Postponed VAT Accounting (PVA) – What does it mean for Me?

Changes to Kashflow to date

We have now implemented all key changes required by the introduction of PVA in the United Kingdom.  As a result, the post-Brexit VAT set-up for UK-users is now significantly different from the pre-Brexit European Community (EC) standard approach.

If you are VAT registered outside the UK, however, your VAT approach will not have changed.

All Kashflow users should have received a request to confirm their VAT status.   Please only select “VAT registered in the United Kingdom” if you are VAT registered in the United Kingdom.  If you are registered for VAT (or an equivalent tax) elsewhere please select the alternative VAT-registered option rather than “I am not registered for VAT.”

If you are based in Northern Ireland, then select “I am VAT registered in the United Kingdom” and follow instructions.

We are continuing to work to refine the user-experience.

 

For a Kashflow user VAT-registered in an EC state (and not in the UK)

  • PVA /Brexit changes only apply directly to business registered for VAT in the United Kingdom. There are no VAT rules changes affecting you.

 

  • EC Union MOSS remains available for transactions in 2021 (except for transactions with the UK). EC Sales lists and intrastate reporting requirements continue to apply as in the past.

 

  • Please remember that trade with the mainland UK is no longer categorised for VAT purposes as being trade with an EC country. All such transactions should be posted therefore in exactly the same manner as you do your trade with any other non-EC nations (Canada, New Zealand etc.)

 

  • If you trade with a UK business operating from Northern Ireland, however, then you continue to categorise such trade as being with an EC state – i.e. no change in your postings.

 

  • With the exception of transactions with the mainland UK (as noted above), please therefore continue to post your transactions exactly as you have always done.

 

For a Kashflow user VAT-registered in the United Kingdom

VAT started as a European tax.  The main changes in VAT after 31 December were largely because the UK is leaving the Single European Market.  The changes required have been termed Postponed VAT Accounting (PVA), though this element was only one part of the changes.

 

Three key elements;
  • No changes to VAT transactions where both the buyer and the seller are within any part of the UK.
  • VAT is now applicable and declarable at the standard rate in your VAT return for all sales and purchases not just those made within the UK and EC. As such, all sales and all purchases are now included in your VAT Return – not just your domestic and EC transactions, but also those from the Rest of the World (‘Outside EU’) as well.
  • Northern Ireland is a special case – it remains in the UK domestic market for transactions wholly within the UK. It also applies the new UK-wide rules for transactions with countries outside the EC.  However, the pre-Brexit VAT arrangements for European Community transactions continue to apply.

 

How does this actually work in practice?

For UK-registered entities before 1 January 2021, there were only two Border types in Kashflow for your VAT Returns – ‘Domestic’ and ‘European’.   European sales and purchases were reported in Boxes 8 & 9 of the VAT return, with European Purchases being reverse charged to VAT in Boxes 2 and 4.

Now there are 4 border types – ‘Domestic’ [no change], ‘European’ [changed], ‘Outside EU’ [new] & ‘Northern Ireland entities trading with the EU’ [new].  If you are in Northern Ireland, you will only have access to this last option for your EC transactions and you will not have access to the standard UK European posting type.  The reverse applies for mainland Kashflow users.

 

Let’s start with the last here:

Boxes 2, 8 & 9 of the VAT Return are now only being used in Northern Ireland.  Only Northern Irish business still also have to make Intrastat returns for European transactions.  All VAT on Northern Irish EU purchases remains reverse-charged.

BUT if nothing else had happened rules-wise then all businesses in the UK outside Northern Ireland would now be treating European transactions as they did most ones before 1 January 2021 – i.e. They would now be having to pay Import VAT at 20% across the board up-front whenever goods were imported before those goods were released by HRMC.

This is a problem because though such VAT would be reclaimable in full in a business’s next VAT Return this does have an adverse cashflow effect on businesses as money is taken out of a business for some time that the business can use.

This is where PVA itself comes in for mainland users.

PVA is essentially a revised version of reverse accounting for Mainland European (Border Type 1) and the Outside EU (Border Type 2) Border types – you recognise VAT at 20% on cost in boxes 1 and 4 – leaving you with nothing to pay immediately – the government then gets its ultimate VAT take when the importer sells the goods imported.  i.e. the VAT charge is postponed.

This will all be addressed automatically within Kashflow when you post the transaction with the correct border type.

There is one complication to PVA though.  It’s the definition of ‘cost’.

Before 1 January 2021, when you imported a good from the EU, that good stayed within the single European market.  Its cost, therefore, was what you paid for it and on that cost import VAT was charged and reversed.

EU imports now, whilst potentially subject to import duties, will not generally suffer any import duties (though an exception may be made where such goods have themselves directly imported into the EU and do not qualify as European by origin).  This is reciprocal.  Imports from outside the EU, however, may still (as they may well have done before 1 January 2021) suffer import duties.

The difference here is that such imports were outside the scope of the UK VAT Return before the start of 2021.  This is no longer the case.

The Import Input VAT calculated on such goods for use in the PVA calculation will be 20% of the actual basic cost of the good (as paid to the supplier) plus any Import Duties – i.e. Tax is recognised and levied on a cost base that itself includes tax – exactly the same as with VAT on petrol.

As a result Kashflow purchase transactions for Border Type 2 include a box for import duties suffered as part of the calculation.  As with EU, this will in many cases also be zero, but it may not be.

Businesses will get the import duties suffered summary data from their C79 monthly return supplied them by HMRC for their Duty deferral account direct debit.  Import VAT that has been postponed under the PVA arrangements is now being captured on a new Monthly Postponed Import VAT Statement (MPIVS).

You therefore may have to go back into individual transactions once you get these returns to check your costs and postponed VAT details align with those recorded by HMRC.

See how IRIS KashFlow works with your business and your books