VAT and duty: Brexit update and practical considerations
October 28, 2019
The UK has previously set out a number of scenarios which might possibly reduce friction in terms of the customs procedures at Brexit, but any changes to the current customs, VAT and excise systems will only be known following the conclusion of on-going negotiations which, as has been widely reported, are not at an advanced stage.
Although Brexit is expected to happen by 31 January 2020, a transitional period may well be negotiated that will allow time for UK and EU businesses to adjust to any new arrangements and to avoid any ‘cliff-edge’ changes immediately following Brexit.
Though the UK hopes and expects to achieve an agreement with the EU, it is also being prudent in preparing for the possibility of a ‘no deal’ scenario. In the absence of any agreement, the UK would adopt World Trade Organisation (‘WTO’) terms which include imposing customs duty and VAT on imports from the EU and vice versa. No agreement would mean that the concept of an ‘acquisition’ of goods from the EU would be abolished; goods from the EU would be treated as imports from outside the EU and, as such, would be subject to import VAT.
Media reports of the new customs arrangements give the impression that we are approaching a cliff-edge because negotiations with the EU have not yet indicated a likely outcome for the indirect tax system and as such many believe there is the possibility that there will be no system to cope with trade when the UK’s exit arrives.
However, what is not widely reported or acknowledged is that there is already in fact a customs framework in place which had been negotiated over many years and could, we understand, be adopted at Brexit. This is the Union Custom Code (‘UCC’), which became law on 1 May 2016. Exactly what is adopted is of course subject to negotiation, however the UK could agree to remain compliant with the UCC which would be consistent with the planned upgrade, or rather replacement, for the system for controlling imports and exports (CHIEF). The new import system is called the Customs Declarations Service or ‘CDS’, which was scheduled for delivery prior to March 2019 but wil not be fully implemented until 2020. In reality, therefore, the picture is not as gloomy as public reports may illustrate.
Stepping back from the political negotiations and considering what, practically, Brexit may mean for businesses, there will inevitably be changes which need to be anticipated. It is not advisable to wait indefinitely for the details to arrive as this could happen too near to October 2019 to allow sufficient time for planning. Whilst transitional arrangements may alleviate some of the issues that immediately arise at Brexit, they are unlikely to solve all of the problems, which is why we would recommend a review of potential risks to see if contingency plans could be put in place for current supply chain models.
Some of the issues you may wish to consider include:
That span pre and post Brexit periods, so these allow for any necessary revisions including supply chains, routes, and timescales for example. Are there aspects of contracts which may be inappropriate or difficult to achieve? Is there a need to agree revisions so that these can remain valid in the transition to the new system and not give rise to breaches at Brexit?
Investigating alternative supply routes for goods destined for and from the EU
Although the UK is looking to negotiate a deal that minimises disruption, busier ports, such as in the south-east of England, could experience delays following Brexit as many fear the procedures needed to clear exports and imports will not achieve a similar result to the current free flow of EU trade. Will there be additional customs requirements or the inability of the system to cope with the increase in declarations? Should businesses test alternative routes and forwarders, building relationships that stand them in good stead at Brexit should the need arise?
For UK suppliers, is an EU establishment and EU VAT registration number needed?
In certain circumstances businesses and other organisations within the EU demand that an EU VAT number is provided and/or that a supplier has an EU establishment in order for the supplier to be part of a contract/tender, or to avoid the need for multiple registrations for VAT in EU countries. See also comments on ‘distance selling’ below.
The EU operates a ‘distance selling’ regime for businesses which sell goods from one EU country, say the UK, to private individuals and unregistered organisations in other EU member states. The regime allows sales VAT to be paid by the supplier in the country of dispatch of the goods, until the level of sales exceeds the ‘distance selling’ threshold in the country where the customer is based.
This threshold varies depending on the member state but is between €35,000 and €100,000 per annum. As and when the threshold is exceeded a UK supplier, as used in this example, is obliged to register for VAT in the other territory and to charge VAT there instead of the UK. This regime only exists within the EU and will presumably not apply to UK businesses post Brexit.
The implication for UK businesses is that unless they expect private customers to pay Duty and VAT on import into their EU country post Brexit, or unless they wish to register for VAT in every country to which goods are supplied no matter the turnover, they will need to set up a base (and EU registration) in a chosen EU country from which they can trade and benefit from the distance selling regime once more.
For EU suppliers, dealing with the UK
Post Brexit, EU businesses dealing with the UK will also need to think about their trade with the UK. They too will need to establish who will pay the Duty and VAT on import of goods into the UK. Again, unless private customers are expected to pay the taxes in order for goods to be released to them, there will need to be a VAT registration in the UK or arrangement with a UK based distributor possibly to declare the VAT and Duty at import and subsequent VAT on the supply to the customer.
Also, for B2B supplies, which entity will be responsible for the import? The self-accounting (acquisitions) mechanism for VAT on goods received in the UK from the EU will no longer apply and thus it is likely that suppliers will want to act as the importer, requiring a UK VAT registration as the UK has a nil VAT registration threshold for supplies made in the UK, irrespective of the lack of an establishment. The imposition of a VAT charge at import will result in a cash flow disadvantage in that importers, or EU businesses that have registered for VAT in the UK, will have to await the refund of the import VAT from HM Revenue & Customs (HMRC) following submission of their VAT returns.
Interestingly, the Office of Tax Simplification in the UK has just announced, in the first complete review of the VAT system to be completed in the UK since its introduction in 1973, a recommendation that HMRC should consider introducing an electronic system for dealing with import VAT certificates (that allows the import VAT to be claimed back and, we presume, more quickly). Whilst this may alleviate some of the cash flow issues the change is thought to be a few years away.
Selling ‘electronically supplied services’
Currently, the EU operates a ‘mini one stop shop’ (MOSS) regime in which a supplier accounts for VAT due in each EU country on sales of electronically supplied services to EU private customers. The MOSS system avoids the need for a supplier to register in every country to which it supplies e-services. It allows for a single MOSS VAT return filing. This may no longer be applicable for UK businesses post Brexit.
For UK businesses currently supplying e-services to EU private customers (such as automated tutorials, e-magazines/books), in order to avoid the need to register for VAT in each EU country post Brexit, they will need to identify an EU country that they can register in, in order to continue to file MOSS returns. Equally, post Brexit, there will be changes for suppliers remaining within the EU. Those supplying e-services to UK private persons will need to register for VAT in the UK as the UK will presumably no longer fall within the EU MOSS rules.
Major change to B2B rules for supplies of goods within the EU
Finally, as if Brexit was not enough, there is also a major change which has been confirmed recently which will affect the trade, initially just in goods, between EU businesses. These measures will not be applicable to the UK, as a result of Brexit. The changes were first announced by the European Commission in its 2016 VAT Action Plan.
Under the new system (due to take effect around 2022, although quick fixes will be introduced in 2019) VAT will be due by the supplier, but according to the country where the goods are destined. VAT will be charged at the buyer’s local rate, collected by the seller and then remitted to the buyer’s tax authority via the Mini One-Stop-Shop (MOSS) mechanism. In other words VAT in the EU will become a destination based system.
This will solve some of the missing trader fraud issues that exist where currently the system allows goods to circulate within the EU VAT free. There will be simplified procedures for those businesses that qualify as ‘certified taxable persons’ such as the use of the reverse charge mechanism for businesses acquiring goods. The criteria for being a ‘certified’ person are similar to those used to achieve the current customs Authorised Economic Operator (AEO) status, focussed around the compliance record, proof of solvency and controls over the VAT system. Trading without this status certainly appears to be a disadvantage.
Four ‘quick fixes’ to the EU VAT system will be introduced with effect from January 2020:
Simplifications for call-off stock arrangements
• Simplified chain transactions and which supply is linked to the intra-community transport
• Proof of transport required for goods moving between two EU countries (certified persons only)
• Clarification that a VIES system VAT number of the customer is required to achieve exemption/zero-rating on movements of goods
UK businesses may be relieved that these new rules will not apply to their transactions. They will instead have to cope with the inevitable
changes to the VAT system that will begin to arise post Brexit, especially with the recommendations announced by the Office of Tax
Simplification – such as one recommendation to review and amend the exempt, zero-rated and reduced-rated reliefs from VAT in UK law
so that they align with the government’s social, welfare and economic policies.
However, any UK business finding the need for an establishment and registration in the EU post Brexit, for reasons discussed above, will
need to understand how this new system works. Significant changes are ahead; fortunately, the Kreston Network and its indirect taxation
Special Interest Group will be on hand for advice and help with implementation.