We’ve seen a lot of demand among our clients and partners for a brief guide to possible changes to the VAT rules as a result of-related Brexit updates. The aim of this guide is to provide bite-sized, digestible information regarding VAT changes due to Brexit.
On the 29th January 2020, the European Parliament approved UK Prime Minister Boris Johnson’s Brexit deal, marking the final major decision oin a 4-year long journey.
The UK entered a transition period until the end of 2020 during which it will still have the benefits of the other EU member states, although would have technically left the European Union.
However, after the 1st February 2020b29 January, the UK would not be included in any policy decision making and therefore the UK MECs left their posts within the EU parliament.
From a VAT perspective, not much will change between 1st February29 January 2020 and the end of 2020 while the UK is in theits transition period.
VAT compliance and reclaim procedures will remain the same and those businesses within the UK and Europe can still expect to make use of the EU VAT refund directive.
The UK’s relationship with the EU after the Brexit transition period
After the Brexit transition period, all EU laws will cease to apply to the UK and the UK gains the status of a third country in relation to the member states of the EU. However, it is important to note that the possibility of an agreement to regulate the relationship between the EU and the UK exists and if this agreement materialises, it will regulate the terms of market access between the two parties.
Brexit and Cross Border VAT Recovery
UK VAT Treatment
UK Domestic VAT (from Januaryafter December 20210)
Current government guidance is clear that:
• The UK will continue to have its own VAT system
• VAT rules relating to domestic (within the UK) transactions will continue to apply as they currently do
• The aim will be to keep VAT procedures “as close as possible to what they are now”
• There will be “some specific changes” to rules and procedures to transactions between the UK and EU member states
VAT on cross border services (the EU and outside the EU)
Assuming the UK leaves the Customs Union, then the following will apply:
• Buying services from outside the UK
Where reverse charge mechanisms are in place, this will remain essentially unchanged. Reverse charge will continue to be accounted for on services bought from outside the UK.
• EU companies looking to seek a cross-border VAT refund from the UK, may have to apply via the 13th Directive mechanism as the EU refund directive will no longer apply. However the details of this are still being ironed out by HMRC.
EU VAT Treatment
Cross- border supplies of goods:
Supplies and movements of goods between the EU and the United Kingdom will be subject to the VAT rules on imports and exports. This will have a major impacts on import VAT and excise duties. For a more detailed breakdown of the changes to import VAT, read this article.
Cross-border VAT Refunds:
After the transition period, all the 13th directive rules apply to refunds by EU mMember sStates to taxable entitiespersons established in the United Kingdom. The 13th Directive is the reclaim mechanism applicabledesignated to businesses based outside of the European Union.
The same reciprocity rules will be applied by member states to the UK. Simply, if the EU member state can claim VAT from the UK, then the UK can claim VAT from the EU member state.
What if VAT was Paid Before the end of the Transition Period?
For VAT paid before 31 December 2020 and on transactions between UK and the EU, the applicable VAT refund portals will remain functional till the 31 March 2021. However, although the EU refund portals will be functional till 31 March 2020, this is only to permit the submission of VAT paid before the end of the transition period. To illustrate, if VAT is incurred on the 3 January 2021, then the VAT refund claim must be submitted via the 13th Directive if the MSE is UK and MSR is an EU country.
UK-EU Border Controls Post Brexit
From 1 January 2021 the UK will have the autonomy to introduce its own approach to goods imported to GB from the EU. The UK’s new border controls will be rolled out in three stages from 1 January 2021 until 1 July 2021. This flexible and pragmatic approach will give industry extra time to make necessary arrangements. The stages are described by HMRC as follows:
From January 2021: Traders importing standard goods, covering everything from clothes to electronics, will need to prepare for basic customs requirements, such as keeping sufficient records of imported goods, and will have up to six months to complete customs declarations. While tariffs will need to be paid on all imports, payments can be deferred until the customs declaration has been made. There will be checks on controlled goods like alcohol and tobacco. Businesses will also need to consider how they account for VAT on imported goods. There will also be physical checks at the point of destination or other approved premises on all high-risk live animals and plants.
From April 2021: All products of animal origin (POAO) – for example meat, pet food, honey, milk or egg products – and all regulated plants and plant products will also require pre-notification and the relevant health documentation.
From July 2021: Traders moving all goods will have to make declarations at the point of importation and pay relevant tariffs. Full Safety and Security declarations will be required, while for SPS commodities there will be an increase in physical checks and the taking of samples: checks for animals, plants and their products will now take place at GB Border Control Posts.
Traders importing standard goods will need to prepare for basic customs requirements and will have up to six months to submit customs declarations to HMRC.
While tariffs will need to be paid on all imports from Day One, payments can be deferred until the customs declaration has been made, giving traders time to adjust to the new requirements. Safety and Security declarations will not be required for six months for all goods.
Traders will, however, need to consider some other processes, such as how they will account for Iimport VAT. Any EU registered companies shipping goods to the UK via DDP shipments will incur Import VAT that may have to be claimed via the 13th Directive which is an onerous task. UK businesses shipping goods DDP to the EU may face the same challenges and should be prepared for either extra foreign VAT registration requirements or more cumbersome VAT reclaim processes.
Importers who have been using a single EORI for all imports across the EU might need to now obtain a second EORI number as HMRC has specifically said all imports into the UK must be done using a UK-issued EORI number.
It is probable that your business may need to use a different supply chain model (perhaps delivering orders from a different country to avoid these complications). Changes to the supply chain will inevitably result in new VAT compliance obligations.
VAT Compliance & Fiscal Representation
UK businesses will need to look into where they may require fiscal representation to remain tax compliant within EU.
Belgium as an example
Belgium has been gearing up for Brexit and ensuring UK businesses will be compliant. During June 2020, Belgium has approached UK entities with Belgian VAT registrations to appoint a fiscal representative. (source)
Non-EU online sellers (Of which category the UK now belongs) are not allowed to register for VAT unless they appoint a Fiscal Representative. The fiscal representative must be tax registered and willing to act as the local representative of the company, managing with queries and filing obligations of the company for dealings with the tax authorities. The fiscal rep is jointly liable for all VAT payments of the company.
These EU countries require a fiscal representative: