The final Brexit countdown has begun, as the transition period comes to an end on December 31, 2020. Based on the latest negotiations between the parties, U.K. businesses should get ready to face a no-deal scenario as there is a significant risk that there will be no free trade agreement in place. No-deal would result in various political and economic consequences, but it also means that the U.K. will no longer be in the single market nor in the customs union. However, based on the U.K. government’s current position, even if there is a free trade agreement the U.K. would not be in the single market or customs union. As a result, the value-added tax (VAT) consequences of Brexit are relatively clear at this point.
From a VAT perspective, the U.K. will become a third country, so goods moving between the U.K. and the EU will be treated as imports and exports instead of the current intra-EU acquisitions and dispatches of goods. Businesses undertaking such transactions need to be aware of all the changes that will result because of the change in treatment.
Customs Duty and Import VAT
There are a number of non-VAT related issues as a result of the U.K. no longer being part of the customs union. The issue of customs duty will arise in the absence of a free trade agreement on goods being imported into the EU or the U.K. The U.K. has introduced the U.K. Global Tariff which sets out the rate of duty that will apply in the absence of a free trade agreement with the EU. The EU already has a tariff which will apply on imports from the U.K. Customs duty is a cost to business as it cannot be recovered, so companies should seek to determine if it can be mitigated and at the very least take steps to ensure that customs duty is not applied multiple times to the same goods.
The other matter of concern is that import VAT is due on goods imported into the EU from a country outside the EU (which will include the U.K. post Brexit) and also imports into the U.K. from any country.
The immediate payment of import VAT will have an important financial impact for U.K. businesses, and managing those cash flows will be key post-Brexit. However, several member states offer procedures whereby cash flows can be mitigated, such as VAT exempt imports in some specific cases (e.g. imports followed by a subsequent intra-EU supply which is known as onward supply relief), but also the application of special measures allowing deferred payment of import VAT or no payment at all.
Postponed Accounting via the VAT Return and Deferred Payment
In principle, import VAT must be paid immediately to the customs authorities at the border where the goods enter the EU. However, according to the VAT Directive, each member state may determine the conditions under which the goods are entering their territories as well as the detailed rules for payment of VAT in respect of the importation of goods. As such, member states have the possibility to implement a postponed accounting mechanism via the VAT return, or a deferred payment scheme, or both.
The principle of postponed accounting via the VAT return is that the import VAT due is accounted for and paid in the periodic VAT return of the taxpayer. If the import VAT is deductible, it is recovered on the same return. As such, the cash flow impact is neutral. This is essentially the same way as accounting for VAT as the concept of acquisition tax as there is no physical payment of VAT to the tax authority. The conditions of application differ from one country to another as each member state lays down the details of the mechanism.
With deferred payment of import VAT, the payment of the import VAT is delayed. The U.K. currently operates deferment with the VAT being paid on the 15th day of the month following the time of import. The specifics of each deferment scheme are determined by each member state and may apply to every importer or be limited to certain cases.
Postponed Import VAT Accounting in the U.K.
The U.K. has announced that postponed accounting for import VAT will be introduced for all imports from January 1, 2021 to ease the cash flow burden. This will apply not only to imports from the EU post Brexit, but to all goods that are imported from outside of the U.K. This will provide a valuable cash flow benefit to importers and removes the potential for significant cash flow costs for U.K. businesses that purchase goods from suppliers in the EU.
Whilst the U.K. is only now introducing postponed accounting due to the impact of Brexit, some other EU countries already have similar postponement mechanisms in place. These are often introduced by governments to make their country an attractive place to import goods. If there is no postponement system, there may be a deferred payment option in place. It will be essential for U.K. businesses to become familiar with these in order to establish the most effective supply chains. In some cases, it could determine where goods are imported.
Applicable Options in the U.K.’s Key Trading Partners
Most of the U.K.’s key trading partners in the EU have implemented some form of deferment or postponement.
Germany is a key partner that has implemented deferred import VAT accounting. This provides a possibility for some importers to apply a deferred payment scheme to mitigate the cost of an immediate payment of import VAT. However, a bank guarantee may be required to obtain the application of this scheme. The import VAT is deductible on the VAT return covering the date that the import took place.
In Belgium, importers may request a specific license (ET14.000) which will allow them to postpone the payment of the import VAT to the VAT return. Consequently, the import VAT will not have to be paid if the importer is a fully taxable business. No guarantee is needed to be able to request this authorization. U.K. businesses can use the VAT deferral license if they file periodical VAT returns.
In France, it is possible for non-EU businesses who have a fiscal representative with Authorized Economic Operator status to apply for postponed accounting via the VAT return by requesting a specific authorization to the customs authorities. This authorization, once granted, is valid until December 31 of the third following year and is renewable by tacit consent. However, the customs authority is relaxing this requirement from January 1, 2021 so any business can apply for postponed accounting.
In the Netherlands, Article 23 of the VAT Law grants the ability to postpone import VAT to the VAT return. It is necessary to be established in the Netherlands in order to apply for an Article 23 license directly. If an importer is not established, it is possible to benefit from Article 23 by using the services of a fiscal representative. There are two types of fiscal representation in the Netherlands; limited and general. “Limited” does not involve the importer obtaining their own VAT number and can only be used for certain transactions. “General” fiscal representation involves the importer obtaining their own VAT number which is managed by the fiscal representative and gives maximum flexibility on what can be done with the goods after import.
In Spain, the postponed accounting system enables the importers to avoid payment of VAT at the time of importation and to declare the import VAT due through their periodic VAT return. Postponed accounting, however, only applies to taxable persons filing monthly VAT returns, which in turn leads to an obligation to file under declarations under the Immediate Supply of Information (SII) regime. This requires continuous reporting of detailed transactional data within four days thereby creating additional reporting obligations which need to be taken into consideration when determining if an application to use postponed accounting is beneficial.
Portugal also implemented a postponed accounting scheme in 2017, subject to specific conditions being met. This involves the submission of monthly VAT returns on an ongoing basis which will increase compliance costs. A specific application must be made to use the scheme.
In summary, even though the specifics of a no-deal Brexit are still unclear, U.K. businesses must be prepared and fully aware of the changes for their future transactions with EU member states.
If they are acting as an importer of goods, they will need to ensure that they able to import the goods which will include completion of customs declarations and having an EU EORI number in place.
To mitigate the cash flow impact of import VAT, they should ensure they make use of whatever relief is available and make the necessary application for deferred or postponed accounting in the country of import.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Andy Spencer is Director of Professional Services at Sovos Accordance