Preparing for a no-deal Brexit: VAT for businesses

On 23 August 2018, the UK Government began publishing technical notes on the effect of a no-deal Brexit. These notes are intended to provide guidance to citizens, businesses, public sector bodies and Non-Governmental Organisations in the United Kingdom on how to prepare for the possibility of the UK leaving the EU next March without concluding a Withdrawal Agreement. It is expected that around eighty technical notes will be published in total. Over the next two months SPICe Spotlight will provide analysis and comparative information on a number of these. The first blog provided an overview of the UK Government’s Preparations for a no-deal Brexit.

This latest article covers the technical note on VAT for businesses. The stated aim of the note is to provide UK businesses with information on how VAT rules for goods and services traded between the UK and EU Member States would be affected by a no-deal Brexit.

Background

Value Added Tax (VAT) is levied on the purchase of many goods and services bought and sold for use or consumption in the EU. It is an EU wide tax, with common rules for all Member States laid out in the VAT Directive. Individual Member States are responsible for the transposition of these provisions into national legislation and their practical application. As a result, rates and administrative practices vary from country to country – EU law only requires that the standard VAT rate is at least 15% and the reduced rate at least 5%. In the UK, the VAT rate is currently 20% for most goods and services, with a reduced rate of 5%. In addition, some goods and services are zero-rated – e.g. most food and children’s clothing.

The Scotland Act 2016 allows for receipts from the first 10p of the standard rate of VAT in Scotland, and the first 2.5p of the reduced rate, to be assigned to the Scottish Government. Assignment is due to begin from 2019-20, as outlined in the Fiscal Framework agreement published by the Scottish and UK Governments on 26 February 2016.

Implications of no deal

Existing VAT rules for domestic transactions will continue to apply after the UK leaves the EU on 29 March 2019, regardless of whether a deal is agreed or not. The UK would of course have greater freedom to alter those rules in future since it would no longer be constrained by EU law.

The impact on transactions between the UK and EU Member States would be much more significant. The note states that the UK Government would aim to keep VAT procedures as unchanged as possible in the event of a no-deal Brexit, however some change would be inevitable.

Importing goods from the EU

Immediately following a no-deal Brexit, the VAT rules that currently apply to imports from non-EU countries would also apply to those from EU Member States – meaning that VAT would be due when the goods physically arrive at the UK border. Business organisations have for some time warned that this would lead to increased red tape and cash flow problems for British companies. To mitigate some of these difficulties, the note commits the UK Government to the reintroduction of postponed accounting rules for import VAT on goods imported from both EU and non-EU countries. This would allow VAT-registered businesses to account for import VAT on their quarterly VAT return.

The note makes clear that, in the event of a no-deal Brexit, VAT would become payable on goods sent by overseas businesses to the UK as parcels. Low Value Consignment Relief (LVCR) – an optional exception to VAT, allowed by EU law, for low value shipments (i.e. worth up to £15) – would no longer apply to any parcels arriving in the UK, from the EU or elsewhere. This will likely increase costs for many businesses, which could in turn be passed on to consumers in the form of higher prices. For parcels valued up to £135, the UK Government is developing an online service which will allow VAT to be collected from sellers overseas – the intention is to have this ready in early 2019. For parcels valued over £135, VAT would be collected from UK recipients in line with the current arrangements for parcels from non-EU countries.

The note also confirms that businesses should continue to notify HMRC about vehicles brought into the UK from abroad, exactly as they do now. The main change here will be in relation to import VAT – following the UK’s withdrawal from the EU, this will be due on vehicles brought in from an EU Member State. Certain reliefs would, however, be available as with current vehicle imports from non-EU countries.

Exporting goods to the EU

Following a no-deal Brexit, EU distance selling rules would no longer apply to UK businesses and UK businesses would be able to zero-rate sales of goods to EU consumers. The note confirms that VAT-registered UK businesses would still be able to zero-rate sales of goods to EU businesses and, in addition, would no longer have to complete EC sales lists. However, to support any zero-rating, evidence would have to be retained to prove that the goods had actually left the UK. The note indicates that these arrangements will be similar to those currently required for exports to non-EU countries. The note highlights that EU rules would treat goods entering the EU from the UK in the same way as those from other non-EU countries, with import VAT payable on arrival.

Supplying services into the EU

The note confirms that the VAT ‘place of supply’ rules would continue to apply, even in a no-deal scenario – these are based on international standards set out by the Organisations for Economic Co-operation and Development (OECD), not EU law. The place of supply for UK businesses supplying digital services to non-business consumers in the EU would continue to be the customer’s country of residence. However, should the UK leave the EU without a deal, the note indicates that input VAT deduction rules for financial services supplied to the EU may have to change – the UK Government has committed to providing further information on this in due course. In addition, the note confirms that the EU Tour Operators Margin Scheme would cease to apply to the UK.

Accessing EU-wide IT systems

Upon leaving the EU, the note confirms that UK businesses would no longer have access to EU-wide VAT IT systems, including the VAT Mini One Stop Shop (MOSS). In the event of a no-deal Brexit, UK businesses could register for the Non-Union VAT MOSS scheme in an EU Member State. Alternatively, businesses could register in each individual EU Member State where sales were made.

The note also makes clear that, while UK businesses would still be able to claim refunds of VAT from EU Member States, they would lose access to the EU VAT refund system. Instead, they would have to use the processes for non-EU businesses that already exist in individual nations.

Reaction

On 23 August, Adam Marshall, Director General of the British Chambers of Commerce, said:

“The government has responded to our campaign to avoid a VAT ‘time bomb’ for traders by introducing postponed accounting for imports, and has gone further than we expected by saying that these arrangements will cover imports from EU and non-EU markets alike.”

“Had ministers not acted, firms faced the prospect of having to pay VAT immediately on each cross-border transaction, creating significant cash flow issues. While we await further detail on how the new postponed accounting rules will work, this commitment defuses the cash flow ‘time bomb’ that many businesses feared.”

Also on 23 August, Helen Dickinson, Chief Executive of the British Retail Consortium, said:

“Any delays caused by increased red tape will have a serious impact on over one-third of our food imports. The Government’s technical notices demonstrate the facts of a No-Deal Brexit – reduced availability and higher prices of food and medicine, increased delays and red tape at borders, and a VAT bombshell for consumers and businesses.”

Andrew Warden, SPICe Research