The deadline for the end of the transition period is fast approaching, and yet Brexit talks yield little clarity on the future of the trading relationship between the U.K. and the EU. However, despite this uncertainty, it is clear that the U.K. will become a third country from an EU perspective on January 1, 2021, which has a number of consequences. One is the requirement for non-EU businesses to appoint a fiscal representative to register for VAT purposes. It is possible that a free trade agreement between the U.K. and the EU would change the position, but this is not guaranteed and therefore action needs to be taken to prepare now.
Representation in the EU
Some EU member states require non-EU businesses to appoint a local fiscal representative where the business requires a value-added tax (VAT) registration. A fiscal representative is effectively a form of insurance for the tax authority to safeguard the collection of VAT. The issue for the tax authority is that enforcing debts from non-EU businesses can be extremely difficult.
It is possible for the EU to have a VAT mutual assistance agreement which circumvents this problem, but as of September 30, 2020 the only agreement is with Norway. It is understood that further agreements may be announced in the coming months which could change the landscape in respect of fiscal representation. A fiscal representative is a local business which, in some member states, assumes joint and several liability for the company it represents in respect of the VAT amounts due.
To act as a fiscal representative, it is necessary to meet the tests set by the member state where the VAT registration is required. It may be possible for local subsidiaries or associated companies to act but they must fully understand the role and be able to fulfill it to reduce the risk of non-compliance. It may also be necessary to be authorized by the relevant tax authority.
In the EU, fiscal representation is necessary under two common scenarios.
The first involves non-EU businesses’ registration in a member state where fiscal representation is required. Each member state has the choice as to how they impose fiscal representation. The result is that in some countries it is mandatory in all cases, whilst in others it is dependent on the activity of the taxpayer. Some tax authorities do not require it, whilst others make it optional.
Alternatively, EU businesses registering in another member state where there is a beneficial VAT regime may require a Fiscal Representative to achieve those benefits. This is the case in the Netherlands where postponed import VAT accounting by a nonresident EU business, which creates a valuable cash flow benefit, requires the appointment of a fiscal representative to obtain an Article 23 license. Post-Brexit the U.K. will become a third country for VAT purposes, and in the absence of an agreement that removes the need for U.K. businesses to appoint a fiscal representative, all businesses needing to remain VAT registered must determine the position of the country where registration is required. In practice this is the case in the majority of member states although there are some notable exceptions such as Germany.
Complications and Clarifications
Many businesses are having to restructure their supply chains to deal with the consequences of Brexit. This can create situations where a VAT registration is required in a country for the first time. For example, where goods have been shipped from the U.K. to a member state, the provisions of the single market have meant that VAT registration is not normally required. This now becomes an export from the U.K. and an import into the EU. Depending on the agreement between the parties, the supplier may have to register in the member state of import. Where this country requires fiscal representation, it will be necessary to appoint a local fiscal representative.
As a former member state, the U.K.’s situation is unique in that there is a mass requirement for the appointment of fiscal representatives whereas the normal position is that businesses will require fiscal representation as and when business needs dictate. This will put unprecedented demands upon tax authorities who will have to process large numbers of applications at the same time. This has led to some member states issuing specific guidance for U.K. companies in relation to the appointment of fiscal representatives, with the potential for others to announce specific guidelines in due course.
The French Tax Authority has recently issued a document stating that U.K. companies do not need to appoint a fiscal representative—this is in line with a similar announcement they made in 2019. Full details are awaited but this is a welcome relief for those U.K. businesses that must be registered for VAT in France.
The Belgian tax authorities previously advised all U.K. businesses who hold nonresident VAT registrations that fiscal representation is required before the end of 2020. They have since relaxed their stance and offered the possibility of an extension, but this will only apply until the end of June 2021. There are likely to be additional member states who take the same approach. This is significant for U.K. businesses, and must signal the need to review different tax authority positions urgently.
Where there is joint liability for VAT debts, fiscal representatives take on a significant amount of risk on a company’s behalf. Consequently, to be accepted by a fiscal representative there is a detailed due diligence process to be completed and this should be factored into the time scales when appointing a fiscal representative. In addition, where there is joint liability, most fiscal representatives will require the taxpayer to put a financial guarantee in place. Guarantees typically take the form of bank guarantee or cash deposit. The amount is based on risk and typically calculated as a percentage of annual VAT amount due. The duration of guarantee is at least for the duration of appointment but can be extended to match the statute of limitations in the member state of registration. Clearly, the process for establishing fiscal representation can be time consuming and admin heavy, and with the Brexit deadline fast approaching businesses must act fast to establish necessary support in the countries in which they are required to register.
What Does This Mean for VAT Registrations, Reporting and Recovery?
In most EU countries, VAT numbers will not change with fiscal representation. However, the tax authority may require information already provided for the original VAT registration application, as it is essential they have the most up-to-date company information. Likewise, the nature of transactions taking place post-Brexit may change and fiscal representatives themselves will need to understand accounting processes and procedures. In principle there will be no change to the ways in which transactions will be reported, but the transactions undertaken may change depending on the business model and planned activity.
Similarly, the appointment of a fiscal representative does not in itself have any impact on the requirement to file additional declarations. However, any post-Brexit change in transactions will have an impact on the requirement for additional declarations and this will need to be fully reviewed. Action is required to prepare, plan and consider supply chains and U.K.–EU transactions as well as potential reporting requirements.
Not all U.K. businesses will have a requirement to be registered for VAT in the EU post-Brexit. However, in some cases, EU VAT will still be incurred and must be recovered to reduce costs. When it comes to recovery of this VAT, fiscal representation can also be required. The process of appointing and the documentation required can vary significantly. The predominant issue in the 13th Directive claim process is likely to be reciprocity, as thus far 13th Directive claims have not been made by U.K. companies. The principle of reciprocity means that a member state can deny recovery of VAT if the country of the claimant does not allow recovery by businesses from the member state where the VAT is incurred. The position should therefore be reviewed in advance of incurring significant amounts of local VAT.
Fiscal representatives are likely to be an ongoing feature of cross-border EU–U.K. trade. The time it will take to switch from direct registration to fiscal representation is unclear; a transfer to a fiscal representative should normally be relatively quick. However, there are vast numbers of U.K. businesses with a sudden requirement to register with fiscal representatives and local tax authorities likely to be inundated with requests as the deadline approaches.
With the next few months set to be complex with the pandemic and the U.K.’s fast approaching break from the EU looming, businesses trading cross-border would be wise to plan and prepare for fiscal representation and its resulting administrative and financial costs ahead of time.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Andy Spencer is the VAT Director at Sovos Accordance, U.K.