UK Businesses and VAT in the Event of a No-Deal Brexit
Raghuram Srinivasan, Manager, Indirect Tax Advisory
What if the UK can’t reach an agreement with the EU about the terms of its exit? What can UK businesses expect to face, specifically with regard to VAT?
So far the message from 10 Downing Street has been that “negotiations are progressing well” and the government is “confident that it will agree a good deal for both sides.” However, the chances of a hard landing seem to have increased after the EU rejected key aspects of Prime Minister Theresa May’s proposals for a new trade agreement in July.
May also faces opposition to her Brexit plan at home, where many who voted to leave the union feel she has made too many concessions to the EU. Several of May’s key advisors have quit over May’s proposed terms. A recent poll found that twice as many voters would prefer that the country leave the EU with no deal rather than accept May’s plan. UK International Trade Secretary Liam Fox said recently that the chances of not reaching a Brexit deal are 60 percent.
The chances of an extension for further negotiations are slight. In response, HM Revenue & Customs (HMRC), the UK’s tax administration body, has published a flurry of “what-if” guidance on the likely UK VAT positions businesses will face post-Brexit.
While the UK prepares to move away from the EU, UK guidance suggests that it would like to keep VAT rules and procedures as close as possible to current practices. However, the required treatment of UK-EU supplies of goods and services will inevitably change.
UK Businesses Importing Goods
In a “no deal” scenario, UK importers will be able to postpone paying import VAT on goods they bring into the UK by first accounting for import VAT on their VAT return, and then paying import VAT at a later date. This will help the cash-flow problems they would have faced had they been required to pay at or soon after the time the goods cleared UK customs.
While delaying payment of VAT makes life easier for importers, it could also allow goods to enter the country fraudulently and circulate without VAT ever being paid, a Financial Times article points out.
For imported parcels, the UK says it will create a new system in which foreign companies sending them register online and remit tax directly through online transfer.
UK Businesses Exporting Goods to EU Businesses
From the EU’s perspective, UK goods arriving at their customs border will be treated on par with goods arriving from the rest of the world. EU countries will charge import VAT and customs duties at the time goods arrive at their borders, just as they do now for all non-member countries. UK businesses may need to implement new processes to ensure they comply with local customs and VAT requirements at the time of importation.
The UK, however, will continue to make sales to EU businesses zero-rated (VAT at 0 percent). To take advantage of this relief, businesses will need to provide their own evidence when filing their VAT returns that their goods left the UK border. UK tax authorities will not police the country’s borders.
UK Businesses Exporting Goods to EU Consumers
While the distance selling arrangements under the EU VAT directive will cease to have effect in the UK, businesses will still be able to zero-rate sales of goods when exporting to EU consumers. On the EU end, countries will charge VAT and customs duties when goods arrive at the border.
UK Businesses Selling Their Own Goods to Customers in an EU Member State
If UK businesses already have goods stored in an EU country, they will need to register for VAT in that country. Instructions are available on the European Commission's website.
Place of Supply Rules for the Selling of Services
Most “place of supply” rules in the UK originate from the EU VAT directive and will remain intact in the event of a "no deal" Brexit. For UK businesses supplying digital services to EU consumers, VAT will continue to be due in the EU country where the customer resides.
For UK businesses supplying insurance and financial services, the rules may change. HMRC says it will provide updates in due course.
UK VAT Mini One Stop Shop (MOSS)
Businesses that sell digital services to consumers in the EU will still be able to use the MOSS service, which allows them to report and pay VAT in a single return using an online portal. Member states each have their own MOSS portal, but the UK’s portal will of course be discontinued after it leaves the EU.
UK businesses can register instead on the portal of any EU state. If they prefer, businesses can register in each EU country where they do business.
Registration cannot occur until after the UK leaves the EU. Businesses are required to register by the 10th day of the month following a sale. So for sales from March 29 to March 31, 2019, a business would have to register by April 10, 2019. For sales in April 2019, registration would need to be completed by May 10, 2019.
Over the next few months, the UK government expects to publish additional information for dealing with VAT and other matters in the event of a hard Brexit.