At the time of writing, we are still unsure on what basis the UK will be exiting the EU, whether this will be with or without a deal, and what conditions will be applied. The one thing that is certain is that, on the date of the exit, EU law will cease to apply in the UK.
This is a concern for businesses at the moment, as there is a question of how VAT will be charged post-Brexit, on trade between the UK and the EU member states that remain within the trading bloc.
As it currently stands, VAT is not charged on the supply of goods and some services from other EU Member States, but after Brexit this is likely to change. The assumption is that at this point, supplies of goods and services will be treated as imports and exports, as with countries from outside the EU.
Customs declarations are likely to become necessary and there is the question of whether double taxation obligations will become an issue if the place of supply rules of the UK conflict with place of supply rules implemented by EU law.
This summer, the government published notices which outlined information which businesses and individuals should take into account so that they can make more informed preparations for Brexit. If there is a ‘no-deal’ outcome, this information tells citizens how this could affect them, and what steps they need to take to guard against any negative effects.
Before the UK leaves the EU
Under current VAT rules:
- VAT is charged for the majority of goods and services sold both within the UK and the EU
- Businesses are liable to pay VAT when they bring goods into the UK, but there are different rules for goods coming from EU countries and non-EU countries.
- Goods that are exported by UK businesses to non-EU countries and EU businesses are zero-rated, meaning that UK VAT is not charged at the point of sale.
- Goods exported from UK businesses to EU consumers are either UK or EU taxed.
- Place of supply rules decide the country in which VAT is charged for services
What will happen in the case of no deal?
The VAT system in the UK will remain even after it leaves the EU. For domestic businesses this means that nothing will change, and goods and services will be taxed at the same rate. The UK’s VAT rules comply with the VAT Act of 1994, which is derived in part from the EU VAT Directive 2006/112/EC (EVD).
What is ‘place of supply’?
Place of supply basically refers to the country in which a supply (goods or services) takes place, and thus the jurisdiction in which VAT rules apply and VAT due is payable. Place of supply rules are fairly uniform across all EU Member States, including the UK, and the likelihood is that we would retain these rules after Brexit to ensure minimal disruption to businesses.
As it stands, business to business supplies of goods between the UK and other EU Member States are zero rated, as long as certain conditions are met. The customer then pays for the acquisition tax in the EU country where the goods came from. It works in the same way when UK businesses buy goods from other companies in the EU. If the UK leaves the free trade area then this will no longer be the case, and imports and exports will be the new norm.
In the case of business to consumer trade, UK businesses currently charge UK VAT up until a certain ‘distance selling’ threshold, which is between €35,000 – €100,000 depending on the EU Member State. Once this threshold is passed, the business must stop charging UK VAT and apply to pay VAT in the country where the goods are being sold.
Distance selling rules will no longer apply once the UK leaves the EU and, with the removal of low value consignment relief, there is a possibility that more businesses will have to apply to pay tax in other EU countries, if they continue trading there.
After Brexit there is likely to be very little change with regard to services. For B2B services, VAT is charged as supplied where the customer is, meaning that the customer pays the local rate of VAT. This rule is likely to remain after Brexit, meaning that there will be no change for UK suppliers. For B2C supplies, UK VAT applies and this will most likely stay the same as well.
Imports & Exports
If the UK ends up outside of the EU free trade area, then automatically all goods supplied to the EU will be considered exports. For UK-based business these goods would still come under UK VAT law and be zero rated. However, for EU customers, they will likely incur, and have to account for, import VAT and import duty. Import VAT is a recoverable expense and thus not too much of an issue, apart from briefly affecting cash flow. However duty costs are irrecoverable, meaning that this will make products from the UK more expensive for EU customers.
In the case of goods purchased from the EU, they will be treated as imports, so there will be import VAT to pay, as well as import duty. As with exports, which import VAT is recoverable, duty costs are not, and this will increase the cost of products coming from the EU.
The UK government may reduce duties to ease the financial burden for UK businesses, but this has not yet been discussed and there is no assurance that this will happen, so businesses should make provisions assuming that it will not.
Because supplies will now be classed as imports and exports, this is also likely to affect how closely scrutinised goods are when going through customs. This could slow down the flow of supplies between the UK and EU and make it more likely that deliveries will be rejected.
What is important for businesses to know at this stage is that we still don’t know what will happen in the end. The UK may well remain within the free trade area, or it may become totally independent and outside of the EU’s legal and trade jurisdictions.
Until there is a more definite decision made on how we are leaving the EU, all businesses can do is prepare for the worst case scenario, to ensure that their trade isn’t too badly affected once the Brexit process has been completed.
If you wish to find out more how this could impact your business then why not contact us on 0800 470 4820 or email [email protected] to find out more.