VAT Fundamentals

VAT is a transaction tax and there are aspects of every transaction which need to be considered in order to determine the appropriate VAT rate. This is important to consider as part of Brexit planning as failure to apply the correct VAT treatment can result in significant financial penalties and reputational damage.

Three fundamental points of consideration are as follows:

(1) What is being supplied?

VAT rules will be dependent on whether the supply consists of a supply of goods or a supply of services.

(2) Whether the goods/ services are being supplied to business or private consumers?

This becomes particularly important with the supply of services and is therefore very important for tourism businesses throughout Northern Ireland.

(3) Where the goods/ services are supplied?

The place of supply will determine where VAT is payable. Goods / services supplied domestically (for e.g. NI trader supplying an NI business in NI) will be unimpacted by Brexit, however, Brexit will have a significant impact on many VAT rules for the crossborder supply of goods and services.

Supply of Goods

In relation to the supply of goods, from 1 January 2021 a new VAT regime exists in Northern Ireland.

It was agreed between the EU and NI that post 31 December 2020 NI was to remain part of the UK VAT regime but EU VAT rules for goods will continue to apply.

VAT rules have not changed for domestic supplies, i.e. where NI businesses supply goods to NI based consumers. However, it is necessary to consider the Brexit implications of the crossborder supply of goods.

The VAT treatment of cross-border movement of goods can be summarised as follows:

It is also important to note that there are a number of services which are separate and distinct from the general rules outlined above. These rules are extremely important in determining where VAT is payable on these services and the rules remain largely unimpacted by Brexit:

Postponed VAT Accounting

• Both the Irish and UK governments have committed to the introduction of postponed VAT accounting;
• Prior to 1 January 2021, where goods were imported from the rest of the world to the EU, import VAT was due at the point of importation. However, since 1 January 2021, postponed VAT accounting ensures that the trader is entitled to account for import VAT on their VAT return. Postponed VAT accounting will be available in respect of all imported goods;
• There are significant cashflow benefits associated with postponed VAT accounting. Traditionally traders would be required to pay across import VAT at the point of importation, with a time lag before an input credit could be claimed through the filing of the trader’s VAT return. However, under postponed VAT accounting import VAT can be accounted for in the trader’s VAT return, a simultaneous input credit can be claimed and subject to the recoverability rules, the transaction may be VAT neutral. This would effectively ensure that the import VAT has no impact on the trader’s cash position;
• For an importer that is not VAT registered, they will still pay VAT at the point at which the goods arrive to the UK, i.e. postponed VAT accounting will not be available;
• There is no formal application process in order to avail of postponed VAT accounting, however, when completing customs declarations traders must indicate that they will account for import VAT on their VAT return;
• When completing their VAT return, traders must include the VAT due on imports accounted for through Postponed VAT accounting. Traders will be able to access this information from their online monthly statements which will be available through their Government Gateway account. As outlined above, traders will be entitled to reclaim VAT on imports which was accounted for through postponed VAT accounting in the same VAT return.

A summary of the position pre and post 1 January 2021 is as follows:

Use & Enjoyment Provisions

The use and enjoyment rules are intended to make sure taxation takes place where services are consumed, i.e. where services are used and enjoyed. This means that rather than following the general supply of service rules, the services covered by these provisions will be deemed to be supplied in the place where the services are utilised and tax becomes payable in that
place.

There are a number of services covered by the use and enjoyment rules with the most applicable from an NI tourism perspective being the letting on hire of goods (including means of transport). In terms of the hire of goods, these will likely be deemed to be used and enjoyed where the goods under hire are used.

Prior to Brexit these services applied:

Post-Brexit these services apply to:

As the UK is now considered a 3rd country to the EU, UK businesses trading with customers in the EU need to assess whether the “use and enjoyment rules” apply to their activities which may require the UK supplier to register and account for VAT in the member state where goods are used and enjoyed.

The change in the provisions is best demonstrated by way of the example of a UK business which hires golf clubs to a UK customer. During the period of hire the customer uses the equipment 60% in the UK, 25% in France and 15% in the UK. Prior to Brexit 85% of this supply would have been subject to UK VAT and 15% would have been outside the scope of UK VAT. Post Brexit 60% will be liable to UK VAT, 25% will be liable to French VAT and 15% will be outside the scope of UK VAT.

It is important to note that this is a complex area of VAT and we would recommend seeking further advice if you are in any doubt as to the correct application of the rules. 

Tour Operator Margin Scheme (TOMS)

What is TOMS?

A special scheme for businesses that buy in and resell travel, accommodation and certain other services as a principal or undisclosed agent.

TOMS may apply to your business even if you don’t view yourself as a traditional “tour” operator. For example, TOMS may apply to:

• hoteliers who buys in coach passenger transport to collect its guests at the start and end of their stay;
• coach operators who buy in hotel accommodation in order to put together a package;
• company that arranges conferences, including providing hotel accommodation for delegates.

What does TOMS mean for businesses?

TOMS allows businesses to account for VAT only on the difference between the amount you receive from your customer and the amount you pay your suppliers, i.e. your margin. It is also margin that is used to determine whether businesses are required to register for VAT. The scheme helps avoid multiple VAT registrations throughout the EU.

Post-Brexit implications:

• The UK will maintain a UK version of the TOMS, which will apply to supplies made in both Great Britain and Northern Ireland.
• Guidance currently indicates that supplies in the EU which were previously VATable can now be zero rated. The result is that only supplies in the UK are subject to VAT on the margin achieved. On the face of it, that may give UK suppliers an advantage whereby a UK supplier may not have to charge a UK customer VAT on any part of a
  European tour that takes place outside the UK, whereas an EU based supplier would probably have to charge VAT at different rates on every stage of the trip. It is highly anticipated that further announcements may be made by in this regard given the potential benefits for UK based tour operators. We would advise NI tourism businesses to maintain a watching brief on this matter.

eCommerce VAT Reform

Post 31 December 2020 Northern Ireland businesses making B2C supplies to EU customers should continue to apply the distance selling rules. However, traders that use e-commerce in order to facilitate sales to EU customers, must be aware of the significant VAT changes due to be introduced in July 2021 with the implementation of the EU e-Commerce VAT reform package. The primary impacts of the reform can be summarised as follows:

• The VAT reform package will abolish the “distance sales threshold” and create a unique and common threshold of €10,000 throughout the EU, up to which B2C cross border supplies remain subject to the VAT rules of the member state of dispatch, and above which supplies become subject to the VAT rules of the member state of destination. This effectively abolishes the distance selling thresholds that are currently applied by individual member states.
• In order to relieve businesses from the administrative burden that this could create, a One-Stop-Shop system (“OSS”) will be introduced which will allow companies to remit VAT due on sales to consumers in member states in which it does not have a VAT establishment through a single EU-wide VAT return (thereby avoiding multiple VAT registrations and EU reporting obligations).
• NI businesses should be aware that this represents a significant departure from how they currently apply VAT to their online sales and if you believe that your business may be impacted by these provisions, we would advise seeking further advice.

VAT Schemes that NI Businesses can continue to avail of post-Brexit:

Changes to the VAT “Place of Supply” rules, i.e. the rules that determine the place where VAT is payable

Where UK (including Northern Ireland) businesses provide services of a professional, technical, financial, intellectual or other intangible nature to unregistered customers outside the UK, the place of supply is the place where your customer belongs. This represents a departure from the general
B2C VAT rules. From a tourism and hospitality perspective, supplies covered under this rule specifically include the provision of tourist information (except where information relates to a particular piece of land) and the letting on hire, or leasing, of goods other than means of transport (other than where goods are let with an operator or technician).

The use and enjoyment provisions seek to tax a supply in the place where it is effectively used and enjoyed. Prior to Brexit the provisions applied where the place of supply would have been the UK but the services were used and enjoyed outside the EU OR the place of supply would have been outside the EU but the services were effectively used and enjoyed in the UK. From 1 January 2021, the UK is recognised independently from the EU and the use and enjoyment provisions now apply where the place of supply would be the UK but the services are used and enjoyed outside the UK OR the place of supply would be outside the UK but the services are effectively used and enjoyed in the UK. From an NI tourism and hospitality perspective the letting on hire of goods (including means of transport) fall within the scope of the use and enjoyment provisions.

This content has been produced on behalf of Tourism NI by PKF-FPM Accountants.