Post-Brexit VAT rules management

Pre- and post-Brexit VAT rules snapshot

When over-simplifying changes due to Brexit, these changes are the consequence of the fact that European Union members become Rest of World (ROW), switching from a zero rate and reverse charge VAT mechanism to zero rate. To minimize the cash flow impact, the Postponed VAT accounting (PVA) is available.

Of course, it is more complex, and there are many changes depending on the type of transaction (sales or purchase), the object of the transaction (goods or services), the origin and destination including the specific case of North Ireland. Some specific cases could influence the VAT scheme to apply as well, such as:

  • In sales, the type of customer (B2B / B2C)

  • For import of goods, the amount of the transaction (<135 £ or >135 £)

  • Specific rules applying to electronic devices, and more recently, domestic construction services scheme to apply as of March 2021.

Refer to the HMRC website for more information on the different VAT schemes to put in place.

You must create all the VAT codes you need so that you can build your VAT return. You must categorize your BPs and products so that the tax determination engine calculates the right VAT code to apply depending on the context.

See the Appendix for all the criteria available in the tax determination engine in order to calculate the tax code to apply.

The following sections focus on Postponed VAT accounting (PVA) for import.

PVA rule and no PVA rule

Invoice flow

Applying the PVA rule implies that:

  • The invoice of the supplier of goods is without any VAT and it is linked to a journal entry. The tax code on the purchase account line must be a zero-rate tax code.

  • The postponed import VAT is known and entered either at the same time, in the Purchase invoices function (GESPIH) or in the Supplier BP invoices functions (GESBIS), or when the new C79 statement is received and can be entered in the Journal entry function (GESGAS). VAT accounts must only be entered with zero-rate tax codes identifying the postponed accounting mechanism.

  • From a VAT return and VAT boxes point of view, include these postponed accounting VAT codes in the calculation of the relevant boxes.

Applying the no PVA rule implies that:

  • The invoice of the supplier of goods is without any VAT and is linked to a journal entry. The tax code on the purchase account line must be a zero-rate tax code.

  • The Import VAT is paid by the foreign agent and entered on the invoice when recorded in the Purchase invoices function or in the Supplier BP invoices function. VAT box 4 is affected. The VAT base account/amount is not entered on this invoice but on the supplier invoice. No VAT calculation is possible, and the import VAT account must only be entered with a zero-rate tax code.

BP tax rule for invoices with PVA rule and with no PVA rule (GESTVB)

Open: COMMON DATA > Common tables > Taxes > BP tax rule

For traceability purposes, it is recommended that you create a dedicated set-up for post-Brexit transactions. This way you can use different tax codes and easily differentiate between pre- and post-Brexit transactions during the transition period.

Depending on how closely you decide to follow postponed VAT accounting, by differentiating or not the PVA scheme and the no PVA scheme, you can choose to use one or two BP tax rules.

As explained before, these two schemes behave the same way on the invoice of the supplier of goods (same boxes affected). And when the agent invoice is entered, because the VAT base amount is not present, the postponed VAT charged amounts (PVA rule) and the charged import VAT amount (no PVA rule) must be entered manually in both cases.

These BP tax rules should be linked to Export rule.

These BP tax rules must be applied to ROW suppliers, depending on which PVA or no PVA rule is likely to be used for their invoices.

Timing

The creation of the new BP tax rules, tax codes, tax determination rules, and VAT box set-up can be anticipated and done before the last day of EU membership.

But the BP tax rule update on suppliers and customers must be done at the very last moment because it will trigger the application of the new post-Brexit rules on newly created documents. Or you include into the tax determination rules several rules depending on the date of the event.

This mass update can be done using three, simplified import templates:

  • An import for customers based on BPCUSTOMER table including, at a minimum, the BPSNUM and VACBPR fields

  • An import for suppliers based on BPSUPPLIER table including, at a minimum, BPSNUM and BPRVAC fields

  • An import for suppliers and customers based on BPARTNER and BPEXCEPT tables including, at a minimum, the BPARTNER, CPY, VACBPC, and VACBPS fields

Remember the import/export processes can be scheduled through batch tasks so that you can schedule the date and time you want to update the BP records.

Tax codes with PVA rule and no PVA rule (GESTVT)

Open: COMMON DATA > Common tables > Taxes > Tax Rates

They are used:

  • In the invoice of the supplier of goods, on the purchase account

  • In the agent invoice, where the you must enter two lines with the postponed import VAT amount for the PVA rule (positive and negative amounts for VAT on inputs and VAT on outputs), and one line with the import VAT charged amount for the no PVA rule

This invoice is likely to be linked to a UK domestic tax rule. When the PVA or no PVA tax code is selected or defaulted on the VAT account lines, a warning message displays because it is linked to a different BP tax rule.

This warning message can be avoided if the PVA or no PVA tax codes are linked to the same BP tax rule as the agent. But it means that the PVA or no PVA BP tax rule for the tax code is not set with Export for Type of regime (but probably Domestic for Type of regime). The tax rate still must be set to zero.

In the agent invoice, because the VAT base amount is not entered (it is in the supplier invoice), VAT amounts cannot be calculated. They must be entered manually.

As a result, the tax codes must have a rate set to zero.

For the PVA scheme, you can wait until you receive the C79 statement and directly enter the corresponding VAT amounts in the Journal entry function.

Tax determination rules (GESTVC)

Open: COMMON DATA > Common tables > Taxes > Tax Determination

New tax determination rules must be created with these new BP tax rules and tax codes.

These rules will be considered when transactions for ROW supply of goods are created after Brexit, as soon as all the EU and ROW suppliers are updated with the new BP tax rules.

Depending on the settings you put in place, you would be able to create specific tax determination rules triggering the right tax codes depending on the Brexit date so that you can prepare all the settings in advance.

Remember, in any case, you can act manually in each transaction to adjust the rules depending on the context, if necessary.

Creating new VAT accounts (GESGAC)

For the PVA and no PVA rules, the VAT amount is entered manually, either when entering the agent invoice in Purchase invoices or in Supplier BP invoices, or when entering a manual journal entry based on the C79 statement.

To ease the accounting verification as well as the management of the transition period, it might be useful to create separate VAT accounts for PVA or no PVA amounts (using the same VAT account or not for Import VAT amount and PVA VAT amount).

VAT boxes update (GESVTB)

Open: DECLARATION > Tax Management > Others > Parameters > VAT boxes

As from the Brexit, post-Brexit transactions will be entered, and journal entry lines will contain new tax codes.

To be considered in post-Brexit VAT declarations, these new tax codes must be added in the VAT boxes function.

Rest of World (ROW) sales of goods

The BP tax rule defined for EU customers must be updated with the existing export tax rule and this update must be done at the very last moment because it will trigger the application of the new post-Brexit rules on newly created documents.

Pre- and post-Brexit sales of goods in the rest of the world must be considered in a different way in VAT returns. Post-Brexit ROW sales of goods must update VAT box 8 with the same amount as in box 6.

The VAT boxes set-up must be updated accordingly.

Other rules

For ROW purchases and sales of services after Brexit, the required VAT boxes are identical to EU purchases and sales of services before Brexit.

Nevertheless, the EU customers and suppliers of services must be checked and updated so that their BP tax rule triggers the ROW scheme for services.

Transitioning

At the Brexit day, you might have some processes still opened and not yet invoiced, for example, orders not yet received, receipts not yet invoiced or returns and credit notes.

After Brexit, depending on the tax point, you will have to enter the corresponding invoices either with one of the new VAT schemes or with a post-Brexit VAT scheme.

In the Sales and Purchasing modules, the VAT scheme will be defaulted from the origin document, and you will have to modify it (or not) according to the tax point.

An EU supplier order has been entered before Brexit.

The import of related goods through customs occurs before Brexit; the tax point is therefore pre-Brexit.

You receive the goods on the before Brexit and enter the related receipt in Sage X3; it has an EU BP tax rule, that comes from the supplier order.

You receive the supplier invoice after the Brexit.

When you pick up the receipt, the EU BP tax rule is defaulted, and it needs to be kept even if the accounting date is post-Brexit.