The EVD has direct and over-riding effect on all EU Member States. However the EVD allows for countries to pick and choose certain rules requiring local legislation. As a result, the local VAT rules across the EU are not always consistent.
Why is this important when thinking about Brexit? 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 could apply 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 harmonise without having to get the agreement of all 27 other EU Member States.
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Place of Supply
These critical rules help businesses to determine the country where a supply takes place for VAT purposes. These VAT rules need to be understood so as to know the place where any VAT due would be payable and hence the rules that need to be followed for rates and accounting for VAT.
The place of supply rules are applied almost identically across the EU Member States. Our expectation is that the UK would retain these (or similar) rules. This results in minimal disruption and benefits businesses. Existing knowledge continues to apply in this scenario.
However, a consequence of this is that businesses will probably continue to create liabilities in other EU Member States. This maintains the need to have or maintain multiple EU registrations.
For supplies subject to UK VAT, the rates of VAT applied to certain products and services may change. For some items, this could 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 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, we treat B2B services 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 on services (such as using a mobile phone) used outside of the EU. Now, UK VAT applies to all supplies. Post Brexit, these rules might require a review (or new ones 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. This obligation results in a need to register for VAT. This is 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.
Exports & Imports
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) which is not recoverable.
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. Businesses need to ensure the correct classification of goods. This is in order that the right amount of duty is levied.
Goods purchased from EU suppliers will be 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. Import duties will also apply, as for EU businesses purchasing from the UK which could mean that 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, these types of supplies are treated as imports and exports. This will mean the benefits of free trade which the EU provides are lost. Consequently, increased levels of scrutiny paid by customs officials to review goods coming into the UK are likely. This is essential to protect the revenue generated from import VAT and duty. We would expect the same procedures implemented in the EU and thus businesses will need to consider how best to manage these new challenges.
Registrations and Fiscal Representation
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. This 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. At present, some have said they would (i.e. Belgium) whilst others have said no (i.e. France). Often, businesses from countries which have in place agreements to share financial and tax information are exempt. However 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. A fiscal representation requirement will increase costs. Business decisions will factor these in going forward.
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 there is more information, businesses should 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 are understood quickly can clearly allowing for proactive action (where required) to take place. Also ensuring minimal disruption to normal working patterns.
The EU has published proposals and new legislation over the past 6 months creating significant changes to VAT. This includes the rates applied, accounted for and compliance obligations for businesses. It will be important to keep up to date with these changes whatever the outcome of Brexit. For businesses trading within the EU, any new rules will still apply.
Our Brexit and VAT Advice Services
We have already begun advising businesses to start this planning. Our Brexit and VAT advice services include a health check guide can be found here. Our Brexit and VAT advice includes:
- Knowing supply chains
- Understanding the potential impact of change
- How to overcome these changes
This is all that businesses can do for the moment. When certainty is provided, businesses can react quickly and lessen the impact on trading.