The deadline is fast ticking towards the UK’s anticipated withdrawal from the EU. As it stands 29th March 2019 will mark the last day of the UK’s EU membership and it is increasingly looking like a hard Brexit will take place after that. This means that the UK will immediately become a third country and no longer be privy to the EU’s customs area and VAT system.
This hard Brexit scenario will occur unless the UK parliament can reach consensus on the existing withdrawal agreement, or some variation of it, which was thrashed out and presented in early December 2018. So far this has only suffered a major defeat in the House of Commons and with just forty four days left, the chances of success look slim. Of course, lots of things could still happen but for many businesses, making plans to manage a hard Brexit should now be a prudent step.
There will be many implications for VAT if a hard Brexit occurs. One of the most significant however, which has recently been commented on by an increasing number of EU tax authorities and also HMRC, will be the methodology for recovering EU VAT costs.
Many UK businesses incur EU VAT costs and vice versa, EU businesses incur UK costs. For those businesses which do not have a liability to be registered for VAT in the country where the costs were incurred, they can be recovered via the EU VAT Refund Directive (“ERD”). This is a relatively efficient mechanism whereby a claim is made to the tax authority in the Member State where the business is headquartered. For example, a UK business making a claim for French, Spanish and German VAT can do this via one claim sent to HMRC. The claim period always covers one calendar year and claims must be submitted by the end of September in the following year.
By contrast, non-EU businesses must make claims for EU VAT via a 13th Directive Refund Claim (“13-DRF”). This is significantly more complicated than an ERD because each claim must be made directly to the individual Member State where the VAT was incurred. Additional information is also usually required, such as original copies of invoices. On the whole claims must be made in the native language of that Member State. There are shorter time periods within which claims must be made – there are just 6 months instead of the 9 months provided under the ERD. And most importantly, some Member States will reject claims from businesses in certain countries if there is no reciprocal arrangement in place (i.e. American companies can’t make claims to Spain).
VAT recovery Brexit impact
In addition to HMRC, we have seen communications from at least 4 other EU Member State tax authorities confirming that if there is a hard Brexit, the ERD will no longer apply to claims made by UK businesses to the EU. At this stage there has been no comment on how EU businesses will recover UK VAT, but a method similar to the 13-DRF is envisaged.
In addition to the changes to methodology, it has also been confirmed by these parties that VAT incurred during the calendar year 2019 will not be recoverable via the ERD. Any claims for EU VAT incurred in 2018 can be made via the ERD but they must be received by the relevant tax authority before 29 March 2019. This is 6 months earlier than the usual deadline that businesses work to. Claims made after this time will have to be made via the 13-DRF.
What action to take?
This means that for all businesses, there is now a huge need to make any claims for VAT incurred in 2018 now.
The advantages of making claims via the ERD cannot be underestimated when compared to the 13-DRF claim methodology. Therefore, although there could still be a withdrawal agreement and claims made via the ERD as usual, any prudent business should look to make its 2018 claims as a priority. Doing this will give at least some certainty in a period that could be more uncertain than any experienced for many a year. The ability to safeguard these claims and the associated VAT repayments that they can unlock might end up being critical if other implications of a hard Brexit see a contraction or slowdown in business or cash flows tightened.
Accordance is on hand to assist with making these claims, so you can secure some certainty on this matter.
If you would like to discuss making a claim then please provide the relevant details below to enable us to promptly advise on claim timeframes and likely amounts that are recoverable.