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.
- Postponed accounting – confirming it has listened, the government will introduce postponed accounting to help mitigate the impact of the above rule changes. Under this mechanism, already used in EU Member States with busy ports such as the Netherlands and Belgium, importers don’t have to pay import VAT upfront to the customs authorities. Instead, they can account for it in their subsequent periodic VAT return. Interestingly, this mechanism will apply to imports from both the EU and countries from the rest of the world as the government wants to “make the most of trading opportunities”. Certainly, it does not appear to view fraud prevention as a current priority.
- Low value consignment relief – Low Value Consignment Relief will be abolished for parcels arriving into the U.K from both the EU and third countries. Therefore, all goods entering the UK as parcels from overseas businesses will be liable for VAT (except those that are VAT-exempt or subject to the zero-rating).
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.
- Distance selling – the existing distance selling thresholds for UK exports of goods to EU consumers will be removed so UK businesses will no longer be able to sell their goods to EU customers without VAT-registering in the Member State where sales are made.
- EC Sales Lists – UK businesses registered for VAT will not be required to complete EC sales lists but will need to retain evidence proving that goods have left the UK.
Exporting Services to the EU
The place of supply rules for services will generally remain unchanged for UK businesses.
- The Mini-One-Stop-Shop (MOSS) – businesses supplying electronically supplied services to customers in the EU will lose access to the UK’s MOSS portal. They will have to register for the VAT MOSS non-union scheme in one of the EU Member States if they wish to continue to use this simplification for digital services. They will only be able to do this after the UK’s exit day (29th March 2018). The scheme requires businesses to register by the 10th day of the month following a sale making for a tight registration timeframe for businesses to comply with for any sales they make for the remainder of March.
- Insurance and financial services – under present rules, suppliers of certain financial services to non-EU customers (unlike to EU-based customers) can recover the associated input VAT on those services. The guidance tells us that “input VAT deduction rules for financial services supplied to the EU may be changed. We will update businesses with more information in due course”. The pending change in law may make the VAT treatment of these supplies more competitive by extending the right to input VAT recovery on services to EU customers.
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.