On 22nd October 2018, HMRC published a guidance pack, entitled “Partnership pack: preparing for a ‘no deal’ EU exit”, informing businesses on how best to prepare for Brexit in case the UK walks away from the EU at 11 p.m. GMT on 29th March 2019, without striking a deal. This would mean that a withdrawal agreement and framework for a future relationship with the EU, will not have been negotiated and therefore there would be no 21-month transitionary period. Consequently, the UK would be out of the single market and the customs union with immediate effect.
The government assures us that such a scenario “remains unlikely” in light of the progress being made in the current ongoing negotiations.
For detailed information on the VAT rule changes that UK businesses trading with the EU need to know, HMRC refers to the technical notice, “VAT for businesses if there’s no Brexit deal”. This guidance outlines the main VAT implications and risks facing businesses dealing in cross border trade. Although the notice doesn’t really contain any unexpected revelations, it is still a useful read, since it is arguable that in the anticipated event of the UK withdrawing from the EU with an agreement in place, the VAT position may well be comparable to that of a no deal scenario.
What will happen to VAT?
Regardless of the type of deal the UK comes to with the EU, the UK will not remain in the EU VAT regime. This paper explains that if the UK leaves the EU on 29th March 2019 without a deal, the government will maintain the current VAT system to reflect as closely as possible existing VAT procedures. However, since VAT is essentially a tax based on EU law, there will have to be certain changes to the VAT rules for the UK’s cross border transactions:
Importing goods from the EU
As of 29th March 2019, without a deal in place, imports from the EU will be subject to the existing rules for imports of goods from non-EU countries. On a practical level this means that businesses will be liable for import VAT at the time of importation as well as for customs duties and might be susceptible to stalling in their supply chains due to waiting for VAT and customs clearances. Understandably, businesses have voiced their concerns over these potential negative cash-flow repercussions.
The government is promising a simplification measure in the form of a new “technology-based solution” for parcels entering the UK of a value not exceeding £135. This system will allow overseas sellers to charge VAT at the point of purchase, register with HMRC and account for the VAT due, which will alleviate consumers and businesses in the UK from the burden of having to pay the VAT on parcels. Currently this system is still in development phase.
Exporting goods to the EU
The EU will treat UK exports of goods as goods imported from any other third country, meaning that they will become subject to import VAT and customs duties payable on their arrival into the EU. Individual Member States may have different import VAT rules for non-EU countries, so it is important for UK businesses to prepare by familiarising themselves with the relevant import VAT rules and processes for the Member States they trade in.
Exporting Services to the EU
The place of supply rules for services will generally remain unchanged for UK businesses.
EU VAT refunds
Although UK businesses will still be able to claim VAT refunds from the EU, they will have to do so using the non-EU refund mechanism which due to the different refund procedures of the various Member States is considered a much slower and laborious process than the EU-refund portal.
The government has demonstrated its commitment to the business sector by taking steps to shield it from some of the increased VAT and compliance costs for businesses trading with the EU. The changes it will make to the UK VAT system, curbing absorption of import VAT costs and easing VAT related border delays may likely lead to increased fraud.
Even so, it is clear that in the event of a no deal Brexit, businesses exporting to the EU will have to get ready to navigate the intricacies of new VAT reporting requirements, customs declarations, non-recoverable duties and additional compliance burdens.