It has never been in doubt that the UK would retain VAT as a domestic tax following Brexit, nor that – for the foreseeable future – the rules as within the UK would remain substantially the same as those developed under the framework of the VAT Directive and the case law of the CJEU. There is little appetite for the upheaval that wholesale changes to the VAT system would cause and it is far too lucrative to abandon altogether.
However, like it or not, the rules will be changing with respect to supplies made to or received from the EU. Until negotiations have progressed further, the shape (or indeed existence) of any deal with regard to VAT is not known, but statements have been issued by the UK government giving an outline of how a transitional period would work, and of what we can expect should there be no deal.
We are starting to see clauses being introduced into supply agreements catering for the potential changes and this should now always be a consideration in the context of long term agreements.
Transitional period
A joint statement issued by the EC and the UK deals with the transition period to 31 December 2020 that will be in place if a deal is reached.
Essentially, the VAT Directive will continue to apply to cross-border supplies of goods where the transport or dispatch of the goods begins before the end of 2020. The taxable person's rights and obligations regarding any supplies made during the transitional period will then continue to be set by the VAT Directive for a further five years.
Time limits are set out for amendments to a VAT position; applications for refunds of VAT paid either by a person either in the UK or an EU member state must be submitted by 31 March 2021, and the deadline for amended VAT returns relating to cross-border services during the transitional period is 31 December 2021.
Administrative cooperation provisions provide that the current Regulation on this subject and on combating fraud in the field of VAT will continue to apply until four years after the end of the transition period, as will the equivalent council regulation in respect of excise duties. Similarly, the EU Directive on mutual assistance for the recovery of claims related to taxes, duties and other measures will apply for five years after the transitional period and it is confirmed that the UK would retain access to the information systems and databases for this purpose.
In the event of no deal
The VAT treatment of supplies of goods and services within the UK would be unaffected by Brexit if no deal is reached. In due course, one would expect the provisions of UK VAT to diverge from EU VAT - as a result of both legislative amendments and of any differing approaches by the UK courts from that of the CJEU, the judgments of which will be persuasive only following Brexit - but there has been no announcement regarding any planned changes to the regime.
In terms of supplies made to and from the EU, however, the picture could be expected to change significantly.
Import from the EU
On import of goods from the EU, businesses currently benefit by accounting for "acquisition VAT", which means that the VAT does not have to be accounted for immediately. By contrast, when importing from a non-EU country, VAT is chargeable on the importer at the time that the goods arrive at the UK border, which can be some time before it is possible to recover it as input tax. There were serious concerns over the cash-flow implications for businesses currently trading with the EU, but these concerns have been allayed by the promise of postponed accounting which will permit UK businesses to account for import VAT on their VAT returns, rather than physically paying import VAT at the time of import. Postponed accounting will apply to imports from both EU and non-EU countries, to ensure that there is no longer any inequality of treatment.
For parcels sent by overseas businesses, the government intends to level the playing field as between EU and non-EU countries by removing Low Value Consignment Relief altogether, rather than extending it to goods entering the UK from the EU. However, VAT on parcels up to the value of £135 will be collected from the overseas business selling the goods into the UK; the VAT will be charged at the point of purchase and the business will need to register with an HMRC digital service and account for VAT due. This should streamline the process but will, like any new system, take some time to become familiar.
Export to the EU
As with the converse situation, EU member states will treat goods entering from the UK in the same way as they treat those coming from other non-EU countries. This means that import VAT and customs duties will be payable by the importer rather than acquisition VAT, although the exact rules will vary from country to country.
From the UK perspective, as the distance selling arrangements will no longer apply, UK businesses will be able to zero rate sales of goods to EU consumers as well as to businesses. The other good news is that there will no longer be a requirement to complete EC sales lists, although alternative evidence will be required of the sales – details yet to be provided.
One area that will need to be kept under review is the supply by UK businesses of insurance and financial services into the EU. HMRC has indicated that the input VAT deduction rules for financial services supplied to the EU may be changed and that it will update businesses with more information in due course.
The issue here is that supplies of such services outside the EU currently fall within the Input Tax (Specified Supplies) Order which provides for input tax recovery. Extending this to insurance and financial services supplied to the EU would be expensive, although it would enable UK businesses to compete on a more level playing field with the other financial services providers based outside the EU.
Administration
UK businesses will still be able to use the Mini One-Stop Shop (MOSS) system which enables businesses selling digital services to consumers in the EU to report and pay VAT via a single return and payment. While there will no longer be a UK MOSS, it will be possible for UK businesses to register for the MOSS non-union scheme in an EU member state. This must be done within a relatively short time (potentially only 10 days) of making sales but cannot be done before the UK has left the EU; businesses will therefore need to be prepared to act quickly if they are making such sales immediately prior to Brexit.
Although the government has stated that it expects a deal to be reached, it is nonetheless important to consider the likely VAT treatment of supplies with the EU in the event that negotiations are unsuccessful. On the whole, this treatment will be broadly the same as that when trading with non-EU countries but some changes will be made and could have a significant impact.
