Brexit and VAT: Some Important Implications You Need to Consider
Nick Hart, Senior Director, Indirect Taxes, Radius
The UK’s EU referendum, more commonly referred to as the Brexit referendum, was held in June 2016. It provided the British public with a choice of remaining in or leaving the European Union, and as has been widely publicized the result was “leave.” The UK is just now beginning to plan the exit process, which will take several years to complete and which has potentially significant short-term and long-term implications for foreign and domestic businesses alike. The indirect tax system in the UK in particular is one area that will likely see a high degree of change.
Given that the UK’s value-added tax (VAT) system is based on EU Directive principles, EU regulations and EU case decisions, there will potentially be significant VAT implications when the UK officially leaves the EU. At this stage, however, discussions around these implications are largely speculative, and until the UK formally begins the exit process, the evolution of the indirect tax landscape in the UK will remain something of an unknown.
That said, there are certain mechanisms and positions within the EU VAT system which will no longer affect UK tax payers post-Brexit. In addition, the UK is a popular country in which non-EU businesses register for VAT purposes in order to support a particular EU operating model. Alternative locations for such registrations will need to be considered in light of the UK’s impending departure. This will affect non-EU-established vendors of electronically supplied services that are currently registered for the non-EU MOSS scheme through the UK portal.
UK companies making taxable supplies in other EU member states are, under certain circumstances, required to register for VAT in those member states as a non-resident company. For example, a UK company must register for VAT in an EU member state if it hosts events in the member state or maintains an inventory of goods there from which it fulfils orders. As the UK is currently within the EU, UK companies in this situation are able to register for VAT across the EU directly with the tax authorities and without the need to appoint a local fiscal representative. (This is in accordance with provisions introduced by EU legislation, EU VAT Direct 2006/65.) This position is likely to change once the UK has exited the single market, since UK companies will overnight be considered non-EU entities. Over half of the 28 EU member states require non-EU entities with VAT-registration obligations to appoint a local fiscal representative. This requirement reduces burdens on local authorities when trying to contact non-EU businesses.
A fiscal representative in these circumstances typically has joint and several liability for VAT liabilities of the non-EU company. As a result, the non-EU company is often required to pay a security (usually based on a percentage of the local VAT liability) or provide a bank guarantee. These are measures used by local authorities to safeguard tax revenue in the event of default by the non-EU company and to protect the fiscal representative from suffering financial losses.
In short: Once the UK leaves the EU, UK businesses with VAT registrations in EU member states may find they are required to appoint local fiscal representatives. This will result in increased administrative burdens, compliance costs and potentially the need to provide a bank guarantee or security deposit. The UK companies will also have to accommodate the fiscal representative within each particular member state’s VAT reporting processes. UK companies in this situation should prepare for this possibility, including adjusting budgets and forecasts as well as identifying potential fiscal representatives in countries where they will likely be needed post-Brexit.
As part of the exit process, the UK may be able to negotiate a deal with its EU partners that, for example, waives the fiscal-representative requirement for UK businesses that have existing registrations and a clean compliance history in that particular country. The extent to which the UK may be able to negotiate such a position is an unknown quantity at this point. It is also worth remembering that the area of fiscal-representative requirements is just one small element of a whole raft of topics that the UK must address during Brexit negotiations.
Distance selling is a VAT mechanism unique to the EU. Distance selling in this context applies to the sale of goods within the EU on a B2C (business to consumer) basis. The volume of these types of transactions has increased dramatically over the past 10 to 15 years with the continued expansion of the e-retail market. UK vendors now operating in this sector are required to register for VAT in other EU member states depending on the volume of sales they make to consumers in those countries. (Basically, once a volume threshold is exceeded in a member state, a vendor based in another member state must register for VAT there and charge local VAT on sales made within that domestic market.)
Distance selling as a VAT concept is specific to the EU, and when the UK exits, UK businesses will no longer have to comply with or acknowledge EU distance-selling VAT rules. A UK company that is already registered will have to complete a deregistration process in each country. After this, the company will revert to an export-import type of supply structure that could initially reduce competitiveness and/or supply chain efficiency. A UK e-retail vendor will have to retain its distance-selling registrations, however, if it holds inventory of consumer goods in the EU from which it will continue to fulfil orders for EU B2C transactions.
As the UK and EU negotiate trade-agreement terms over the coming years, UK-based e-commerce traders will need to stay on top of related developments. As the terms of those negotiations become clearer, affected UK businesses will need to quickly implement necessary changes to supply chain structures, systems and pricing in order to remain competitive and accommodate an export-import position when supplying goods on a B2C basis to EU consumers.
In this period of uncertainty, it is difficult for UK businesses to begin planning for regulatory changes related to indirect tax. However even at this early stage, businesses would do well to map out their EU VAT footprints — including the reasons for all existing registrations — and understand the logic of their supply chain structures.
Taking these proactive measures will help businesses establish a solid foundation of knowledge that will enable them to make quick, informed decisions about important indirect tax matters as Brexit negotiations unfold. This will in turn lower their VAT-compliance risks and promote supply-chain efficiencies.
Send an email to Nick Hart at email@example.com.