With so much uncertainty around the future relationship between the UK and the EU, many businesses that trade in or between the two territories are understandably worried. In order to try and alleviate some of these concerns, the UK authorities and other EU Tax Authorities have released various guidance to help businesses prepare for the possibility of a no deal.
In this article, we will be looking at how VAT changes with a possible no deal Brexit will impact businesses who trade goods in and between the EU and UK. If the UK leaves without a deal there will no longer be frictionless borders, instead supplies will be treated as imports and exports.
Current trading rules:
Business to Business (B2B) supply of goods between the EU and the UK are currently being treated as zero rated for VAT purposes when certain conditions are met. These conditions include that the customer is VAT registered in another EU member state, and that the goods are delivered into another EU country. In this scenario, the customer receiving the goods will account for acquisition VAT in their own country, meaning the supplier does not have a requirement to VAT register in the customer’s country.
On the other hand, for Business to Consumer (B2C) supply of goods, businesses currently charge the EU member state’s VAT rate in the country where the goods are moving from, until they exceed “distance selling” thresholds set in the country where the goods are delivered. Once they have exceeded these thresholds in any calendar year they will have a requirement to VAT register in that country and account for VAT there.
How might it change?
In a no deal scenario, the above VAT treatments would not apply and instead these transactions would be treated as imports and exports.
Currently UK businesses may have multiple VAT registrations for distance selling into the EU. Likewise EU businesses may have a UK VAT number for these types of sales. After Brexit it is likely that these registrations will need to be cancelled and sales will be treated as imports and exports.
Before any business can undertake imports and exports, they must first obtain an Economic Operator Registration and Identification (EORI) number in their own member state. This number allows businesses to clear goods into or out of the EU or UK. Businesses should only obtain one EORI number across the whole EU.
With this change, the benefits of frictionless trade between the UK and EU will be lost with increased scrutiny of goods potentially causing delays or disruptions to supply chains. To try to limit this disruption, in February 2019, HMRC announced the introduction of a new Transitional Simplified Procedure (TSP) for customs. This only applies to UK businesses and should make importing easier for certain types of imports after the UK leaves the EU.
If TSP is applicable then registered UK business will be able to transport goods into the UK without having to make a full customs declaration at the border. It will also allow a postponed payment on import duties. For controlled goods, such as hazardous materials, some information will have to be provided before import. For further guidance or to sign up for TSP go to www.gov.uk/hmrc/eu-simple-importing.
Another impact of a no deal is on exports from the UK to the EU. Although these transactions will continue to be VAT zero rated, the customers receiving the goods in the EU will have to pay import VAT and any import duties (subject to the classification of the goods) in order to clear the goods into their own country. Whilst import VAT is deductible the duty element will not be, therefore EU businesses may have to pay these costs, leading to an increase in the cost of products being purchased from UK suppliers.
UK companies buying goods from the EU will face similar issues. These goods will be treated as imports which means that UK Import VAT and duties may need to be paid on clearing the goods into the country. This would create a significant cash-flow problem for companies receiving goods into the UK on a regular basis, so in order to try to ease this impact HMRC have announced that they will introduce a ‘postponed import VAT accounting’ simplification. This will take away the need for VAT to be paid at the time of clearance of goods into the UK. Instead these transactions will become reportable in the importing companies’ VAT returns.
Import duty is not normally refundable, therefore these amounts will be an additional cost to a business importing dutiable goods into the UK.
Other changes – Postal Goods
A new technology based solution will be implemented to account for VAT collected on parcels being sent into the UK with a value of up to £135. In a no deal scenario, HMRC will expect overseas businesses selling e-commerce goods into the UK to consumers with a value up to £135 to register for a new digital service. This will mean affected businesses will need to charge VAT at the point of purchase and once registered the supplier will be able to account and pay the VAT collected directly to the UK VAT authorities, guidance on these procedures can be found in HMRC notice 143.
Other changes – Overseas VAT reclaims
Currently a UK business incurring VAT in a country where they do not need to be VAT registered has access to an EU VAT refund mechanism via an HMRC portal. Post-Brexit this will be closed.
A UK business wanting to make claims in the EU after Brexit will need to use a different facility which is not as easy or as efficient as the current one.
As a result of the above changes, some of the key issues that businesses face include:
- Potential delays in clearing goods through customs both into the UK and into the EU
- Additional costs as a result of customs duties being applied on goods arriving into the UK from the EU and vice versa.
- The VAT treatment of goods sold to private individuals in both the UK and the EU changing.
- Changes to the calculations of the UK VAT return, relating to the new postponed import accounting rules.
- Changes and likely delays in obtaining refunds of EU VAT for businesses who currently use the HMRC EU VAT refund portal.
- The need to consider additional VAT registrations in the UK and in EU countries, for businesses who can no longer take advantage of the free movement of goods between the territories.
- Distance sellers will need to review their VAT registrations across the EU.
With Brexit still up in the air we recommend that businesses ensure that their current supply chains and business relationships are understood and the effect of a no deal is assessed. For example if a business is importing into the UK and then distributing these goods from there to other EU countries, then they will need to consider registering in another EU member state in order to avoid paying duties in both the UK and the EU.
We understand this is a daunting task, but the experts at Fiscal Solutions can help you with all of your VAT needs and can also help you to understand the impact that Brexit may have on your business. Please contact us here if you need our help.