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EU-UK Trade and Cooperation Agreement: What You Need to Know About VAT

The EU-UK Trade and Cooperation Agreement (TCA) was finally signed on December 24, 2020, after months of intense negotiations between the European Union and the United Kingdom. The TCA aims to establish a framework for future economic relations between the EU and the UK, covering various aspects such as trade in goods and services, investment, transport, energy, fisheries, and level playing field provisions. However, one of the most relevant aspects for businesses trading across the EU-UK border is VAT.

VAT (value-added tax) is a consumption tax levied on goods and services in most countries, including the EU and the UK. The basic principle is that VAT is added to the price of a product or service at each stage of the supply chain, and ultimately borne by the final consumer. VAT rates and rules vary across jurisdictions, and can have significant impacts on the competitiveness, profitability, and compliance costs of businesses that operate internationally. With the UK`s departure from the EU Single Market and Customs Union on January 1, 2021, many VAT implications emerged for businesses that trade between the two regions. However, the TCA provides some guidance and clarification on how VAT should be handled in different scenarios.

Here are some key points to keep in mind regarding VAT under the TCA:

1. Import VAT and customs duties: The TCA provides for zero tariffs and zero quotas on trade in goods between the EU and the UK, if the products meet the rules of origin requirements. However, import VAT and customs duties still apply. This means that goods imported from the EU to the UK (or from the UK to the EU) are subject to VAT and potentially other taxes and fees, depending on the classification and value of the goods, as well as the customs procedures followed. Import VAT can be paid upfront or deferred through the postponed VAT accounting (PVA) system, which allows eligible importers to declare and recover VAT on their VAT return, rather than paying it directly to the customs authorities.

2. VAT treatment of cross-border supplies: The TCA confirms that cross-border supplies of goods and services between the EU and the UK are subject to the VAT rules of each respective jurisdiction. This means that businesses need to ensure they comply with the correct VAT rules and rates, and handle import and export declarations appropriately, to avoid double taxation or non-compliance. The TCA also clarifies some specific issues, such as the VAT treatment of trade in second-hand goods, the use of simplified VAT schemes for small enterprises, and the recognition of professional qualifications.

3. VAT refunds and appeals: The TCA establishes a mutual assistance procedure for VAT refunds and appeals between the EU and the UK. This means that businesses can submit refund claims for VAT paid in the other jurisdiction, if they have no VAT liability in that jurisdiction, or if they would incur a disproportionate administrative burden. The TCA also provides for cooperation and exchange of information between the tax authorities of the EU and the UK, in order to detect and prevent fraud and evasion.

4. VAT and Northern Ireland: The TCA includes a protocol on Ireland and Northern Ireland, which aims to avoid a hard border between the two parts of the island, while maintaining the integrity of the EU Single Market and Customs Union. As part of this protocol, Northern Ireland remains aligned with certain EU VAT rules and procedures, in order to prevent the diversion of goods from Northern Ireland to the rest of the UK, which could undermine the EU`s customs and regulatory controls. This means that businesses that trade between Northern Ireland and the EU (including Ireland) need to comply with specific VAT rules and documentation requirements, such as the Northern Ireland Protocol VAT Return, which records the VAT on certain goods moving from Northern Ireland to the EU.

In conclusion, the EU-UK Trade and Cooperation Agreement has provided some clarity and guidance on how VAT should be handled in the post-Brexit era. However, businesses still need to be aware of the specific VAT rules and procedures that apply to their sector and activities, and ensure they comply with them to avoid any potential penalties, delays, or disputes. Furthermore, the TCA is subject to review and revision, and may evolve over time, depending on the future relationship between the EU and the UK. Therefore, businesses should continue to monitor any updates and changes regarding VAT and other aspects of the TCA, and seek professional advice if needed.