The UK’s VAT rules are set down mainly within the VAT Act 1994, which is derived from the EU VAT Directive 2006/112/EC (“EVD”). The EVD has direct and over-riding effect on all EU Member States but local legislation is required because the EVD allows for countries to pick and choose certain rules. As a result, the local VAT rules across the EU are not always consistent.
Why is this important when thinking about Brexit? It’s important because once the UK leaves the EU it will theoretically (but this is not certain) no longer be bound by the EVD. This means that the UK could have free reign to amend its VAT rules as it sees fit.
For example, it would no longer be prevented from applying a reduced VAT rate on supplies of women’s sanitary products which is currently precluded under the EVD. Also, the rates of VAT applied to physical and digital newspapers and books (zero-rated and standard-rated respectively) could be harmonised without having to get the agreement of all 27 other EU Member States.
Whilst these would be positive developments, there could also be some downsides created. So, considering that at this stage we still don’t know how the UK’s relationship with the EU will look after Brexit we have provided some thoughts on what the key changes might be and what businesses should do to manage this.
These critical rules help businesses to determine the country where a supply takes place for VAT purposes and hence, the VAT rules which apply and the place where any VAT due would be payable.
The place of supply rules are applied almost identically across the EU Member States and our expectation is that the UK would retain these (or similar) rules. This would be beneficial for businesses in that it would minimise disruption that would be caused and existing knowledge could continue to be applied.
However, businesses will continue to create liabilities in other EU Member States and hence a need to have or maintain multiple EU registrations will not be extinguished.
For supplies subject to UK VAT, as mentioned above we would expect there to be some changes to the rates of VAT applied to certain products and services. For some items, this might be immediate (i.e. women’s sanitary products, digital content) whilst for others it may happen over time. With the UK being able to set its own rates (and maybe expand on the current number of rates we have) any proposed change is likely to occur more quickly than at present.
These consist of services and goods which are supplied from the UK to recipients in a different EU Member State.
Post-Brexit we would expect there to be little difference concerning supplies of services. Generally, B2B services are treated as supplied where the customer belongs and that customer must account for the local VAT itself. Once the UK is outside of the EU, if the same rules continue to apply there will be no change for UK suppliers – they will continue to not charge UK VAT. For B2C supplies, UK VAT generally applies and again, we expect this to stay the same.
There are some exceptions to this general rule which can create a need for UK businesses to register in other EU Member States. Examples include services connected with immovable property and admission to events. On the basis that the EVD rules will stay the same then UK businesses will continue to create VAT registration obligations in the EU because of making these supplies (although it must be remembered that in some cases a reverse charge can apply which removes the need to register, but the application of this differs from country to country).
Use and enjoyment rules might be subject to review once Brexit happens. These are rules which allow for a supply to become subject to UK VAT when under normal rules, the supply would be outside the scope. An example of this would be the UK Government’s decision to remove use and enjoyment rules from supplies of telecommunication services. Before the change, UK VAT did not apply when the services (such as using a mobile phone) were used outside of the EU. Now, UK VAT applies to all supplies. Post Brexit, these rules might again be reviewed (or new ones be implemented) to reflect on the UK’s changed relationship with the EU.
When receiving services, we would expect to see UK businesses still having to apply a reverse charge to the receipt of services from non-UK suppliers. This would ensure that there is no competitive advantage from sourcing services via non-UK suppliers.
Presently intra-community B2B supplies of goods are treated as being zero rated in the UK if the certain conditions can be met. That customer then must account for acquisition tax in the EU country where the goods are acquired. The same currently applies when UK businesses buy goods which are delivered from the EU. If the UK leaves the EU free trade area then this treatment will no longer apply to UK businesses. Instead, exports and imports will take place – see below for more on this.
For B2C supplies of goods, UK businesses currently charge UK VAT on these supplies until they exceed a “distance selling” threshold. These vary from between €35,000 – €100,000 across the different EU Member States. Once the threshold is exceeded in a calendar year, the supplier stops charging UK VAT and must register and account for VAT in the country where the goods are delivered to.
Once the UK leaves the EU distance selling rules will not apply. Theoretically, this could lead to a reduction in the number of registrations that are required. However, with the imminent removal of low value consignment relief (LVCR) in the EU it could lead to more registrations.
This is because many EU Member States require a non-EU supplier of B2C goods to act as the importer of record when goods arrive. Having this obligation results in a need to register for VAT to recover import VAT and account for local VAT on the supply to the customer. Hence, a UK business might have to register for VAT in a country from the moment of making its first supply – for businesses with a wide geographical customer base this will create more compliance obligations.
It should also be noted that use of a warehouse within the EU Member States will probably also continue to require a local VAT number. Customs procedures will also have to be considered, which are described below.
Whether EC Sales Lists and Intrastat reporting will still be required for both goods and services going to and from the UK remains to be seen, but for those businesses trading within the EU this requirement will remain.
If the UK ends up outside the EU free trade area then all supplies of goods to the EU will become exports. Under existing UK VAT law these would continue to be zero rated. However, instead of having to account for acquisition tax, the EU customers will probably incur import VAT and, more importantly, import duty (subject to the classification of the goods).
The import VAT should be recoverable by most businesses and hence only be a cash flow issue but duty costs are irrecoverable. Therefore, if duty does apply EU businesses will see an increase in the cost of products originating from the UK. Additional care will have to be taken to make sure that the correct classification is given to goods, in order that the right amount of duty is levied.
When goods are purchased from EU suppliers, they will be treated as imports into the UK. Again, import VAT will probably apply and this will create a cash flow issue, even if an import VAT deferment account is in place. In theory, import duties will also apply and as for EU businesses purchasing from the UK, the cost of imported products from the EU will increase. It may be that the UK government reduces duties to assist UK businesses, but at this stage there has been no comment on this issue and hence plans for post Brexit trading should not assume this will happen.
Finally, because these types of supplies will be treated as imports and exports it will mean the benefits of free trade which the EU provides will be lost. One of the consequences of this is likely to be increased levels of scrutiny paid by customs officials to review goods coming into the UK . This will be essential to protect the revenue generated from import VAT and duty. We would expect the same procedures to be implemented in the EU and thus businesses will need to consider how best to manage these new challenges.
At the moment, some EU Member States require non-EU businesses to appoint a fiscal representative when they register for VAT. This representative usually takes on joint and several liability for the VAT debts and accounts of the business, which gives the tax authority comfort because dealing with non-EU businesses means increased risks for them.
When the UK leaves the EU, it is unknown which EU countries would extend the requirement for a fiscal representative to UK businesses. Often, businesses from countries which have in place agreements to share financial and tax information are excepted from such requirements but the list of these countries can change on a regular basis. It will be important to determine this because generally, the use of a fiscal representative involves higher costs (as a result of them taking on the risk of joint liability). In some cases, it also creates a need to pay a financial guarantee. If fiscal representation is required then costs will increase and these will have to be factored into business decisions going forward.
The final issue to consider is the legal process and decision-making regime that might be in place post Brexit.
Now, the UK is under the jurisdiction of the European Court of Justice (ECJ). This means that VAT cases can be referred to the ECJ for interpreting and enforcing VAT law. UK courts are subject to decisions made by the ECJ in other cases which can sometimes lead to changes in UK VAT law.
Whether the UK maintains ECJ principles is a contentious political point and one that at this stage of the Brexit negotiations cannot be predicted. However, if it transpires that the ECJ no longer has jurisdiction in the UK then all VAT cases will ultimately be decided (if they progress this far) to the Supreme Court. UK businesses will also most likely no longer be subject to future decisions made by the ECJ (although again, this is an area that might be subject to change).
Whilst this will not radically alter positions, the two legal bodies can have slightly different opinions on matters and hence UK businesses will need to consider this when challenging decisions and opinions from HMRC.
As stated at the outset, at this stage of the Brexit process we do not know what the final position will be in terms of the UK’s relationship with the EU. Will it remain within the free trade area? Will the EVD still have effect? Or will the UK be completely independent, totally outside of the EU’s legal and trade jurisdiction?
Until these positions are confirmed (along with the timescales for the changes) then the most prudent steps a business can take are to ensure that current supply chains and business relationships are understood and maintained. This should ensure that once information is available on the changes ahead, the implications can be understood quickly can clearly allowing for proactive action (where required) to take place and ensure that disruption to normal working patterns is minimised.
It should also be noted that a number of proposals and new legislation have been published by the EU over the past 6 months which will create significant changes to VAT. This includes the rates applied, how it is accounted for and compliance obligations for businesses. It will be important to keep up to date with these changes whatever the outcome of Brexit because for businesses trading within the EU any new rules will still apply.
We have already begun advising businesses to start this planning; our Brexit health check guide can be found here. Being prepared in terms of knowing supply chains, understanding the potential impact of change and how to overcome these changes is all that businesses can do for the moment, so that when certainty is provided businesses can react quickly and lessen the impact on trading.