On 23 August 2018, HMRC published guidance on the effect on VAT of a no deal Brexit. The document emphasises throughout that it is unlikely, because of the mutual interests of the UK and the EU in securing a negotiated settlement, that there will be a no deal Brexit.
The purpose of the notice is to inform UK businesses of the implications for VAT rules for goods and services traded between the UK and EU member states. It outlines the impacts and gives information for businesses to take into consideration. It is worth noting that it does not cover a number of complex matters such as triangulation or warehousing but it is well worth a read through.
It covers the following areas:
- VAT is charged on most goods and services sold within the UK and the EU
- VAT is payable by businesses when they bring goods into the UK. There are different rules depending on whether the goods come from an EU or non-EU country
- Goods exported by UK businesses to non-EU countries and EU businesses are zero-rated, meaning that UK VAT is not charged at the point of sale
- Goods exported by UK businesses to EU consumers have either UK or EU VAT charged, subject to distance selling thresholds
- For services, the complicated ‘place of supply’ rules determine the country in which you need to charge and account for VAT
Position after 29 March 2019 in a no deal scenario
The revenue generated by VAT in the year to 31 March 2018 was £129 billion. The notice says that this is vital for funding public services and that the VAT rules for UK domestic transactions will continue to apply to businesses as they do at the moment. The changes in the treatment of transactions involving EU countries are covered below.
Importing goods from the EU
The system in place for non-EU countries will be extended to include both EU and non-EU countries. VAT will be payable through a business’s VAT return rather than shortly after their import. For parcels valued at £135 or less, a technology-based solution will allow VAT to be collected from the overseas business selling the goods into the UK. Overseas businesses will charge VAT at the point of purchase and will be expected to register with an HMRC online digital service (which, it is planned, will be available in early 2019) and account for VAT due. Above the £135 threshold, VAT for parcels entering the UK will continue to be collected from UK recipients. For vehicle imports the Notification of Vehicle Arrival Procedures (NOVA, an online service) applies.
Exporting goods to EU countries
Supplies to consumers in the EU will be zero rated from 29 March 2019 if there is a no deal Brexit. Because the goods are entering from outside the EU, the consumer will be liable to import VAT and customs duties. In the case of exports to EU businesses, clients will be pleased to hear that one administrative burden will be removed, in that EC sales lists will no longer have to be completed. Zero rating will continue to apply. Distance selling rules will not as these apply only to EU members. The goods will be liable to import VAT and customs duties and in some EU countries import VAT payments may be due at the border. If the UK business stores goods in an EU country and sells them from there it will be required to register for VAT in the EU member states where sales are made in order to account for the VAT due in those countries.
UK businesses supplying services into the EU
The current place of supply rules determine the country in which you need to charge and account for VAT. These will continue to apply in broadly the same way as they do now:
- for business to business supplies, the supply is where the customer belongs; and
- for supplies to consumers, the place of supply is where you belong (unless one of the specific exceptions applies and then it is where the customer is resident).
However, there are a few areas of potential change:
- In regards digital services, if the UK leaves the EU with no agreement, businesses will no longer be able to use the UK’s Mini One Stop Shop (MOSS) portal to report and pay VAT on sales of digital services to consumers in the EU. Businesses that want to continue to use the MOSS system will need to register for the VAT MOSS non-Union scheme in an EU Member State. This can only be done after the date the UK leaves the EU. The non-union MOSS scheme requires businesses to register by the 10th day of the month following a sale. You will need to register by 10 April 2019 if you make a sale from the 29 to 31 March 2019, and by 10 May 2019 if you make a sale in April 2019. The alternative is to register in every EU Member State in which sales are made.
- Input VAT deduction rules for insurance and financial services supplied to the EU may be changed after 29 March 2019, and HMRC will update businesses with more information in due course.
- The Tour Operators Margin Scheme is an EU VAT accounting scheme for businesses that buy and sell on certain travel services that take place in the EU. HMRC has been engaging with the travel industry and will continue to work with businesses to minimise any impact.
UK businesses will continue to be able to claim refunds of VAT from EU member states by using the existing processes for non-EU businesses. This process varies across the EU and businesses will need to make themselves aware of the processes in the individual countries where they incur costs and want to claim a refund.
Validation of VAT numbers
HMRC expects businesses to check VAT numbers of suppliers (in certain circumstances) to ensure they are not involved in Missing Trader Intra-Community (also known as carousel) fraud. This is where a business vanishes owing large amounts of VAT which it has collected from customers. The reverse charge procedure is intended to curtail this type of fraud. Under it, the customer has to raise an invoice to his own business on behalf of the supplier. UK businesses will be able to continue to use the EU VAT number validation service to check the validity of EU business VAT registration numbers. However, UK VAT registration numbers will no longer be part of this service. In the event of no agreement HMRC is developing a system so that UK VAT numbers can continue to be validated. We know this is important for certain businesses to carry out due diligence (not least because otherwise they may become liable to pay the unpaid VAT!)
Businesses in Northern Ireland importing and exporting to Ireland
The notice affirms that the UK government is clear that in a no deal scenario we must respect our unique relationship with Ireland, with whom we share a land border and who are co-signatories of the Belfast Agreement.
It says that the UK would stand ready to engage constructively to meet our commitments and act in the best interests of the people of Northern Ireland, recognising the very significant challenges that the lack of a UK-EU legal agreement would pose in this unique and highly sensitive context.
The Irish government has indicated that they would need to discuss arrangements in the event of no deal with the European Commission and EU member states. It recommends that, if you trade across the land border, you should consider whether you will need advice from the Irish government about preparations you need to make.
We are aware that not everyone will share HMRC’s expectation that the UK government will negotiate a successful deal with the EU. HMRC acknowledges that it does not have all the answers and indicates that further information will be provided in due course.
The document it has published does, however, give an outline of what businesses need to consider. Planning is clearly the key to success and avoiding costly errors.
CBW’s Tax Team are here to assist you in this difficult area. Please contact Tax Partner, Tom Adcock in the first instance on the contact details below.