The UK Government and the EU have agreed to delay any ‘no-deal Brexit’ to 31 October 2019 at the latest.
Brexit could happen earlier under the ‘flexible extension’ agreed and could be as early as 2300 hours on 31 May 2019 if the UK fails to participate in the European Parliament elections scheduled for 23 May. In the meantime, HMRC continues to publish details on potential changes to the UK’s VAT system in the event that the UK leaves the European Union without a withdrawal agreement.
HMRC’s plans include postponed accounting to avoid the cash flow burden of paying import VAT on goods at the time of arrival from the EU. Major changes will arise for businesses making distance sales of goods, using the Tour Operators Margin Scheme, the Mini One Stop Shop for B2C supplies of digital services, or submitting refund claims for VAT incurred in EU member states. HMRC have also provided an initial indication of what duties will apply to goods imported to the UK and its outline of the treatment of goods imported from the Republic of Ireland to Northern Ireland.
No-deal and trading with the EU
HMRC has since August 2018 published a series of online documents setting out its plans for how a ‘no-deal Brexit’ would affect the UK’s VAT and customs rules.
If there is no deal, businesses will have to apply the same VAT and customs rules to goods moving between the UK and EU as currently apply to trade between the UK and non-EU countries – i.e. a hard border will apply with the exception of the Irish land border. Customs declarations will be required when goods enter or leave the UK and importers will be liable to pay import VAT and/or customs duties. The EU will apply customs rules (and duty and VAT at EU rates) to goods it receives from the UK, requiring customs declarations on goods imported from the UK just as for goods imported from other non-EU territories. The EU will treat goods imported from Northern Ireland to the Republic of Ireland in the same way as goods from mainland UK.
For ease of reference, the various HMRC publications are:
1. VAT IT system rules and processes if the UK leaves the EU without a deal
2. Moving goods to and from the EU using roll on roll off locations if the UK leaves the EU without a deal
3. Register for simplified import procedures if the UK leaves the EU without a deal
4. Customs agents - no deal Brexit
5. Information for financial service institutions if there’s no Brexit deal
6. VAT recovery for financial services exports in a no deal scenario
7. Accounting for import VAT on all goods brought into the UK if the UK leaves the EU with no deal
8. Changes to your customs authorisations if the UK leaves the EU without a deal
9. Check temporary rates of customs duty (tariffs) on imports after EU Exit (Trade Tariff Tool)
10. Guidance from the French customs authorities for UK businesses in the event of a no deal Brexit
11. VAT IT system changes for the businesses outside the UK if the UK leaves the EU with no deal
12. Prepare your business for the UK leaving the EU - Tool
13. Communications Pack: Import VAT on parcels in the event of a no deal EU exit
The key VAT issues that are important for businesses trading cross border with EU member states as summarised below:
Postponed accounting for import VAT
In the event of a ‘no-deal Brexit’, the government will introduce postponed accounting for import VAT on goods brought into the UK. This would allow UK VAT registered businesses bringing goods into the UK from both the EU and non-EU countries to account for any import VAT due on their VAT return, instead of paying it at the time the goods arrive in the UK.
Under the currently EU VAT system, VAT on purchases of goods from the EU27 is accounted for under the ‘reverse charge’ procedure on the buyer’s VAT return (acquisition tax), usually resulting in a nil net tax adjustment. However, if the UK left the EU’s VAT system without a contingency plan in place, UK importers would face a liability to pay import VAT (at 20% for many goods) at the time that the goods enter the UK from the EU. VAT recovery would be available on the next VAT return which might cause pressure on cash flow and working capital. The introduction of postponed accounting, under which businesses will still be able to account for the VAT on their VAT return provides some reassurance for UK importers.
While postponed VAT accounting is good news for UK importers, it is only expected to apply to import VAT, and not to any customs/excise duties that may become due.
With the UK VAT gap estimated at £13.6 billion for 2017-18, there must be some concern that the erosion of current import VAT policing regime might encourage the diversion of goods onto the grey market and increase the VAT gap.
Turning to customs duties, these can only be deferred (not paid at the port of entry) by use of:
A deferment account, which allows businesses to pay their customs charges by a single monthly payment on the 15th day of the month following the month of import, and/or
A customs regime such as warehousing.
Authorisation for a deferment account or for warehousing is subject to review by HMRC and invariably, a cost is attached to both.
The EU VAT distance selling rules apply to online and mail order sales of goods to private customers (B2C) in other EU member states. UK businesses must register for VAT in any EU member state to which they deliver goods, where their turnover exceeds the distance selling threshold set by that country – either €35,000 or €100,000. Sales below the threshold do not trigger a registration requirement and vendors instead apply and account for VAT at the rate applicable in the member state of dispatch of the goods.
In the event of a no-deal Brexit, the distance selling regime will no longer apply to the UK. HMRC says that sales by UK operators would be zero-rated as exports from the UK, but could then face a liability for customs duty and VAT at the point of arrival into the EU. The reverse would apply to goods being sold to UK B2C customers by EU27 businesses. HMRC has opened an online registration system to allow overseas vendors to charge and account for UK VAT at the point of purchase for packages valued up to £135.
UK businesses involved in distance selling should review their current arrangements and consider setting up a VAT registration in an EU member state to deal with any customs charges and ensure smooth continuation of sales to EU customers. This will require stock to be held in that country.
Tour Operators Margin Scheme (TOMS)
After a no-deal Brexit, the UK will no longer be part of the EU wide TOMS system for businesses who buy in and resell travel facilities as a principal or undisclosed agent.
Instead, a UK only TOMS system will be introduced, under which UK established businesses falling within TOMS must account for UK VAT on the profit margin achieved from the sale of UK travel services and treat the supply of non-UK travel services as zero-rated. The position for UK travel businesses and services supplied in the EU27 has yet to be clarified but it is expected that VAT will have to be brought to account after Brexit, but the EU has yet to confirm this or how such a requirement would work in practice.
Mini One Stop Shop (MOSS)
Currently, UK businesses selling telecoms, broadcasting and digital services (e.g., apps, computer software, music and video downloads/streaming, ebooks etc) B2C to the EU27 have the option of using the UK’s MOSS portal to account for VAT on such sales. This allows them to declare VAT on sales without having to register for VAT in each EU country where sales are made.
In a ‘no-deal’ scenario, HMRC says that the UK will no longer have a MOSS portal and all businesses will be automatically deregistered from UK MOSS. UK businesses who wish to continue using MOSS must apply to another EU Member State to register for the VAT MOSS ‘Non-Union scheme’ as a non-EU provider. The digital services threshold of €10,000 for MOSS registration will no longer apply to UK businesses.
Non-EU vendors who have chosen the UK to host their MOSS registration for the entire EU will also have to re-register in another member state, and in the UK too if they supply these services to UK consumers.
EU VAT refund claims
Businesses established in one EU member state may, subject to conditions, submit claims to recover VAT they have incurred in another member state. UK businesses currently submit such claims online through the EU VAT Refund online portal, which HMRC then forwards to the member state concerned.
HMRC says that, in the event of no-deal, the UK portal will close for new claims when the UK leaves the EU. After that, UK businesses claiming VAT in the EU must apply directly to the EU member state under the ‘13th Directive’ VAT refund scheme for non-EU applicants, which requires submission of original, hard copy forms and supporting invoices.
For EU businesses claiming VAT from the UK, the UK will introduce a manual process for recovering VAT incurred before Brexit, keeping the current EU VAT Refund claim deadlines of 30 September 2019 for VAT incurred in 2018 and 30 September 2020 for VAT incurred between 1 January 2019 and the date of the UK’s exit from the EU.
For VAT incurred in the UK after Brexit, the UK will introduce its own paper based refund scheme similar to the 13th Directive scheme.
What happens next?
The UK now awaits the final decision from the EU and UK Parliament on when and how Brexit will take effect, so its VAT implications remain subject to change.
For the time being, businesses should continue to prepare for a no-deal Brexit and watch out for further developments.