VAT and duty – practical planning for Brexit

Published on 7 March 2018

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Although the UK Government has already set out potential scenarios which might reduce ‘friction’ in regards to customs procedures at Brexit, changes will of course only be confirmed following the conclusion of negotiations. We recommend that you do not wait for the final outcome of these discussions and instead make contingency plans now to mitigate the potential issues which could affect your business supply chain.

Deal or no deal?

Possible scenarios at Brexit could include:

  • A ‘no deal’ at which the UK could adopt World Trade Organisation (‘WTO’) terms which include imposing customs duty and VAT on imports from the EU and vice versa. No agreement would mean that the concept of an ‘acquisition’ of goods from the EU would be abolished; goods from the EU would be treated as imports from outside the EU and, as such, would be subject to import VAT.
  • The UK could agree to remain compliant with the Union Custom Code (‘UCC’), which became law on 1 May 2016. This would be consistent with the planned upgrade, or rather replacement, for the system for controlling imports and exports (CHIEF).

However, although Brexit is scheduled to happen on 29 March 2019, a transitional period may be negotiated, allowing time for UK and EU businesses to adjust to any new arrangements and avoid any post Brexit ‘cliff-edge’ changes.

What you can do now

Some of the issues you should consider include:

Contracts that span pre and post Brexit periods

Review these contracts so they allow for any necessary revisions and do not give rise to breaches at Brexit. Pay particular attention to supply chains, routes, and timescales etc.

Alternative supply routes

Investigate alternative supply routes for goods destined to and from the EU. Although the UK is looking to negotiate a deal that minimises disruption, busier ports such as in the South East of England could experience delays following Brexit. Many anticipate that the procedures needed to clear exports and imports will not achieve the current free flow of trade enjoyed under the EU system.

For UK suppliers – is an EU establishment and EU VAT registration number needed?

In certain circumstances businesses and other organisations within the EU demand that an EU VAT number is provided and/or that a supplier has an EU establishment in order for the supplier to be part of a contract/tender, or to avoid the need for multiple registrations for VAT in EU countries. See also comments regarding ‘distance selling’ below.

Distance selling

The EU operates a ‘distance selling’ regime for businesses which sell goods from one EU country, say the UK, to private individuals and unregistered organisations in other EU member states. The regime allows sales VAT to be paid by the supplier in the country of dispatch of the goods, until the level of sales exceeds the ‘distance selling’ threshold in the country where the customer is based. This threshold varies depending on the member state, but is between EUR 35,000 and EUR 100,000 per annum.

If the threshold is exceeded, a UK supplier, as used in this example, is obliged to register for VAT in the other territory and to charge VAT there instead of the UK. This regime only exists within the EU and will presumably not apply to UK businesses post Brexit.

The implication for UK businesses is that unless they expect private customers to pay Duty and VAT on import into their EU country post Brexit, or unless they wish to register for VAT in every country to which goods are supplied no matter the turnover, they will need to set up a base (and EU registration) in a chosen EU country from which they can trade and benefit from the distance selling regime once more.

For EU suppliers – dealing with the UK

Post Brexit, EU businesses dealing with the UK will also need to think about their trade with the UK. They too will need to establish who will pay the Duty and VAT on import of goods into the UK. Again, unless private customers are expected to pay the taxes in order for goods to be released to them, there will need to be a VAT registration in the UK or arrangement with a UK based distributor possibly to declare the VAT and Duty at import and subsequent VAT on the supply to the customer.

Also, for B2B supplies, which entity will be responsible for the import? The self-accounting (acquisitions) mechanism for VAT on goods received in the UK from the EU will no longer apply, so it is likely that suppliers will want to act as the importer. This means they would require a UK VAT registration as the UK has a nil VAT registration threshold for supplies made in the UK, irrespective of the lack of an establishment. The imposition of a VAT charge at import will result in a cash flow disadvantage: importers, or EU businesses that have registered for VAT in the UK, will have to await the refund of the import VAT from HM Revenue & Customs (HMRC) following submission of their VAT returns.

The Office of Tax Simplification in the UK has recommended that HMRC should consider introducing an electronic system for dealing with import VAT certificates (that allows the import VAT to be claimed back and, we presume, more quickly). Whilst this may alleviate some of the cash flow issues the change is thought to be a few years away.

Selling ‘electronically supplied services’

Currently, the EU operates a ‘mini one stop shop’ (MOSS) regime in which a supplier accounts for VAT due in each EU country on sales of electronically supplied services to EU private customers. The MOSS system avoids the need for a supplier to register in every country to which it supplies e-services. It allows for a single MOSS VAT return filing. This may no longer be applicable for UK businesses post Brexit.

For UK businesses currently supplying e-services to EU private customers (such as automated tutorials, e-magazines/books), in order to avoid the need to register for VAT in each EU country post Brexit, they will need to identify an EU country that they can register in, in order to continue to file MOSS returns. Equally, post Brexit, there will be changes for suppliers remaining within the EU. Those supplying e-services to UK private persons will need to register for VAT in the UK as the UK will presumably no longer fall within the EU MOSS rules.

For further information on the above, especially regarding establishing and registering in the EU post Brexit, please contact Rupert Moyle, Partner and Head of VAT and Duty here or on +44 (0)330 124 1399.

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