, and any additional transportation and insurance costs.

Additionally, Incoterms determine when risk and liability passes from the seller to the buyer – something that is not as clear cut with customs borders, compared to the free travel of goods before Brexit/end of the transition period.

Transport logistics

The organisations you use to transport goods across borders, such as sea shipping, couriers or air freight, will need to know many of the details above before shipping commences.

You should consult with them now to learn what they will require, and when. Most are introducing new charges for the additional Brexit customs administration work they have to do.

There might be additional issues you’ll need to consider when importing goods, such as using the correct border inspection post and pre-notification of the movement of goods.

Some logistics companies may only offer international transport (between different countries) as there are additional rules about providing domestic transport services (moving goods within a single country) known as cabotage.

The government’s general Brexit preparedness tool for business will help you discover this information.

Part 2: Exporting from the UK to the EU following Brexit (after 1 January 2021)

Here’s a high-level overview of what you need to know, or set up, before exporting goods from the UK to the EU.

EORI number

You’ll need a UK EORI number beginning with GB or XI to export goods out of the UK. But you’ll also need to know the EU EORI number for the European business you’re exporting to.

If it hasn’t got one, it will need to apply for one in its own country.

You should contact all the businesses you export to in the EU to ensure they have an appropriate EORI number.

If you’re moving goods to your own warehouse in the EU, you’ll need your own EU EORI number.

Commodity codes

The importer in the EU will need to pay tax on what you export to them. Therefore, it’s important to ensure you use the correct commodity codes.

Export declarations

As with importing, the government suggests you hire a freight forwarder, customs broker or fast parcel operator for making customs declarations.

If making declarations yourself, you’ll need to register for and use the National Export System (NES), which will let you make declarations electronically. You’ll need what’s known as a CHIEF badge role.

Following this, you can make export declarations via the web, email, or using software.

To make web declarations, you’ll need a Government Gateway ID and password for your business.

To use email for declarations, you’ll need a standard email server (SMTP), and CHIEF-compatible software.

An alternative is to all these options is to use a Community System Provider (CSP). You can use your own import/export software to access their system, and therefore use their CHIEF registration. However, there will be a fee.

Export licences

Some goods require export licences, and there are additional rules specific to alcohol, tobacco and certain oils, and for controlled goods. Ensure you have these in place prior to export.

Incoterms

Businesses should review the commercial terms of trade (Incoterms) in contracts relating to delivery of goods for those you export to.

These will help you to understand who is responsible for customs duties, import VAT and any additional insurance and transportation costs.

Additionally, they determine when risk and liability passes from the seller to the buyer – something that will not be as clear cut with customs borders, compared to the free travel of goods before Brexit/end of the transition period.

Transporting goods

Businesses can utilise commercial goods transportation services, which is certainly the easiest option, or opt to use their own transport.

In the latter case, operator licences and permits are required, the driver will need to be eligible to drive abroad (and will need to ensure they carry the correct documents), and there might be rules for certain goods that need to be transported in any given country.

Some logistics companies may only offer international transport (between different countries) as there are additional rules about providing domestic transport services (moving goods within a single country) known as cabotage.

Businesses that export a lot of goods might want to apply for authorised consignee and/or consignor status to avoid the need to use customs offices to start and end transit of goods.

Part 3: What Brexit means for VAT in your business

In this section, discover how VAT has changed (and what hasn’t), learn about VAT on imports and exports, and find out how Northern Ireland is affected.

How has VAT changed after Brexit?

Domestic VAT rules remain the same following the end of the Brexit transition period.

However, VAT rules relating to imports and exports to and from the EU have changed.

Prior to Brexit and during the transition period, the UK was part of the EU VAT regime. This meant a UK business didn’t have to register for VAT in each EU country, and instead applied a common set of rules in relation to VAT.

It also meant UK businesses were able to use various VAT simplifications such as distance selling thresholds and the online VAT refund process.

However, as of 1 January 2021, businesses in Great Britain now treat EU countries like they already do countries outside the EU.

The VAT terminology has changed accordingly.

Trade with EU countries are no longer called dispatches and acquisitions, and instead are referred to as imports and exports – again, in line with trade with non-EU countries.

In broad terms, VAT is payable upon import, although the UK government has introduced the postponed VAT payment system to avoid cash flow issues (see below).

This lets businesses importing goods into the UK account for the VAT on their next VAT Return, and means the goods can be released from customs without the need for VAT payment.

It also means that nothing will effectively change from a cash flow point of view compared to before, although there will obviously be new administrative requirements.

Note that the rules for Northern Ireland again differ, and are explained separately below.

Import VAT

Prior to Brexit/end of the transition period, VAT-registered businesses in Great Britain applied VAT through the EU reverse charge on intra-community acquisitions.

For goods imported from anywhere in the world, they had to account for import VAT.

As of 1 January 2021 this requirement now includes the countries within the EU.

The above applies only the value exceeds £135. For imports beneath this amount, there’s still a need to account for VAT but you must use news rules that broadly reflect the EU’s VAT e-Commerce Package (even if the goods were not traded via e-commerce). See the ‘VAT on imports £135 and under’ section below.

Import VAT is applied at the point the goods are to enter free circulation, which is to say, this should be considered the VAT tax point.

This might be at the port of entry but it could be when the goods are released from customs warehousing, if customs special procedures are used.

However, you’ll need to collect evidence from HMRC regarding the point the goods entered free circulation for your VAT records.

The VAT can be paid at the tax point if you wish, in which case monthly C79 reports should be obtained from HMRC, as when importing from outside the EU, in order to reclaim the VAT.

But most businesses are likely to make use of the postponed VAT accounting system.

This is similar to the existing reverse charge mechanism, whereby import VAT is not physically paid upfront and then reclaimed on the subsequent VAT return. Instead, it’s accounted for as input and output VAT on the same VAT Return.

Although postponed VAT accounting is optional, it’s mandatory if you defer the submission of customs declarations, as described earlier.

It’s worth remembering that postponed VAT accounting can now be used for all imports outside of the EU too. It’s also available for Northern Irish businesses but will only be relevant for non-EU imports.

This represents a change from how VAT was accounted for prior to the end of the transition period, and is likely to provide a cash flow boost for businesses that import from outside the EU.

A new online monthly statement is available as part of the postponed VAT accounting system. It shows the import VAT postponed for the previous month on a transactional basis and when you should include it in your VAT Return (that is, the correct tax point).

When it comes to VAT on services, as a general rule following Brexit/end of the transition period, sales of cross border purchases of services from one business to another (B2B) remain subject to tax in the country of the customer (with some exceptions).

Therefore, the tax is generally accounted for as reverse charge in the destination country by the recipient of the service.

VAT on imports £135 and under

Alongside the end of the transition period on 1 January 2021, the UK has introduced additional measures for overseas goods arriving into Great Britain from outside the UK:

• Low Value Consignment Relief (LVCR) has been removed. Previously, this exempted imports with a value below £15 from import VAT.
• Online marketplaces (OMPs), where they are involved in facilitating the sale, are responsible for collecting and accounting for the VAT.
• VAT on imports with a consignment value of £135 or lower have VAT applied at the point of sale, rather than applied as import VAT at customs. For B2C transactions this UK VAT will be charged and collected by the seller but for B2B transactions the VAT will be revere charged to the customer.

Essentially, the rules around sub-£135 imports means that foreign sellers sending goods into the UK to consumers will need to charge UK VAT and apply to be part of the UK VAT system when supplying goods with a value of £135 or less to end consumers (that is, non-VAT-registered individuals).

Or they can simply ignore the VAT requirement, in which case it’ll be applied to the import by HMRC and collected by the delivery service (along with a processing fee).

Businesses that receive goods of £135 or less will have to account for the VAT as part of the reverse charge procedure, declaring the VAT on their next VAT Return. Normal rules apply for the tax point, which is to say, it will usually be the invoice date.

Additionally, the recipient business should ensure the seller knows their VAT number, or the seller will have no choice but to treat it was a B2C sale and apply VAT.

The UK measures in some respects mirror those due to be rolled out in the EU from July 2021 under the EU 2021 VAT e-Commerce Package.

VAT on exports

As of 1 January 2021, when it comes to exporting goods to EU countries, the VAT situation also changes. Exports to EU countries are treated like those to non-EU countries, which is to say, they should be zero-rated for UK VAT.

This will apply regardless of whether you’re exporting goods to a consumer (B2C), or to a business (B2B). In other words, there’s no longer any need to observe distance selling regulations, or to verify the VAT status of the recipient business.

This could mean businesses selling B2C to the EU need to register for EU VAT and appoint fiscal representatives depending on the requirements of the countries in which they sell.

It’s important to understand what it means to zero-rate goods for VAT.

It doesn’t mean you can simply forget about VAT. It means you apply a 0% VAT rate. No UK VAT is payable but you still have to include the exports as part of your VAT accounting and consider any requirements for VAT in the recipient country.

When it comes to selling services throughout the UK, rather than goods cross-border, things continue much as they did before 1 January 2021.

Under the place of supply rules, B2B sales of services continue to be generally subject to tax in the country of the customer and administered through reverse charge, with some exceptions.

B2C sales of services will continue to be generally subject to tax in the country of the seller, again with some exceptions.

However, UK businesses that use the Mini One-Stop Shop (MOSS) system will need to register for the non-union MOSS and will no longer benefit from a €10k threshold before having to apply the place of supply rules.

This means many more businesses may be liable to VAT in the countries they sell digital services to and will need to register for non-union MOSS.

Northern Ireland VAT and customs after 1 January 2021

When it comes to customs and VAT after the end of the transition period, Northern Ireland isn’t like the three other countries that comprise the UK.

It uses the Northern Ireland Protocol, which is part of the Withdrawal Agreement between the UK and EU that aimed to avoid a customs border (known as a hard border) between Northern Ireland and the Republic of Ireland (ROI).

There are different rules for the supply of goods and services as follows:

Goods

Northern Ireland remains part of the EU customs and VAT regime when it comes to trade with the Republic of Ireland and the rest of the EU.

From a customs perspective, moving goods from Northern Ireland to Great Britain hasn’t changed. There are no additional processes, paperwork or restrictions.

Moving goods from Great Britain to Northern Ireland is a little trickier. It’s now necessary to declare goods in movement to Northern Ireland as being not ‘at risk’ of moving.

To be considered not at risk, one of the following has to be true for goods moving from the UK to Northern Ireland:

• The EU tariff is zero, or the goods are eligible to claim the zero-rate, zero-quota allowance of the preferential rate of duty as discussed earlier in this article. Taking this route will involve completing customs paperwork, as with any export to the EU.
• The goods are to be sold to end consumers in the UK and you are authorised under the UK Trusted Trader scheme, Under this scheme you make a declaration for each export that the goods are not at risk of onward movement to the EU, and must be able to provide evidence this is the case.

From a VAT perspective, these movements between GB and Northern Ireland will continue to be treated like domestic sales and purchases as they are today.

This means that, among other things, there won’t be import VAT due on movements.

Services

Services are excluded from the Northern Ireland Protocol, so sales of services between Northern Ireland and Ireland/EU are treated like Third Country supplies.

As already mentioned, this results in very little change from a VAT perspective.

Similarly, nothing changes for supplies of services between Great Britain and Northern Ireland, and they continue to be considered domestic supplies.

Trader Support Service

The UK government is running a new Trader Support Service for businesses moving goods to and from Northern Ireland.

This provides free support to businesses buying and selling between Northern Ireland and Great Britain. The support service will also be of help if you bring goods into Northern Ireland from outside the UK.

Conclusion on customs and VAT after Brexit

The UK government has introduced measures to try and minimise disruption for businesses.

But the simple fact remains that the new customs and VAT requirements represent a significant upheaval for all businesses. This will be an ongoing focus for business for the coming years as new systems, such as the planned computerised customs systems, are rolled out.

You should immediately review supply chains and assess the potential implications, such as the need for EORI numbers, changes in VAT reporting obligations and payments.

You should ensure you meet the evidence requirements for VAT zero-rating exports. Systems changes may be required, so speak to your IT/software services provider.

You may need to seek help with customs, such as employing a customs broker or freight forwarder..

Or you may need to invest in new IT infrastructure if you intend to do-it-yourself via the CHIEF badge system.

You should talk to the suppliers of any invoicing or accounting software you use and understand if you need to make any changes or upgrades to ensure Brexit-related changes are applied correctly.

Editor’s note: This article was first published in October 2019 and has been updated for relevance.