VAT Changes after Brexit
With effect from 1 February 2020 the United Kingdom (UK) is no longer a member of the European Union (EU) although it will remain part of the EU’s VAT territory until 31 December 2020, the end of the transition period. During this transition period the UK and the EU will seek to negotiate a Free Trade Agreement which will include, amongst others, future tariffs and customs controls on movement of goods.
Since the UK joined the EU in 1973 it has aligned both its domestic and international legislation with EU rules and conventions, the aim of which is to create a single market for all its members. As a result of the UK leaving the EU VAT regime, the UK will no longer have to assume the EU VAT Directive rules into its own VAT Act.
While it is expected that UK VAT rules relating to domestic transactions will continue to apply, there will inevitably be changes to rules applicable to transactions between the UK and EU member states.
Below is a snapshot of the major changes for both UK and the EU businesses. During the period of negotiation some of the proposals may however change if a Free Trade Agreement is reached before 31 December 2020.
- The UK will no longer have to assume the EU VAT Directive rules into its own VAT Act. That implies, for example, that the UK will no longer have to maintain a minimum VAT standard rate of 15% (as currently prescribed by EU legislation).
- The UK will have complete control over its reduced VAT rates (which again are currently dictated by the EU VAT Directive).
- The ending of zero-rated ‘Business to Business’ (B2B) intra-community supplies of goods; all movements will become imports and exports, subject to UK or EU import VAT.
- The UK will introduce a Postponed Accounting Import VAT deferral scheme, so no cash payment must be made by business importers to UK customs. Therefore, if a business is registered for VAT in the UK, it will be able to account for import VAT on its VAT Return instead of paying import VAT when the goods arrive in the UK. If, however, the business is not VAT-registered in the UK, it will not be able to account for import VAT in this way and it will have to pay import VAT at the time of importing goods.
- The loss of Distance Selling Thresholds for UK e-commerce sellers of goods to EU customers. Goods will now be subject to import VAT and UK sellers will have to consider VAT registering in EU immediately. Similarly, EU e-commerce sellers need to register immediately for UK VAT.
- Any UK business with a foreign VAT registration (or an obligation to register after Brexit) in the EU may now face an obligation to appoint a special fiscal representative for VAT purposes. This requirement would apply in 19 of the 27 EU member states. Fiscal representatives are to be directly liable for any unpaid VAT, and therefore will require cash deposits or bank guarantees in exchange (see also below, where France is used as an example to highlight the problems associated with the requirement to appoint a fiscal representative).
- For goods having a value of no more than £135, the tax point will be the point of sale rather than the point of importation. The effect is that the consignment will be subjected to UK VAT as if it were a supply. As a consequence, where an online marketplace (OMP) is involved in making the sale of goods valued at no more than GBP 135, the OMP will be responsible for collecting and accounting for the VAT. In order to be compliant, an OMP will need to know the location of the goods at the time of the transaction and if they are outside the United Kingdom, whether the VAT-exclusive value is below GBP 135. Where, on the other hand, goods valued at no more than GBP 135 are sent directly from an overseas supplier to a UK customer without OMP involvement, (therefore not in consignment) the overseas seller must register for VAT in the UK and account for the VAT directly to HMRC. Where a sale of goods valued at no more than GBP 135 is made by an overseas business to a UK business, and the customer is VAT registered in the United Kingdom, VAT must be accounted for under the reverse charge mechanism.
- Also, the Low Value Consignment Relief, which currently gives total relief from import VAT of consignment of no more than £15, will be abolished from 1 January 2021.
- For UK sellers of digital services to EU consumers, the UK will no longer be a member of the EU Mini One-Stop-Shop (MOSS) single VAT return scheme. UK sellers of electronic, broadcast and telecom services will have to register in any other EU state (as non-EU businesses) and they will have to file their VAT declarations for e-service sales. Similarly, EU sellers into the UK will have to register with HMRC for the same declaration. The complication here arises for a non-EU business which used the UK MOSS registration: the same business will now have to register for MOSS in the EU and separately in the UK under an ordinary VAT return.
- There will be limited changes on the VAT on services for B2B transactions. The reverse change will still apply for now but in the future the UK may deviate from some of the use and enjoyment rules.
- UK businesses incurring EU VAT on travel, hotel or other expenses will no longer be able to use the 8th Directive online VAT reclaim system (via HMRC). Instead they will use the 13th Directive paper-based reclaim process. This will require individual claims to each country where there is a VAT claim. The last VAT claim under the 8th Directive will be for the final quarter of 2020 (see also below for further details).
- As part of the Withdrawal Agreement (WA) Northern Ireland (NI) will enter into a special VAT and customs relationship with the EU, that is whilst NI will remain within the UK VAT area, it will track EU rules (for examples zero-rating for VAT on intra-community supplies across the Irish border).
Other areas of interest and potential pitfalls
Unlimited liability issue, France
According to domestic French legislation, a non-EU business making supplies for VAT purposes, not subject to reverse charge in France, needs to appoint a French fiscal representative to operate in France. The fiscal representative is liable for any unpaid or undeclared VAT that’s due on that non-EU company’s activities. It will not be easy to find a business that is tax resident and accredited in France to act as tax representatives, because of the unlimited liability of the tax representative. Besides, a company might carry activities that are unknown to its tax representative and it would therefore be a big responsibility and a risk that even insurance companies are not ready to take on. A potential exemption to the tax representatives rule would require a change in the French law.
Cross Border VAT claims
Currently, UK firms incurring VAT in EU countries can claim that VAT back (subject to national rules) via HMRC’s portal. That arrangement will be in place until 31 March 2021, after which time there is currently no provision in place to claim for VAT incurred in 2020 under the terms of the Withdrawal Agreement. We are likely to see a situation where businesses have only three months to claim their 2020 non-UK VAT back. This, of course, also applies to EU companies incurring recoverable VAT in the UK.
Insurance and financial services
The European Commission is considering removing the exemption from VAT for insurance and financial services. By removing that exemption, European Union banks and insurance companies will be able to recover far greater amounts of their input VAT and potentially reduce other taxes affecting the finance and insurance sectors. This would put them, therefore, in a much better competitive position compared to their counterparts in the UK.