How is VAT being affected by BREXIT?
VAT (Value Added Tax) is a sales tax that is charged on the supply of goods and services in the UK with similar taxes applying across the EU. In the UK there is a turnover threshold for VAT of £85,000 where businesses with a turnover over this figure are obliged to register for VAT. Historically, VAT law has been interpreted by the Court of Justice of the European Union (CJEU) which has been binding on the UK. However, in a post-Brexit world this will change, with the most likely impact being that the UK’s courts will need to take into account historical decisions by the CJEU when deciding on future VAT cases.
Are there any exceptions?
In geographical terms, there is one BREXIT exception where VAT is concerned and this is for Northern Ireland, where the UK government will only be able to change VAT rates on goods and services in line with EU rules as part of a negotiated withdrawal agreement. The UK government may also apply VAT exemptions and reductions, including zero rating, to goods and services in Northern Ireland if they are also applicable in the Republic of Ireland, which of course is part of the EU.
How will VAT be charged on the supply of goods from the UK to EU countries?
The most significant change brought about by Brexit concerns how VAT is charged on trade with the remaining EU member states and as of the date of this article (1st December 2020), an interim or final outcome is yet to be negotiated. Across the UK for transactions that have been wholly between two UK based parties, the seller charges the buyer VAT and then pays the VAT collected (typically 20% with several exceptions) to the tax authorities/HMRC on a quarterly basis. Up to the final BREXIT exit date, EU transactions have involved a different mechanism for the application of VAT on the supply of goods between businesses based in one EU country and selling to another party in another EU country. Historically and under EU rules, a EU based business that has purchased goods and services from a supplier based in another EU country has been required to charge itself VAT, known as acquisition VAT, which is typically an accounting transaction on the VAT return and is shown on the supplier’s invoice with the buying company’s VAT stated on the invoice. There are also different rules for private customers and other exceptions.
What about the supply of services?
For services, the important point is that the ‘place of supply’ rules determine the country in which VAT is charged and accounted for, so after the 1st January 2021, services supplied by an EU based company to a UK company (except Northern Ireland) where the supply of the service is in the UK will have to charge VAT at the UK prevailing rate, typically 20%.
How will buyers in the UK pay VAT on goods imported from the EU?
From the 1st January 2021, the UK will become what is known as ‘a third country’ as far as the EU is concerned. This means that the way businesses manage VAT on goods and services exported and imported to and from the EU will change. Sellers will not charge VAT, so this is not too dissimilar to the pre-BREXIT arrangement described earlier, but buyers in the UK will have to pay VAT to the tax authorities/HMRC at the point of import together with any applicable customs duties.
The payment of VAT at the border could have potential cash flow consequences and the UK government proposes to mitigate this for imports, through the introduction of postponed accounting for import VAT. This will move the VAT accounting and payment process from the border to a quarterly VAT return, more or less in line with the previous system. Such a system of postponed accounting is also likely to apply to non-EU imports.
What else will be different in Northern Ireland?
The Withdrawal Agreement means that the rules on cross-border VAT will be different for Northern Ireland. From the 1st January 2021, Northern Ireland will be treated as if it is still part of the EU and this means it will continue to function under the previous system with acquisition VAT on supplier invoices and no VAT being paid until the quarterly return is due. However, there will be a new VAT border in the Irish Sea and the rest of the UK will in effect be outside the EU VAT area. This means that businesses in Northern Ireland buying goods from the rest of the UK will have to pay VAT to HMRC when they import the goods, rather than to their supplier (who would have passed the VAT on to HMRC). As mentioned earlier, the introduction of postponed accounting means this may not make much difference.
Will there be any additional or new reporting?
Some businesses will have to make import/export declarations for the first time and this could affect up to 250,000 businesses who carry out their trade solely between the UK and EU based customers. A further potentially large number of businesses, who trade with both EU and non-EU countries, will also have to make declarations for their UK-EU trade in addition to their non-EU trade.
Where EU member states are concerned, it is also likely that the EU will require VAT to be paid on import of goods from the UK unless they introduce a deferral mechanism. UK businesses exporting to the EU may therefore need to arrange for advice or support in different countries to comply with EU VAT obligations. Furthermore, UK based businesses (not Northern Ireland) claiming for refunds of overseas VAT incurred on purchases will no longer have access to the EU VAT Refund Portal and may face longer waiting periods for a refund. Individuals and overseas businesses will also be affected as the rules for parcels entering the UK will change; Low Value Consignment Relief, for parcels valued at £15 or less will be scrapped on parcels arriving from the EU.
How will VAT on services including digital services change?
To date, the UK government has provided little information concerning the VAT treatment on services supplied by EU based companies after the 1st January 2021. The EU VAT rules governing services depend on the nature of the service provided, who receives the service and the location of the service as previously mentioned. Again, rules regarding the export of financial services are still under consideration at the time of writing.
UK suppliers of digital services to EU non-business consumers using the EU’s online Mini One-Stop Shop (MOSS) scheme will have to change to the ‘non-Union’ scheme to account for their sales. The MOSS has allowed non-established service suppliers to file a single VAT return, documenting their sales by the member state of consumption in only one member state. This return has then been distributed to the relevant member states so VAT can be levied accordingly. From the 1st January 2021, businesses established in non-EU countries who use the UK for their MOSS VAT return will have to move their MOSS identification to one of the remaining 27 EU member states to continue using the non-Union MOSS scheme.If any of the issues raised in this article are of interest to you, please contact Camilla Dinesen – email@example.com
- on December 3, 2020