Category: Taxation

Preparing for the VAT consequences of a no deal Brexit

By Richard Staunton

07 Mar 2019

Writing an article on Brexit is a difficult task, not only because of the uncertainty, but also because every day the position changes.

This article is easier than most articles on Brexit as I will just focus on what is likely to happen in a ‘no deal’ Brexit. I suspect that the potential for no deal will carry on for some weeks, which means this article will not go out of date too early. In addition, what is likely to happen may not happen, so my comments will be based mainly on what will happen should there not be agreements to ease the transition.

Part of the added complication is that VAT is very much a Common Market/EC/EU/Union tax. In the UK it replaced purchase tax when the UK joined the Common Market. For those of you who do not like VAT, the bad news is that it is unlikely to be scrapped!
I will run through the main changes as I see them based on the information to hand. This may change, or indeed, will be irrelevant if a deal, extension or new vote is agreed.

Imports 
If the UK leaves the EU on 29 March 2019 the government will introduce ‘postponed accounting’ for import VAT on goods brought into the UK. This means that UK VAT registered businesses importing goods to the UK will be able to account for VAT on their VAT return, rather than soon after the time that the goods arrive at the UK border. This reverse charge will apply both to imports from the EU and non-EU countries. 

For businesses importing from outside the EU there will be an immediate cashflow benefit, and those trading within the EU will, in many ways, continue to account for VAT as they have already been doing.

There will be changes though as businesses importing goods from the EU will be required to follow customs procedures in the same way that they currently do when importing goods from a country outside the EU. This means that for goods entering the UK from the EU an import declaration will be required, customs checks may be carried out and any customs duties must be paid. A deferment account is also likely to be needed as well as Economic Operator Registration and Identification (EORI) status.

Exports
All supplies of goods to the EU will be zero rated regardless of the identity of the purchaser, i.e. whether they are in business or not. Again, EORI status should be obtained. 

Distance selling rules will no longer apply.

Exports will be simpler, but be aware that any VAT and/or duty will be applied when the goods enter the EC. 

Intrastat
This will no longer be needed. The UK was one of the member states that was most keen on the introduction of these statistics. 

Services
Services purchased will not change dramatically, the reverse charge will still apply for all services supplied by overseas businesses. 
For certain supplies of services, it will no longer matter whether the customer is in business or not, but this will depend upon exactly what service is supplied.

Land related services will continue to be taxed where the land is. Currently, the UK allows a reverse charge extension for EC businesses. This means that if an EC business carried out supplies on land in the UK, and its customer was registered in the UK, the reverse charge could apply. This will cease, along with similar arrangements with other EU states.

Other issues
The Tour Operators Margin scheme should treat all margin, apart from that in the UK, as zero rated.

The ability to recover VAT on foreign and specified supplies, i.e. certain financial transactions that would be exempt from VAT, in the UK would be extended to EU customers. This will lead to UK financial institutions being able to recover additional VAT.

The Office of Tax Simplification has been examining a stepped VAT registration threshold. This means that rather than immediately being required to declare VAT on all supplies once the threshold is breached, there will be a softer introduction to VAT registration, while at the same time the limit is likely to be reduced. This ‘stepped’ approach is contrary to EU law, but HMRC are keen on its introduction. 

Hopefully the above gives a taster of what we could expect if the UK leaves on 29th March 2019. Nothing is set in stone at the moment, and it is likely that if the UK does leave, there will be smaller agreements in place that may mean that VAT (and other issues) are not affected as much as they appear to be now. The Brexit situation continues to be one to watch.

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