As long ago as 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, but the recent confirmation by the UK government that the Coronavirus pandemic will not result in an extension of the 31 December 2020 deadline for agreement on the future trade relationship between the UK and the European Union makes a no deal scenario more likely.
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 1 January 2021 in a No Deal Scenario
The revenue generated by VAT in the year to 31 March 2019 was £132 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. If you move goods from an EU country you must add these acquisitions and any tax due to your VAT Return. You can reclaim the VAT paid if the goods are for you to make taxable supplies or use in your business. If your business buys services from outside the UK a rule called the ‘reverse charge’ applies. The steps are as follows:
- Convert the value of the services into sterling.
- Calculate the amount of VAT due and include this in your VAT Return.
- Credit your VAT account with the amount of VAT due (as if you had supplied the services).
- Debit your VAT account with the amount of VAT due.
Exporting Goods to EU Countries
Supplies to consumers in the EU will be zero rated from 1 January 2021 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 July 2020 if you make a sale in June 2020. 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 31 December 2020, 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 or her 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.
There is now a transition period until the end of 2020 while the UK and EU negotiate additional arrangements. Because of this there have been no further communications about VAT since the publication of the above guidance in August 2018.
The current rules on trade, travel, and business for the UK and EU will continue to apply during the transition period.
New rules will take effect on 1 January 2021 and we will keep you informed of developments in the run-up to these.
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.