Brexit and VAT: A short summary
There are many areas of risk surrounding Brexit to be managed, including legal, VAT and Customs uncertainties.
This article is a rapid overview of many of the VAT scenarios which might require attention, along with some comments for consideration. Each business is different, however, and many supplies are either not pinpointed by VAT law or involve the interaction of different elements of VAT law.
Best practice for each business with an EU dimension to their supply chains (whether purchase or sale) is to consider those supply chains in bespoke detail in the light of recent government policy announcements and to address the VAT risks which might arise in 2021. The below considerations will be a good start, but more detailed, bespoke considerations will ultimately be required.
Brexit and VAT
Brexit and VAT is a large subject on which detail has been released increasingly rapidly over the past few months.
VAT and imports
The post-Brexit rules for imports appears simple, but there are complications for many businesses.
UK VAT registered business customer
Goods transported to a UK VAT registered business from the EU27 into GB (Northern Ireland rules will be different, see below) were in 2020 an Acquisition into the UK and VAT was recorded only in VAT returns by the acquirer, rarely resulting in a payment to HMRC.
This process of recording VAT on arrival of the goods in the UK will continue in 2021 provided the new rules for postponed VAT accounting are permitted, which should be available in most scenarios.
From the perspective of an overseas seller, in 2020 they would either zero-rate such a supply to a UK VAT registered business, or charge VAT in their “home” country to the UK non-VAT registered customers under Distance Selling rules, or (if sales are significant) register for and charge UK VAT to non-VAT registered customers.
For overseas sellers, it is expected that they will continue to zero-rate their exports the UK in 2021, but that they will be unable to use Distance Selling. The risk is that they will be required to register for and charge UK VAT.
Consignments below £135
The rules will differ however when individual consignments are £135 or below. Overseas sellers (EU27 and non-EU), UK business purchasers and even online marketplaces should all monitor imports and determine whether they have an obligation to account for the VAT liability. There are a number of different factors which lead to different import VAT obligations and these different types of import should each be identified and captured.
More to consider
Take care to ensure that the party who will recover any import VAT will also be the owner of the goods upon importation: HMRC policy currently prevents VAT recovery in those circumstances.
In addition, ensure the importer has an EORI registration in place before importing goods into the UK.
VAT and exports
The UK is expected to zero-rate exports from GB (Northern Ireland will have its own rules, see below) to any other country in the world including the EU27. This will be a change for suppliers relying on Distance Selling provisions, who in 2020 were charging UK VAT rather than register for VAT in EU member states where the goods arrive.
The difficulties will come when considering the goods’ arrival in the EU27 during 2021. Will the UK supplier be required to register for and charge EU VAT and in which EU member state, and will an (expensive) VAT Representative be required? Will the UK supplier be able to negotiate terms and draft contracts with their EU customers which allow the UK supplier to avoid local EU VAT obligations?
Services to non-UK non-business customers
Services provided by UK suppliers (including within Northern Ireland) to non-business customers in the EU27 were in 2020 subject to UK VAT with few exceptions. From 1 January 2021, it is expected that many of these services will be zero-rated.
This is good news but check that the services qualify for zero-rating (some will not beyond the usual exceptions) and check for use and enjoyment override rules which occasionally compel services to be subject to VAT in the EU.
VAT and financial and insurance services
Suppliers of financial services to EU customers will be able to recover VAT on their costs from 2021. A recent statement by the Chancellor confirmed that from 1 January 2021 the VAT rules governing the supply of financial services to customers in the EU27 will align with the VAT treatment of supplies outside the EU, enabling VAT on attributable costs to be recovered and reducing costs overall. This could be important when suppliers of financial services to customers in EU27 member states have significant costs, such as technology start-ups.
Digital services and MOSS – mini one stop shop
UK suppliers of digital services are required to register for VAT in each EU member state where their non-business customer is located. This burden is eased to some extent if the UK supplier registers for the EU’s mini one stop shop (Union MOSS).
UK suppliers relying on MOSS from 2021 will have to register under the Non-Union MOSS scheme in an EU member state of their choice and complete regular VAT returns locally in that country.
Conversely, an EU (e.g. Italian) supplier into the UK would be required to register for UK VAT.
The above is subject to any kind of deal which preserves mutual recognition and mutual payments between the UK and the EU under the MOSS rules. This is something we don’t yet know, but we’re not aware of any suggestions that even a deal would preserve this mutual recognition.
Margin schemes involving purchases from the EU27 will cease to become effective when the Brexit transition rules end. Steps should be taken by those businesses relying on margin schemes where goods are sometimes brought to the UK from the EU27, as this can reduce the VAT burden significantly.
TOMS – tour operator margin scheme
It is likely that supplies of services under TOMS will not be affected, except that supplies of tour operator services performed outside the UK (e.g. accommodation in Italy) but within the EU27 can be zero-rated in 2021.
The question is whether the EU will impose use and enjoyment provisions or similar, requiring VAT to be accounted for by the TOMS supplier in local EU member states. This is not known at the time of writing.
VAT recovery cross-border
If VAT is paid in one EU member state by a business in another EU member state, this VAT can be recovered. Recovery is not through a business’ “home” VAT return but via an online portal, in 2020.
The UK will lose the right in 2021 to use this portal, affecting UK businesses recovering VAT in the EU27 and affecting EU27 businesses recovering VAT in the UK. A different mechanism is available for this VAT recovery, but the timings and deadlines for claims are different.
There is also a transitional arrangement in place, effectively giving a much-shortened deadline for recovering VAT paid in 2020.
VAT and Northern Ireland
Northern Ireland (NI) is set to be a unique VAT jurisdiction for goods, but not services. NI will be part of the EU for the purposes of transported goods, requiring its own EU designator “XI”.
Goods moving from GB to NI will effectively cross a border, but the UK is making this as light touch as possible and suppliers in 2021 will simply charge UK VAT as for a domestic supply in 2020.
In addition, goods entering NI which are “at risk” of moving between GB and EU via NI will be subject to relevant Customs checks and duties (details awaited). A joint EU-UK committee are still setting out definitions and procedures, but it appears that suppliers should register with one of the trader support services to confirm their goods are not at risk.
It is worth watching developments in NI in case there are planning opportunities.
There are also some oddities, for example VAT Group rules will be disapplied between GB and NI. Care should be exercised and detailed reviews of a business’ activities to confirm any VAT impact.
Yachts, aircraft and other UK-owned assets in the in EU
Upon Brexit, will moveable assets owned by UK parties but kept in the EU (e.g. yachts in the Mediterranean) be deemed to have been exported?
For yachts and aircraft in particular, being able to evidence that EU VAT has been paid and that the item is legitimately in the EU is important. Local EU authorities can impound the vessel or aircraft if they are not satisfied. The risk is that VAT and perhaps even import duties will become a cost to the UK owner. There often ways to address the issue free of VAT costs, but the appropriate steps must be taken.
VAT number checker
As part of the fight against VAT fraud, it was possible in 2020 to use the EU’s VAT registration number checker website, VIES.
In 2021, VIES will remain available to determine the validity of EU VAT registration numbers. For GB VAT registration numbers, HMRC have launched its own online checker service.
The use of a deferment account will help importers to manage their cash flow, with import duty being paid later.
Import VAT can be deferred too when using a deferment account to defer duty payments, or postponed VAT accounting rules can be used when permitted.
Kevin Hall, VAT Partner, Wright Hassall