UK VAT implications of a 'no-deal' Brexit
PLEASE NOTE: If seeling to EU countries you will need to consider VAT registration in each EU country post Brexit.
The Government has issued a number of publications setting out its plans in the event it of a ‘no deal Brexit’ - these include how a 'no deal Brexit' would affect the UK’s VAT and customs rules.
Local VAT registrations
Businesses that are currently registered for VAT in other EU countries should be aware that many countries have different registration requirements for EU and non EU businesses. For example, some countries insist on a fiscal representative being appointed for all non EU businesses, but are banned from doing so for businesses from other EU member states. We would suggest that businesses that are VAT registered overseas check that the compliance requirements will not change and that they will not be obliged to change the registration.
Postponed accounting for import VAT
In the event of a 'no- deal Brexit', the government has announced that it will introduce postponed accounting for import VAT on goods brought into the UK.
Under the EU VAT system currently in force, VAT on B2B arrivals of EU goods is accounted for under the ‘reverse charge’ procedure on the buyer’s VAT return, usually as a nil net tax adjustment. However, if the UK left the EU’s VAT system without a contingency plan in place, UK importers would face a liability to pay import VAT (at 20% for many goods) at the time that the goods enter the UK from the EU. They would also have to wait until the next VAT return to recover it as input tax, putting increased pressure on cash flow and working capital. The introduction of postponed accounting, under which businesses will still be able to account for the VAT on their VAT return, is therefore a very important reassurance for UK importers.
Although this easement is intended to address the import VAT issues arising from Brexit, ie cash flow issues related to goods arriving from the EU, postponed accounting will also apply to non-EU imports. The government says further guidance on postponed accounting will be published in due course.
While postponed accounting is good news for UK importers, it should be noted that it is only expected to defer the liability to pay import VAT, and will not cover any customs duties that may become due.
In the event of a no deal Brexit, the UK will introduce its own customs tariff and apply duty to many imports from the EU. Payment of customs duties can only be deferred by use of:
- A deferment account, which allows businesses to pay their customs charges by a single monthly payment on the 15th day of the month following the month of import, and/or
- A customs warehousing arrangement, where goods can be stored with customs charges suspended until the time the goods are removed for use.
However, both are subject to an application process and have stringent authorisation requirements, including a bank guarantee as security for a deferment account. This would create additional compliance and administration costs for importers.
One important check for all businesses operating a deferment account would be to ensure that the limits are sufficient to cover their EU trade as well as the traditional imports. If bank guarantees are required this may need to be carefully managed to ensure that the businesses borrowing position is not adversely affected.
Currently, the EU VAT distance selling rules apply to online and mail order sales of goods to private customers in other EU member states. UK businesses must register for VAT in any EU member state to which they deliver goods, where their turnover exceeds the distance selling threshold set by that country – either €35,000 or €100,000 (see table). Sales below the threshold do not trigger a registration requirement and vendors instead apply and account for VAT at the rate applicable in the member state of dispatch of the goods.
Should there be a 'no-deal Brexit', the EU’s distance selling regime will no longer apply to the UK. HMRC says that sales by UK operators would be zero-rated as exports from the UK, but could then face a liability for customs duty and VAT at the point of arrival into the EU. In practice, some UK distance sellers might be able to benefit from the EU’s Low Value Consignment Relief (LVCR), which exempts packages worth less than €22 from customs charges as they enter the EU, although the EU plans to abolish this in 2021.
In the reverse situation, EU businesses distance selling into the UK could be liable to customs duty and VAT at the border - there will be no LVCR threshold for goods arriving in the UK. However, HMRC has opened an online registration system to allow overseas vendors to charge and account for UK VAT at the point of purchase for packages valued up to £135.
UK businesses involved in distance selling should review their current arrangements and consider setting up a VAT registration in an EU member state to deal with any customs charges and ensure smooth continuation of sales to EU customers.
Mini One Stop Shop (MOSS)
At present, UK businesses selling telecoms, broadcasting and digital services (eg apps, computer software, music and video downloads/streaming services, online gaming, ebooks etc.) to EU consumers have the option of using the UK’s MOSS portal to account for VAT on B2C digital sales to EU customers. This allows vendors to declare VAT on sales without having to register for VAT in each EU country where sales are made.
After a 'no-deal Brexit', the UK will no longer have a MOSS portal and all businesses will be deregistered from UK MOSS. UK vendors will instead have to choose an EU Member State in which to register for the VAT MOSS ‘Non-Union scheme’ as a Non EU provider. The digital services threshold of £8818 for MOSS registration will no longer apply to UK businesses.
Non-EU vendors who have chosen the UK to host their MOSS registration for the entire EU will also have to re-register in another member state, and in the UK if they supply these services to UK consumers too.
HMRC has yet to comment specifically on the position of EU vendors using MOSS to sell digital services to consumers in the UK, but it is likely that they would be required to register for VAT in the UK and declare their sales to UK customers via a UK VAT return.
Triangulation is another important VAT simplification that may be lost after Brexit. This refers to a scenario when a business in one member state orders goods from another member state and arranges for it to be delivered to a third.
A common example would be that of a UK business ordering spare parts from a supplier in Germany and asking for those parts to be delivered to its customer’s site in France. Under current EU rules, this would mean that the UK business would need to register for VAT in either Germany or in France, as it would be deemed to be making a supply of goods from Germany or acquiring goods in France.
Triangulation currently removes this obligation and, provided the UK business completes the paperwork correctly, then it will have no requirement to register or charge any overseas VAT. Once we leave the EU however, this simplification will no longer be available and the UK business will need to register for VAT in an EU country.
Tour Operators Margin Scheme (TOMS)
After a no-deal Brexit, the UK will no longer be part of the EU wide TOMS system for businesses who buy in and resell travel facilities as a principal or undisclosed agent.
Instead, a UK-only TOMS system will be introduced, under which UK established businesses falling within TOMS must account for UK VAT on the profit margin achieved from the sale of UK travel services and treat the supply of non-UK travel services as zero-rated. It is expected that UK travel businesses will be required to account for VAT on their services in EU member states at some point after Brexit, but the EU has yet to confirm this.
EU VAT refund claims
Businesses established in one EU member state may, subject to conditions, submit claims to recover VAT they have incurred in another member state. UK businesses currently submit such claims online through the EU VAT Refund online portal, which HMRC then forwards to the member state concerned.
HMRC says that, in the event of no-deal, the UK portal will close for new claims. After that, UK businesses claiming VAT in the EU must apply directly to the EU member state under the ‘13th Directive’ VAT refund scheme for non-EU applicants, which requires submission of original, hard copy forms and supporting invoices.
For EU businesses claiming VAT from the UK, the UK will introduce a manual process for recovering VAT incurred before Brexit. For VAT incurred in the UK after Brexit, the UK will introduce its own hard copy based refund scheme similar to the 13th Directive scheme.