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Brexit no deal: VAT
Reproduced by kind permission from Practical Law
Please note, Valemus Law does not provide tax advice. This article appears here as a point of interest for its clients.
On 23 August 2019, the government published the first tranche of government technical notices giving guidance to UK businesses and citizens on how to prepare for no deal. Among the notices published was VAT for businesses if there’s no Brexit deal, which provides guidance on VAT in relation to goods and services traded between the UK and the EU.
Government technical notice on VAT if Brexit no deal
On 23 August 2018, the UK government published a technical notice on the impact on VAT if the UK leaves the EU without agreement.
The note is part of a series of technical notices that aim to provide information to UK businesses and citizens on how to prepare for a no-deal scenario. The government has also published an overarching framing notice, which sets the technical notices in broader context and related notices on trading with the EU “No deal” describes the situation in which the UK and the EU fail to conclude a withdrawal agreement by the time of the UK’s exit from the EU. This would mean no transition period and a sudden “cliff-edge” break in the application of EU rules to the UK at 11pm on 29 March 2019.
If the UK leaves the EU without a deal, the government aims to retain existing VAT rules and procedures as far as possible. However, there will be some changes to the VAT rules and procedures applying to transactions between the UK and EU member states and the notice outlines these.
Importing goods from EU
The current rules for imports from non-EU countries will also apply to imports from the EU, but with some changes. Significantly, the government will introduce postponed accounting for import VAT on goods brought into the UK (both from the EU and non-EU countries). Accordingly, importers will account for import VAT in their VAT returns, instead of paying import VAT at the time of import. In the Autumn 2017 Budget, the government announced that it would consider options for mitigating the post-Brexit cash flow impact on businesses resulting from accounting for import VAT on imports from the EU instead of accounting for acquisition VAT.
In the government’s October 2017 white paper on legislating for a Customs Bill, it announced, in the event of no deal, it would not extend low value consignment relief (LVCR) to parcels from the EU (because of the high risk of undermining UK retailers because of the EU’s geographical proximity). The notice confirms that LVCR will not apply to any parcels arriving in the UK.
With effect from 29 March 2019, overseas businesses sending parcels valued at £135 or less will be required to charge VAT at the time of purchase and account to HMRC for the VAT. The government promises a technology-based solution that will require overseas businesses to register with an HMRC digital service. Businesses will be able to register from early March 2019. However, for all excise goods, parcels with a higher value and, potentially, non-compliant overseas suppliers, VAT will be collected from UK recipients in line with current procedures for parcels from non-EU countries. HMRC is consulting with relevant stakeholders and will provide further information later.
VAT on vehicles imported
Vehicles from the EU will become subject to import VAT (unless a relief is available). Businesses should continue to notify HMRC about vehicles brought into the UK using the existing Notification of Vehicle Arrival Procedures (NOVA) system, which will be necessary to verify that VAT is correctly paid.
Exporting goods to EU
The government warns that UK businesses may need to check, with the EU or member states, the rules and processes which will to apply to the goods they export to the EU.
Exports to consumers
On exit from the EU, distance selling arrangements will cease to apply to UK businesses. UK businesses will zero-rate sales of goods to EU consumers. Under current EU rules, such goods entering the EU will be treated in the same way as goods entering from other non-EU countries. Therefore, import VAT (and customs duties) will be due at the point of import.
Exports to businesses
VAT registered businesses will continue to zero-rate sales of goods to EU businesses, but will not be required to complete EC sales lists. To support zero rating, businesses must retain evidence showing that the goods have left the UK. The required evidence will be similar to that currently required for exports to non-EU countries, but any differences will be announced later. Businesses are advised to check import VAT rules with relevant individual member states.
Sales of goods stored in EU to EU customers
Businesses selling goods to EU customers from stocks stored in a member state will be subject to EU rules applicable to non-EU countries. These will require UK businesses to register and account for VAT in the member state where the sales are made.
Supplying services to EU
Broadly, the place of supply rules for services supplied to EU member states will be the same as they are now. The place of supply for digital services to non-business EU customers in the EU will continue to be where the customer resides and VAT will be due in the customer’s member state.
Currently, businesses supplying insurance and financial services into the EU are unable to deduct input tax attributable to those services, while input tax attributable to such services supplied to non-EU countries is deductible. The notice states that input VAT deduction rules for financial services supplied to the EU may be changed and more information will be given later.
Mini One Stop Shop (MOSS)
Businesses selling digital services to EU consumers will no longer be able to use the MOSS EU scheme, but will be able to register for the MOSS non-union scheme in an EU member state. MOSS is an online service allowing businesses selling digital services to EU consumers to report and pay VAT through a single return and payment in a single member state (rather than in each member state in which such services are supplied).
Applications to register for the MOSS non-Union scheme can only be made after the UK has left the EU. Registration is required by the 10th day of the month following a sale. Therefore, registration would be required by 10 April 2019 if sales are made during the period 29 to 31 March 2019, and by 10 May 2019 if sales are not made until April 2019.
EU VAT refunds
After Brexit, UK businesses will continue to be able to claim refunds of VAT from EU member states but they will need to be made under the EC Thirteenth Directive (rather than the Eighth Directive).
EU VAT registration number validation
UK businesses will be able to continue to use the EU VAT number validation service to check the validity of EU business VAT registration numbers (which will no longer cover UK VAT registration numbers). The notice states that HMRC is developing a service that will allow UK VAT numbers to continue to be validated.
The government acknowledges the importance of upholding the Belfast agreement and the protection of the co-operation between the North and South embodied in the agreement. The notice offers no specific comment on how VAT may apply to post-Brexit trade between Northern Ireland and Ireland. The notice does say that the Irish government has indicated that it would need to discuss no-deal arrangements with the European Commission and EU member states and that the UK government would engage constructively. The government also suggests that those trading between North and South should consider obtaining advice from the Irish government. More information is promised.
The guidance offered is somewhat rudimentary and will not surprise businesses that are used to trading with non-EU countries or those that have carried out their own contingency planning to assess the impact of Brexit on supply chains and trading with the EU generally. However, the announcement that the government will, in the event of a no-deal Brexit, provide for importers to account for import VAT through the VAT return rather than paying it at the point of entry will be welcome.
For those supplying insurance and financial services into the EU, the government acknowledges that the input tax deduction rules will change. Currently, input tax attributable to such supplies to the EU is not deductible, while input tax attributable to such services supplied into non-EU countries is. It is no surprise that the position will need to change since it would make no sense to treat input tax recovery on supplies into EU countries differently to that on supplies into non-EU countries. However, while the obvious solution is to recognise that the existing input tax treatment should apply to supplies made into EU countries, this is likely to come at a significant cost. We may have to wait until the next Budget to learn how the government proposes to address this.