Brexit and VAT

The Brexit process has been characterised by uncertainty – it is more than four years since the referendum, and it is still not clear what the future relationship with our largest trading partner will be. But with the clock ticking, there is a growing imperative for businesses to plan and prepare for all eventualities.

A no-deal Brexit is an increasingly likely scenario and has several ramifications for those who trade with the EU. Whether a deal is agreed or our exit occurs on World Trade Organisation terms, there will VAT implications which are substantial and, in many cases, immediate.

There is a breadth of detail to cover, but in the interests of space and clarity, this article will primarily consider the impact of Brexit on the treatment of goods and services, the recovery of VAT and Fiscal Representation. 

Treatment of goods and services

The treatment of goods moving between Great Britain and the EU will change significantly from 1 January 2021. It should be noted that the reference is to Great Britain and not the UK – this is because the Northern Ireland Protocol means Northern Ireland will be treated differently. This will not be explored in this article, but it is essential that businesses that trade with Northern Ireland are fully aware of the implications post Brexit. 

The concept of dispatches and acquisitions will no longer apply to GB-EU trade and will be replaced instead by exports and imports. Though zero rating for exports exist if the relevant conditions are met, crucially, imports are liable to import VAT and potentially customs duty. To mitigate the impact of this, some Member States allow for import VAT to be accounted for on VAT returns – this is called postponed accounting.

This effectively minimises cash flow but may require an application or licence – both of which are conditional, can be revoked, and aren’t automatic like the current mechanism for accounting for acquisition tax. HMRC is implementing postponed import VAT accounting for goods arriving from the EU – this is automatic and will also be available for imports from countries outside the EU. 

When it comes to the treatment of services, businesses can breathe a tentative sigh of relief as significant changes are unlikely. The UK looks set to continue to apply VAT place of supply rules in line with VAT Directive, in part to avoid instances of double or no taxation. However, businesses will need to consider the liability to be registered in the EU and the UK on an ongoing basis. 

Businesses that engage in UK-EU trade of goods need to ensure that they review their supply chain and are fully aware of the implications post 1 January 2021.  It may be possible to make changes to the supply chain to mitigate any negative impact by changing contractual relationships and consider the flow of goods but these will need to be done well in advance of January 2021 in order to be effective.

VAT recovery

If and how VAT can be recovered post-Brexit is understandably a concern for many businesses. If a UK company is registered in the EU it can continue to recover VAT via returns, but the appointment of a fiscal representative may be necessary. If a business is not registered and not liable to do so, recovery will be via the 13th Directive. T

he 13th Directive has several drawbacks – it’s a paper-based system with different time limits and potential issues of reciprocity which may prevent UK businesses from making claims in some countries. This will be a particular risk in countries where claims can only be made by businesses from named countries – the UK is not on these lists as previously there was no requirement. It’s not clear how quickly it will be added.

EU businesses registered for VAT in the UK can continue to recover VAT via the VAT return. However, if a business is not registered and not liable to do so, recovery will be via a paper-based system.

Key to this is that the UK currently applies the reciprocity principle if a UK business would be denied a claim in the country of the claimant. For EU businesses, this means running the risk that they are denied VAT returns if there is no reciprocity between their country and the UK. 

Planning is key to ensuring that VAT can be recovered successfully especially when there are changing systems.  Claims under the current mechanisms can be made for 2020 but the deadlines will be much shorter than at present.  Claims under the new processes will need to be evaluated in order to ensure that no recoverable VAT is lost. 

It will continue to be essential to ensure that VAT has been properly charged by the supplier as if it is charged incorrectly, it cannot be recovered from the Tax Authority. 

Fiscal representation

Fiscal Representatives are local entities that act on behalf of non-resident businesses, and in some Member States have joint liability for VAT. From January 1st, UK businesses will have enhanced requirements for Fiscal Representation, although like much related to EU fiscal law, there are no hard and fast rules.

Currently, 19 Member States have a requirement for non-EU businesses to have fiscal representation, but some – like France – previously signalled that this may not be the case for UK companies. Some countries may relax the requirement for UK businesses in the coming months, if there are appropriate mutual recovery provisions in place between the countries.

Whether exceptions are established or not, there is a lot for UK businesses to do to prepare, including planning for the transfer of existing registrations to Fiscal Representatives. 

Each Member State has its own process and some Tax Authorities such as Belgium are contacting businesses now to inform them of the new requirement, in order to continue trading in the nation. It is therefore essential that planning is carried out as soon as possible, to avoid difficulties nearer the end of the transition period. 

In conclusion, we find ourselves once again guessing at the likely VAT panorama, with the potential for the all-important future trading relationship details to be agreed at the eleventh hour and a no-deal Brexit looming large. The only way for the status quo to be maintained is an extension to the transition – this is, at the current moment, looking very unlikely.

As such, businesses in the UK and the EU need to proactively consider and have plans in place around registrations, supply chains, and Fiscal Representation in good time, to ensure seamless trading in the new year and beyond.

By Andy Spencer, Director of Professional Services at Accordance

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