INSIGHT: The Next Phase of Brexit—VAT and Customs Duty Developments

Following the official departure of the U.K. from the EU on January 31, 2020, the U.K. is now in a period of transition. Negotiations are taking place to decide what form the U.K.’s relationship with the EU will take, in particular with regard to trading arrangements, including both value-added tax (VAT) and customs duty.

Under the terms of the Withdrawal Agreement, the U.K. will remain within the single market, EU VAT regime and EU Customs Union until December 31, 2020. U.K. organizations will welcome the fact that, for the remainder of this year, they have certainty as to the VAT and customs duty treatment of their activities, although clearly there remains significant uncertainty about what happens beyond 2020.

The U.K. and EU will soon enter into negotiation of a trade agreement to take effect from January 1, 2021. Many commentators have questioned whether a trade deal can be agreed in this time, so it remains unclear whether there could be an extension to the period of transition agreed in the Withdrawal Agreement. While, at one time, there was provision in the agreement for an extension, it remains to be seen whether there is political will for this.

In the event that a trade agreement is not concluded by December 31, 2020, and no extension is agreed, the U.K. would exit the EU on a “no deal” basis.

“No Deal” Brexit Reminder

Should the U.K. leave the EU on a “no deal” basis, then the U.K. will exit the EU Customs Union and EU VAT system, and businesses trading in goods (as opposed to services) can probably expect the major impact. The EU Customs Union removes import tariffs on goods moving between its members, and there is currently no need for import or export declarations on physical movements between member countries. If the U.K. exits the EU Customs Union, then all goods moving between the U.K. and EU would require declarations (giving rise to increased administrative costs) and would potentially be subject to import taxes on import.

During 2019, the U.K. government issued a considerable amount of material about its “no deal” plans. This included the introduction of postponed import VAT accounting to ease the cash flow cost of the current import process, whereby import VAT is paid at the time of the goods entering the U.K., with a refund of the import VAT being given several months later. There will also be a temporary period of 12 months where 87% of imports into the U.K. (i.e. goods coming to the U.K. from another country) will be tariff (but not import VAT) free. A note of caution though, is that the EU has not said it will do the same.

HM Revenue & Customs (HMRC) also embarked on a program of automatically issuing Economic Operator Registration and Identification (EORI) numbers and auto-enrolling businesses for Transitional Simplified Procedures (TSP): measures which are designed to help businesses trade with the EU after a “no deal” Brexit.

Expected VAT Changes after January 1, 2021

While some areas of the U.K.’s future VAT and customs duty rules may not be fully known until the U.K./EU trade negotiations are complete, organizations can expect a number of changes to the U.K. VAT regime.

• EU VAT Directive: the starting point is that the U.K. will no longer have to apply the EU VAT Directive, meaning that the U.K. VAT Act will be the sole source of U.K. VAT law. Initially, we do not expect any significant changes from the terms of the EU VAT Directive, but there is likely to be a deviation over time. For example, the U.K. will not be subject to the restrictions in the EU VAT Directive about what goods and services qualify for reduced rates and exemptions.
• Movement of goods: as noted above, all movements of goods to/from the U.K. will be imports and exports as the EU becomes a third country to the U.K.
• EU VAT Distance Selling thresholds: a concern for sellers of goods from the U.K. to consumers in the EU is the likely loss of the EU VAT Distance Selling thresholds. This can allow businesses not to have to VAT register in multiple EU countries, where their sales to customers in that country are below a compulsory VAT registration threshold. The same is likely to apply to EU businesses selling to U.K. consumers, in that after January 1, 2021, goods will need to be imported into the local country, which will require the supplier to U.K. VAT register.
• Intrastat and EC Sales List: it remains to be seen whether the Intrastat and EC Sales List regimes will continue, given they are focused on EU trade.
• Use and Enjoyment rules: for suppliers of services, such as telecommunications services, broadcasting services, electronically supplied services (for business customers), hired goods and hired means of transport, there is likely to be a need to consider the Use and Enjoyment rules in more situations.
• Digital Services: once the U.K. has left the EU after its transition period ends, all supplies of digital services to consumers in EU member states will become liable for VAT in the consumer’s member state. U.K. businesses will no longer be able to benefit from the existing annual threshold of 10,000 euros ($10,979) for cross-border sales of digital services to EU consumers. For U.K. sellers of digital services to EU consumers, the U.K. will no longer be a member of the EU Mini One Stop Shop (MOSS). Any non-EU business which used the U.K. MOSS registration will have to re-register for MOSS in the EU and separately in the U.K. under a regular VAT return.
• Reclaiming EU VAT: there are are also likely to be changes for businesses providing financial services and there are initial signs that they may benefit from increased VAT recovery. There will be changes to the way in which U.K. businesses reclaim EU VAT in countries where they are not required to be VAT registered. U.K. tour operators could lose access to the Tour Operator Margin Scheme (TOMS), which may result in them having to VAT register in every country in which they operate. A “no deal” Brexit could mean that the simplification is no longer available— increasing the VAT compliance obligations for businesses that currently benefit from the TOMS rules.
• Appointment of a fiscal representative: any U.K. businesses that are registered for VAT in an EU member state in which they are not resident may have to appoint a fiscal representative. This will increase compliance costs as the fiscal representative will charge for its services and will also require a bank guarantee to be provided, given the fiscal representative is jointly liable for any VAT debts. To date, there appears to be inconsistency in the EU member states as to whether or not this is required, and so the position in each country should be reviewed.

Finally, there is specific provision in the Withdrawal Agreement for what will happen in relation to trade to/from Northern Ireland. In the event of a “no deal,” Northern Ireland will remain in the U.K. VAT area, but in full alignment with EU VAT laws. It will also remain part of the U.K.’s customs territory, meaning that if the U.K. signs an international trade agreement with another country, its terms would also apply to Northern Ireland. For Northern Ireland to Republic of Ireland trade, the EU Customs Union rules apply, and there would be no tariffs or restrictions.

Goods moving directly from Great Britain to Northern Ireland would not be subject to a tariff unless the goods are “at risk” of being moved into the EU afterwards. Likewise, goods from third countries entering Northern Ireland will be subject to the U.K. tariff, unless they are at risk of being moved to the EU.

Life after Brexit

We are now in a period of transition and relative calm while the U.K. and EU prepare to negotiate their future trading relationship. As the talks progress, there will no doubt be a period of intense media reporting on the negotiations and the likely outcomes, during which businesses may want to take steps to reassure their customers, suppliers and workforce, informing them of the steps being taken to deal with the uncertainties of Brexit, and vice versa.

Business will carry on; there may be some changes, and perhaps some delays, but all companies will be working to adjust to the changes so that business can carry on as normal.

To help make the smartest decisions for your business at each step of the above and beyond, it is also worth seeking specialist advice to look at your business operations more generally. Specialist advisers are adept at noticing and addressing issues that you may have overlooked, or not had the chance to consider.

Robert Marchant is Partner, VAT at national audit, tax, advisory and risk firm, Crowe.

The author may be contacted at: robert.marchant@crowe.co.uk

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.