Brexit: An Overview of Indirect Tax Considerations
On 23 June 2016, voters in the UK decided to leave the European Union. While the political, economic and social significance for the United Kingdom remain to be determined, it is clear that there will be indirect tax implications as a result. In this short article, we examine some of the questions that businesses may be facing around indirect tax.
What is likely to happen now that the UK has voted to leave the EU?
- It is likely that Brexit will happen in the spring of 2019.
- The process of negotiating terms of exit is expected to be 2 years from the execution of Article 50 of the Treaty of Lisbon although even this time limit can be extended.
- The UK has invoked Article 50 on 29 March 2017.
- Until the UK exits the EU, the current VAT and customs duty legislation within an EU framework remains in place.
- What exactly happens after the period of negotiation is uncertain. This makes it very difficult to predict the precise impact of Brexit.
What should businesses be doing now?
- Most business do not need to take any immediate action; all of the normal compliance obligations – filing returns, intrastat, ESLs and payment arrangements – will continue unchanged in the short term.
- It is extremely unlikely that the UK government will change UK VAT law in the short term in any signifi cant way as a result of Brexit.
- VAT accounts for approximately 20% of tax revenue in the UK, at about £120 billion, it would be hard to imagine that VAT would be replaced or materially changed in the short to medium term.
- VAT receipts provide a regular predictable income for government. These revenues make a real contribution to the perception of long term UK financial stability.
What may change in the 2 years after the Brexit vote?
- Given other economic pressures on government it may be that the standard rate of VAT is adjusted to try to stimulate consumption or bolster government revenues. This depends on other economic circumstances.
- We expect very little about UK law will change in this two year period. There may be some tinkering with certain reliefs – e.g. political favourites for “zero rating”.
What could change when Brexit becomes effective?
- The UK VAT landscape could change much more once the UK leaves the EU in 2019 or later.
- This depends very much on exactly what form Brexit takes and what new arrangements, if any, are negotiated between the UK and European Union.
- The UK could agree a Norwegian or Swiss model which will mean trading with the UK would be similar to, but not the same as, the UK’s current arrangements with the EU.
- Alternatively it may be that we end up with an outcome that is more like Canada which has an advanced free trade agreement covering certain products.
- A further option is that the UK reverts to being simply a member of the World Trade Organisation. WTO rules do not include any preferential access to the EU single market. Nor do they provide preferential access to any of the 50+ markets with which the EU has Free Trade deals.
- Below we list several VAT and Customs implications that could follow Brexit in 2018 or later:
Supplies of Goods – Business to Business
- Goods leaving the UK and arriving in the EU will no longer be intracommunity transactions. They will be zero rated exports of goods from the UK and will be treated as imports into the EU country of destination.
- Supplies to and from the EU will therefore no longer be subject to Intrastat reporting nor will European Sales or Purchase Lists be required to be submitted.
- Goods coming into the UK will be subject to import VAT and duty if applicable although if the UK becomes part of the EE A then duties will not apply.
- Reporting relating to all imports and exports will probably revert back to being the responsibility of the freight forwarder, exporter or importer.
- Acquisition VAT which we account for on EU movements of goods into the UK therefore will become import VAT post Brexit. When the UK entered the Single Market the removal of import VAT was linked to the introduction of Monthly VAT Payments on Account for large traders in order to provide the same cash-flow benefit for government finances. Whilst it is conceivable that Monthly Payments on Account will be withdrawn post Brexit it may be that government feels the need to maintain the Payments on Account arrangements. This will become clear as Brexit approaches.
- Alternatively, in order to provide relief to businesses, we might suggest the UK looks at a more advanced import VAT system such as they have in the Netherlands where on certain imports the importer can simply treat it as if it is an acquisition from the EU.
- Depending on the terms of exit and whether an EU-UK trade agreement is successfully concluded, customs duties may be imposed between the UK and EU. Although no European country outside the EU is currently subject to EU tariffs except for Russia and Belarus, the politics of Brexit are unclear and it is conceivable that tariffs will exist between the UK and EU on certain products.
- The EU place of supply rules will no longer apply to the UK but short to medium term there is no expectation of any significant change.
- Cross-border B2B supplies of services would still be free of UK VAT.
- Supplies of services to and from the EU will no longer need to be recorded on EC sales Lists for services (as per goods mentioned above).
- Depending on the detail of any negotiation, it is likely that online retailers selling from the UK will no longer be subject to distance selling rules post Brexit. They will instead be making exports which are zero rated and subject to import VAT when they reach the EU.
- Of course the UK may still benefit from low value consignment relief (LVC) in the country of the consumer, in which case no VAT may be due on small online purchases. At an EU level we note however that there are plans to catch non-EU sales of low value goods to consumers in a way which is similar to digital services in a VAT MOSS (single EU VAT return) system and abolish the LVC relief. These plans are still to be disclosed in detail.
- UK consumers buying from overseas / EU online retailers may benefit from the UK’s application of LVC relief.
- UK consumers travelling to the EU would in all likelihood benefit from the VAT refund system provided for non-EU visitors. This relief naturally we would expect to be reciprocal.
- For tour operators special rules apply such that VAT is added only to the standard rated “margin” within the EU. Non EU travel is currently not taxed. This could make the UK a more attractive destination for EU travellers but it remains to be seen how this special regime will evolve with the UK outside the EU.
- The UK must set up its own system to collect VAT on digital services supplied to British customers as it would no longer be part of EU VAT MOSS.
Financial Services and VAT recovery
VAT is also a way of taxing banks, financial services companies generally and insurance companies as these companies have limited right to deduct VAT to the extent their customer base is in the UK or EU.
- Financial Services providers have a limited right to VAT recovery in respect of EU or UK activities. If they provide services to customers outside the EU (export of services), they do have the right to recover VAT on costs relating to those services. Post Brexit all services rendered by Financial Services providers to EU counterparties are arguably exports, their right to recover input VAT may increase markedly but this would require a natural adaptation of UK law.
- EU Financial Services providers that sell financial services to UK businesses will have the have the right to recover VAT on costs relating to those services.
- Overseas businesses having a VAT registration in the UK for distance sales may no longer be required to have that VAT registration after Brexit.
- UK businesses having a VAT registration overseas for distance sales may no longer be required to have that VAT registration after Brexit.
- UK businesses that do need a VAT registration in an overseas country may have to appoint a VAT representative as they will be based in a non-EU country.
- Without an EU VAT registration, UK businesses can no longer utilise reliefs available for triangular trade.
- UK businesses that incur VAT in overseas countries where they are not VAT registered will have to file 13th Directive VAT refund requests instead of using the HMRC foreign VAT refund portal.
- EU businesses that incur VAT in the UK and who are not VAT registered will have to file UK foreign VAT refund requests instead of using the local EU foreign VAT refund portal.
Status of the European Court of Justice (ECJ)
- The ultimate judicial authority within the EU is the ECJ and we are in the interesting position that as we get nearer to Brexit there may be reluctance to enforce or apply EU case law where it has an impact on UK companies and operations. There are a number of historic and pending cases that may now be more open to challenge.
Don’t expect any changes soon.
The exit negotiations still have just started and may last 2 years or longer. Given the importance of VAT revenue, the UK is not likely to make meaningful changes to the current VAT system.
Once Brexit becomes effective probably in 2019, then the detail of any changes will depend on exactly the model that is agreed between the EU and the UK. This could be similar to the Norwegian or Swiss models; alternatively it could be more like Canada where the common external tariff is imposed on only some imports of (Canadian) goods into the EU. Lastly the UK could just be a “third country” like the USA and operate under WTO standard rules.
As the position develops we will issue more such releases.