The end of the Brexit transition period means that from 1st January 2021 there are changes to the way VAT is charged between the UK and the EU. To reflect these changes, we have made updates in Pandle.
This article is now split into two main sections dealing with VAT treatment on or after 1st January 2021, and VAT treatment before 1st January 2021.
VAT treatment on transactions dated on or after 1st January 2021
Specific changes affecting Great Britain (England, Scotland, Wales) - which excludes Northern Ireland
- EU tax codes (ES & EG) can no longer be used for transactions dated on or after 1st January 2021.
- As EC Sales Lists are no longer required for GB businesses, it will not be possible to create EC Sales lists for the period starting 1st January 2021 onwards.
Transactions between Great Britain (which excludes Northern Ireland) and the EU will now mostly use either an ‘EX’ tax code for zero rated transactions, or RC tax code where the reverse charge applies. If you are unsure which tax code to use, please seek help from your accountant.
To enable the reverse charge tax code for your relevant EU customers or suppliers, please tick the 'Reverse Charge?’ box when creating or editing that customer or supplier as below:
Doing this will enable the RC (Reverse Charge) tax code option when you create invoices for that customer or supplier.
Specific Changes for Northern Ireland (United Kingdom)
- ES tax codes can no longer be used for transactions dated on or after 1st January 2021.
- EG tax codes can still be used as normal with EU member states.
- EC Sales Lists can still be used but only containing transactions with EG tax codes.
As with the changes to the United Kingdom (Excluding Northern Ireland) a Reverse Charge (RC) tax code has been made available for the relevant transactions with the EU. If you are unsure which tax code to use, please seek help from your accountant.
VAT treatment on transactions dated before 1st January 2021
If you have a business that offers goods/services outside the UK to Europe then this section of the article will explain how the VAT is treated in Pandle.
VAT on goods and services to Europe
When selling goods or services from the UK to other EU countries, the VAT treatment can differ depending on your customer.
As a general rule, when selling to non-VAT registered businesses and consumers in other EU countries you should charge them full UK VAT on your sales (using the standard rate 'ST' VAT code in Pandle). However, you do need to check each country's 'distance selling threshold' to see whether you need to register there as well (see below).
If you are selling to another EU business that is VAT registered in their country, then you can zero-rate the sale. This means that you charge VAT but at zero percent. To do this you should ask your customer for their VAT registration number and show it on your invoice with a note to say that you are zero-rating the sale.
On your invoices to these customers you should use the following VAT codes in Pandle:
ES: Europe Services, if you are selling a service to your European customers.
EG: Europe Goods, if you are selling goods to your European customers.
You must also complete an EC Sales list which is a quarterly report to HMRC listing the sales to your VAT registered European business customers. If you use the correct VAT codes in Pandle then the software will populate your EC Sales list automatically each quarter (always the calendar quarters).
As you can see, the EC sales list in Pandle has picked up the invoice just raised to your German customer. There is a button here to 'Check VAT Numbers' which will ensure your customer's VAT numbers are legitimate, and therefore whether or not you can zero rate the VAT. Once this is checked you can lock the return and submit it to HMRC.
Should you register for VAT in other EU countries?
Distance selling is when a VAT-registered business in one EU country sells goods or services to a non-VAT registered customer in another EU country.
Each country in Europe has a distance selling VAT threshold, which if breached means that you must register for VAT in that country. However, this only applies to the sales you make to customers that are not VAT registered in their own country. So for example, the distance selling VAT threshold for Germany is 100,000 euros and Ireland is 35,000 euros. So if you sell goods of 50,000 euros to non-VAT registered consumers in each country you would need to register for VAT in Ireland but not Germany.
This means you should keep an eye on the level of sales you’re making to consumers in each European country so that you know when you breach these registration thresholds.
VAT on sales outside the EU
You do not need to charge VAT on goods or services you sell to customers outside of the EU. However, goods are treated slightly differently from services.
Goods are zero rated, which means the value of the goods will show on your VAT return (use VAT code 'EX' in Pandle), albeit with no VAT reported. But services sold outside the EU are what’s called ‘outside the scope’ of VAT (use VAT code 'NV' in Pandle). This means that they are not reported on the VAT return and VAT is not a consideration.
Different types of businesses can have different rules. For example, if you sell digital services such as e-books, downloads or apps then there are new rules which may mean you need to register for VAT even if you do not breach the thresholds.
These are general rules and this area can get a lot more complex, so it’s always worth discussing VAT with a professional.
What if I am required to Register for VAT in an EU country?
As with other accounting software providers, Pandle will not handle the various VAT rates and VAT returns in other countries. However, there is a simple solution you can follow:
- Create Revenue and Expense categories for the other country in which your business is registered for VAT. Please ensure you categorise transactions relating to that country in those categories and use tax code NV (No VAT).
- Create a new Liability category for the VAT you will owe in the other country.
- Once your VAT return has been completed for the other country, simply make an adjustment between your Revenue and Expense categories into the Liability category for that country.
The Liability category should now show how much VAT you owe for the other country. The adjustment would typically debit the Revenue category, credit the Expense category, and credit the Liability category.
- When paying the VAT owed through the bank, categorise the transaction into the Liability category you have created. This category should now have a zero balance as nothing will be owed.