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VAT and Brexit: possible changes and implications

Posted: July 15, 2016

When (and if) the UK finally exits the EU – current estimates suggest some time in 2018) – it will be the perfect time to revise the UK’s existing (and some might say outdated) VAT legislation, writes Greg Mayne, Greg Mayne, Director, Indirect Tax Services at Burgess Hodgson.

The current VAT Act – which takes its lead from the Principal EU VAT Directive -dates back to 1994 (and was preceded by one from 1983) is arguably long past its useful shelf-life; an overhaul would be welcomed by most professionals who have to deal with it. This would hopefully bring the legislation more in line with modern commercial transactions, such as Internet trading.
So what are some of the implications of any potential changes? We discuss these below.

1) Current suppliers of ‘BTE’ – Broadcasting, Telecommunications, E-commerce – to EU customers (not to businesses) have to either register in each customer’s country or use Mini One Stop Shop (MOSS). BTE sales include digital supplies of film, music, publications, radio, gaming and gambling, website supplies, etc.) If outside the EU they would have to use the ‘non-union MOSS’ that applies for non-EU suppliers – the supplier choosing which Member State in which they want to register. This is an optional scheme, but not taking that option would mean having to register in each of the countries in which they sell, so unless they’re only dealing (and only ever going to deal) in one specific country, then using the MOSS is a practical solution.

2) When (if) the UK does leave the EU it may lose access to the Single Market, and also any business selling goods or services into the EU would no longer benefit from ‘distance selling’ thresholds and registration for VAT would be required straight away. One of the biggest impacts would be for businesses making “distance sales”, i.e. selling directly to consumers in other member states. Existing rules allow a threshold for value of sales in each country to be in place, but if the UK gives up being a member state then businesses would no longer be able to distance sell and would have to deal with export regulations. Any business priding itself on ‘next day delivery’ or fast response times on sales would have to get used to potential delays and administrative hold ups as goods are cleared (see ‘Duty’ section below). This may lead many businesses to set up warehouses and distribution hubs within the EU to continue to exploit the Single Market and removal of trade barriers.

Having a VAT registration in place within the EU may be a suitable and beneficial solution, registering as a ‘non-established’ taxable person, using fiscal representation (where required) and accounting for VAT within the EU under the same/similar rules to those used when UK was in the EU.

3) Current recovery of VAT incurred elsewhere in the EU (hotel, travel, subsistence, etc.) is achieved by way of submitting a claim via the domestic VAT ‘portal’ using the EU VAT recovery system. If the UK eventually leaves the EU any relevant business would have to submit claims as a non-EU country under the ‘EC 13th VAT Directive’ – a paper-based, physical submission of documents to the relevant tax authority in each Member State (subject to the vagaries of courier and postal delivery), on a different time limit requirement (claims are for year to 30 June, must be submitted by the following 31 December).

Duty

1) If the relationship with the EU following Brexit precludes access to the Single Market, and duty tariffs are introduced as a result, then the rates of duty and the processes for moving and distributing goods to and from the EU would need to be reviewed and quantified. Any business currently selling goods to the EU or buying goods from the EU can request (from Burgess Hodgson) a review of the likely tariff codes that would apply and thereby an indication of the kind of import/export costs for those goods. This would potentially impact on budgeting and finance costs, and may affect the treatment of supplies to EU customers in terms of the point of sale, i.e. who has responsibility for the receipt of the goods.

2) If the UK doesn’t get proper and full access to the Single Market then UK supplier clients may look at movement of goods to the EU either as consignment stock or under any available form of suspension, for example ‘warehousing’ where fiscal charges are delayed until the goods leave the suspension regime. This will bring with it administrative requirements which Burgess Hodgson can advise on and provide the outline of benefits, costs and impact in each scenario.

So in summary those businesses likely to be impacted by any Brexit VAT and duty changes would be those with:

• dispatches (sales) to the EU or acquisitions (purchases) from the EU. Leaving the Single Market would make these ‘exports’ and ‘imports’ instead, with different VAT and duty treatment accordingly;

• supplies of services to the EU or the purchase of services from the EU – the ‘reverse charge’ and ‘general rule’ for B2B sales will no longer apply;

• expenses incurred in the EU – any VAT recovery will be on a different timescale and will revert to a paper-based, postal system;

• ‘Distance Selling’, as existing limits will no longer apply, and ANY sale will require VAT registration to be in place (possibly somewhere else within the EU – see above);

• the VAT simplification provided by ‘Triangulation’ – this avoids an intermediary having to register in the country where goods are finally delivered by the supplier. This would no longer apply, requiring VAT registration for the intermediary in the country of final supply (or possibly elsewhere in EU);

• financial services and insurance – currently EU suppliers with transactions involving non-EU businesses are allowed to recover VAT on costs. By leaving the EU this may cease (subject to any subsequent UK tax decisions) which would potentially provide a beneficial comparative hike in recovery for remaining EU suppliers to UK businesses. Conversely it may be that any non-UK supplies are deemed (by the UK post-Brexit) to warrant associated VAT recovery on costs, which would be a benefit to all FS, banking and insurance businesses;

• Tour Operators’ Margin Scheme (TOMS) – as an EU-wide measure (aimed at ‘simplification’, but fiendishly complex) the scheme may be adopted, adapted or completely dismissed post-Brexit;

• MOSS supplies – see above for ‘non-Union’ measures;

• outsourcing and offshoring – a bit of a ‘two way street’, as there would be implications to the VAT treatment of outsourcing to EU, but also a potential reticence for EU (and non-EU) to outsource operations to UK suppliers.