A deal or no deal, that is the question? – Brexit
Will there be an agreement on Brexit with the EU or not? In the UK the questions posed by Brexit are becoming a concern and the jury is still out as to whether a deal will actually be reached. Some are still hoping there will not actually be a Brexit, but that is perhaps too optimistic.
We still do not have the details of what will happen but, whilst remaining confident that there will be a deal, HM Revenue & Customs (HMRC) have issued information on what will happen if there is no deal.
In summary, in the event of there not being a deal with the EU:
Any hopes that VAT will be abolished are sadly mistaken. The UK will continue to have a VAT system. There are no real surprises here, as the VAT system is the third largest revenue source for the UK Government.
The current rules that apply to goods arriving in the UK from outside the EU will apply for all transactions. That is to say that VAT will be due on goods entering the UK. In theory, this will be payable at the point of entry and claimed back via a VAT return but HMRC has advised that it will introduce postponed accounting for VAT on imports to reduce the cash flow burden. There are no details on the mechanism for this but we would expect it to be similar to the current rules for EU movements of goods i.e. the VAT will be paid and claimed back on the same VAT return.
Currently for parcels coming in from non-EU countries a Low Value Consignment Relief (LVCR) applies but HMRC has announced that this will not apply to parcels from the EU so VAT will be due. HMRC has advised that a technology based system will be introduced for parcels valued at £135 or below. This will enable the VAT to be collected from the overseas supplier. It is expected that the overseas business will charge VAT at the point of sale and register with an HMRC digital service to pay over the tax. For parcels above £135 VAT will be due on entry to the UK.
Goods leaving the UK will be zero rated and so no VAT will be payable then, but VAT and/ or Customs Duty may be payable if the goods are destined for an EU country. This may also be payable at the border, creating administration and possibly cash flow costs.
The distance selling rules which apply to goods sold to consumers in other EU countries will no longer apply for UK to EU sales. These rules currently mean that, where the sales reach a certain level, VAT registration is required in the EU. In a ‘no deal’ scenario goods would be zero rated but, as above, VAT and Customs Duty may be payable at the destination.
Supplies of services will remain broadly the same for B2B supplies, i.e. VAT will be due where the recipient is based, according to the ‘place of supply’ rules, and the charge will be subject to the self accounting mechanism, known as the ‘reverse charge’.
For B2C services the place of supply will very much depend on the service being supplied and there will be more possibilities than there are with B2B sales. Certain services will be zero rated as exported services (e.g. accountancy), some services will be subject to UK VAT and, as it is now, some services may be subject to local VAT abroad, with VAT registration possibly being required in other countries.
HMRC is in discussions regarding the Tour Operators Margin Scheme (TOMS) as this is an EU only system and so will, in theory, not apply following exit. This area of the tax will require special consideration.
UK suppliers of digital services to the EU are currently registered for VAT in each EU country (as required) or they use instead the EU Mini One Stop Shop, ‘MOSS’ system. These suppliers will need to leave the EU MOSS system but can use the non-Union scheme. Non-EU suppliers of digital services may continue to use the non-Union scheme.
EU VAT refunds will still be obtainable but by using the non-EU 13th Directive process.
In essence and from a practical perspective most businesses will not see significant changes in the VAT that they have to pay. But there will be some changes around some of the documentation and the form filling but the expectation of HMRC is that these should not be too onerous. Nevertheless, whatever the compliance requirements are, it will be important to deal with the detail and ensure that the administration is correctly applied. So often, paperwork incorrectly completed or lacking the right level of detail can lead to significant issues with HMRC and costs, for example obtaining satisfactory evidence of export.
Nothing has been set in stone yet. This information is being provided to quell the fears of some in the event of a ‘no deal’ situation being reached. We remain optimistic that negotiations within the EU will reach a deal with clear rules set out, in advance of the 29 March 2019 deadline. Watch this space!
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