VAT and Brexit: how UK leaving the EU will impact your VAT compliance?
The UK has voted out of the European Union last week.
Europe and Brexit
The impact of this decision on UK and EU businesses is yet uncertain, however, there are a number of scenarios for "Brexit and VAT" that are more likely to happen than others.
In our analysis of Brexit and VAT impact it will have, we have grouped the different scenarios in those more likely to happen, where we go through the main areas of VAT being affected, and those where it is yet difficult to make an impact assessment. At the end of our analysis, we propose a number of actions and services to help you handling the changes ahead.
Brexit and VAT - most likely to happen…
VAT Directive and ECJ Decisions: They will no longer apply no matter the scenario described below. However, it is unlikely that the UK introduces very different VAT rules to those currently in place. In addition, the UK will no longer have to follow ECJ decisions, which will be taken over by UK domestic tribunals. It is still uncertain how the UK Courts will approach issues where the ECJ has ruled against the UK in the past.
Brexit and VAT rates: Currently, there are strict rules on VAT rates in the EU. Member States cannot set a standard rate lower than 15% and only a number of goods and services can benefit from reduced VAT rates. Although the Commission has recently proposed a relaxation of these rule, Brexit will immediately bring the EU VAT rate rules ineffective. UK will also gain freedom over the scope of VAT exemptions.
EU VAT Refunds: EU businesses benefit from several simplifications when recovering VAT incurred in other EU countries. For example, British companies can claim back VAT incurred in France through the HMRC portal. This system (Directive 2008/09/EC) will no longer apply after the Brexit. UK companies will need to submit a different claim in each country where they incurred VAT. Similarly, EU companies will need to submit a claim in the UK portal for VAT incurred in the UK.
Customs: There is a single Customs regulation in all Member States which the UK will no longer apply after leaving the EU. The final outcome is however uncertain. We analyse the different scenarios below under section ‘May or may not happen’.
ECSL and Intrastat returns will no longer be required to UK businesses selling goods or services to EU countries. Instead, several export formalities and document requirements will need to be met for all exports of goods into the EU or elsewhere.
Fiscal representative requirements: EU companies can register directly for VAT purposes when trading across the EU. This means they do not need a local tax representative, all documents can be signed by the Director of the company. This will no longer apply, so all UK businesses will need to comply with fiscal representative requirements in each country. You can check these requirements in our EU Overview of fiscal representation.
Online businesses: The UK is the biggest online business market in Europe and benefits from all simplifications that the EU allows in this sector. These benefits will also go away. Distance sales simplifications for goods will not apply, which means that UK companies selling goods to private individuals in the EU will need to register for VAT in almost every country where a sale is made (there are low-value import simplifications, but these are very low). In addition, the one-stop-shop simplification for online services (so called MOSS rules) would no longer apply, again obliging UK companies to comply with the registration requirements in other member states in order to benefit from the one stop shop simplification
Brexit and VAT - may or may not happen
The impact of a UK exit goes way beyond VAT compliance and Indirect taxes. The economic and regulatory impact will depend on the status of the United Kingdom after the Brexit and its relationship with the EU and third countries. In this respect, the final impact will depend on the negotiations held after the exit is formally requested.
Depending on how these negotiations are carried, the below scenarios go from more to less European integration:
European Economic Area (like Norway): Would normally not happen as it contradicts most of the Leave campaign arguments, mainly regarding free movement of labour across all EEA countries. If it does, UK would have access to the single market, as well as apply some of the Directives (not the EU VAT Directive), have a small contribution to the EU budget, and gain more control over FTA with third countries (which at the moment are fully under EU control).
FTA – Free Trade Agreement with the EU: In this scenario, the EU would sign a free trade agreement with the UK. Although goods circulation would remain free of tariffs, non-tariff compliance barriers such as differences in regulations and standards would remain. The UK would also need to comply with EU regulations around the free movement of goods. There would be no economic contributions of the UK to the EU. And finally, current Free Trade agreements of the EU with third countries may or may not be grandfathered by the UK.
World Trade Organization Agreements: The relationship with the EU would follow the standards set by the WTO. In this scenario, the UK has no access to the single market. Although UK would not have to comply with EU regulations, in practice, all exports to EU Member States will need to meet EU product standards. Current free trade agreements between the EU and third countries would not be grandfathered by the UK, hence new agreements need to be negotiated. Finally, UK will have full control over immigration and will not have any economic contribution to the EU budget.
At present, tariff free exports from UK to EU countries account for 45% of all UK exports. On the other side, the UK accounts for 10% of all EU exports. The importance of the customs status of the UK and EU is therefore vital for both economies.
Irrespective of these different scenarios, the Brexit timeline does not foresee any change in the current regulatory framework for the next two years. UK and EU companies should therefore continue business as usual until the negotiation discussions reach an agreement.
How can we help you?
These are uncertain times for businesses. The impact and compliance costs must be assessed as soon as possible by every EU company doing business in UK and vice versa. We have experience dealing with VAT obligations of non-EU companies in the EU. We are also experienced in dealing with HMRC and other bodies of the UK authorities. These are some areas where Marosa can help your company:
Brexit and VAT impact assessment: The consequences of Brexit are not the same for every company. Depending on whether you are a providing services, selling goods across the EU or you are in the financial services industry, the impact should be assessed individually. We will draft a Memo outlining the changes in the regulations following the Brexit. Upon review of your ERP system, we will also list the changes required in your system to reflect the regulatory impact of these changes.
VAT registrations: You will require new VAT registrations as well as changes in your VAT registration status (from direct registration to fiscal representation). We can handle these changes in all European countries with a single one stop solution.
VAT representation: We provide fiscal representative services in all EU countries. Our approach will keep the single contact person for all countries while complying with new local regulations.
VAT Refund services: It is important that businesses assess the impact of VAT recovery in the post-Brexit environment. This will be a major area of changes. Thankfully, we are able to submit 13th Directive refund claims in every European country. Please contact us to ensure that your company does not have any VAT leakage due to Brexit.
Export formalities: If you are now making intra-Community supplies from the UK, you must be aware of all export documentation and formalities that will be required once the UK leaves the EU. We can help you with the process documentation, desk procedures and staff training required to ensure compliance with the new regulations.
Please contact us for more information on any of the services regarding Brexit and VAT compliance.