In this article, Rouse VAT Consultant, Nicola Gladwell reflects on the VAT and tax regulatory barriers, the lessons learned, and what businesses might expect moving forward.
VAT and cross-border trading impacts
It is fair to say that Brexit has brought about significant changes for businesses engaged in cross-border trade between the UK and the EU, and one of the most impactful areas being that of handling VAT.
Before Brexit, the UK was part of the EU’s Single Market, meaning that businesses could move goods and services across borders without needing to account for customs duties or VAT on imports and exports between EU member states. However, with the UK’s exit from the EU, the landscape of cross-border trading has drastically changed, leading to a series of challenges and adjustments for businesses.
In particular, we have noted:
Postponed VAT accounting still not being utilised by all importers
When it comes to importing to the UK, there have also been some notable changes following Brexit.
The UK introduced a new deferred import VAT regime named ‘Postponed VAT Accounting (PVA)’ from 1 January 2021 for importers. This relief enables importers into the UK to avoid immediate cash payments of import VAT, and instead declare the transactions and settle the costs through their next VAT return.
Whilst most importers have swiftly adopted postponed accounting, it is surprising to see that there are still some not taking advantage of the resulting cashflow benefits and simplified admin requirements. Perhaps this is an awareness issue rather than a conscious decision, and we can help those importers unfamiliar with the rules.
Businesses reverting to manual recovery of EU VAT
Instead of using the standard, automated system for recovering VAT across EU borders, we are increasingly noticing UK companies turning back to the more traditional, paperwork-intensive method known as the 13th Directive.
There are several factors driving this, including the complexity of VAT refunds across multiple jurisdictions and technical issues being experienced with the automated system.
Those hoping to take advantage of IOSS face extra hurdle
The EU’s Import One-Stop-Shop (IOSS), allows eCommerce and low value (<€150) goods sellers to register with just one of the 27 EU tax authorities. This means that they can submit just one monthly IOSS VAT return in a way that allows the right payment of VAT across the other EU tax authorities where customers are based.
However, non-EU based businesses who want to take advantage of IOSS are required to appoint an EU-resident intermediary, a type of VAT agent, to represent them. This has proved a stumbling block and added an extra administrative burden for UK businesses.
Tour Operators Margin Scheme still a question mark
For travel firms, some EU member states are restricting the use of the Tour Operators Margin Scheme (TOMS) to businesses in other member states only, meaning UK businesses having to register in each country (for example, Croatia – but with others possibly following).
This scheme simplifies VAT accounting by allowing UK businesses to pay VAT on their margin rather than the full selling price. By not being able to access the scheme, UK travel businesses have faced added administrative and cost pressures.
Further changes on the way
There are further changes on the way and UK businesses who trade with/within the European Union (EU) should prepare for significant changes to EU VAT rules, including:
e-invoicing coming to the UK
Some EU countries have already moved to the requirement of B2B e-invoicing, including Italy (2022), Serbia (2023), Romania (2024) and Germany (2025), while others are in the process of making this mandatory. The UK Government will open a consultation in early 2025 to look at the introduction and practicalities of mandatory e-invoicing in the UK.
Use and enjoyment rules
If you supply virtual services to private customers in the EU (such as live virtual events or distance learning courses), you may be affected by changes in 2025 on how EU countries apply use and enjoyment provisions.
Previously, UK providers of these services were charged VAT based on where the provider is located. From 1 January 2025, VAT is charged based on where the consumer resides. As well as creating added administrative work from needing to register in each country where a business has consumers, this also increases the potential risk of double taxation for UK businesses this year.
Further separation from EU restrictions
We have already seen the government move away from EU VAT restrictions, such as extending the zero-rating for the supply and installation of energy-saving materials until March 2027, and opting to charge VAT on private school fees.
This raises the question of whether further changes and divergence from the EU VAT regime are likely in the future.
What’s next for UK businesses?
As we reflect on the five years since Brexit, it’s clear that this shift in VAT treatment has posed significant challenges, especially for businesses that were not previously accustomed to managing VAT in cross-border transactions. Furthermore, this is set to continue as we see further changes regarding VAT and tax for businesses trading with the EU.
From small and medium-sized enterprises (SMEs) to larger corporations, the impacts have been felt across the board, with many companies needing to invest in new systems or advisory services to navigate the complex VAT landscape post-Brexit.
We remain committed to providing our clients with support on tax, regulatory compliance, and international trading. Please contact us to discuss how we can assist your business.
With a career in VAT spanning over 20 years, Nicola advises businesses of all sizes; from start-ups to major international organisations.
