Navigating a ‘No Deal’ Brexit
Mark Moore – Tax Partner at Rayner Essex offers thoughts and opinion on the effect of a ‘No Deal’ Brexit.
The uncertainty around Brexit continues. If a deal is reached with the EU on the UK’s exit terms, it is expected that there will be transitional arrangements that will allow cross-border trade to continue, with broadly the current rules and simplifications, for a significant transitional period whilst the discussions move on to the UK’s future trading relationship.
If agreement cannot be reached by 12 April 2019 then a hard-Brexit is very much on the horizon, although the UK has the right to revoke Article 50 (remain in the EU) or seek a significant extension.
If there is a “no-deal” Brexit this will have immediate practical implications that must be considered by businesses trading with the EU. We summarise below the information that has been released around some of the notable VAT impact areas for businesses should a ‘no-deal’ Brexit transpire. The full HMRC guidance may be found at: VAT for businesses if there is a no-deal Brexit
Import VAT on goods from the EU
Currently, when goods are acquired in the UK from the EU, a business makes accounting entries on its VAT return to account for ‘acquisition tax’. Following Brexit, this will now be an import (rather than EU acquisition) and will be subject to import VAT (and potentially customs duties). As a facilitation, the government has agreed that it will also be possible to account for import VAT on the VAT return. This is a significant simplification that will maintain something similar to current arrangements and would actually be of help in the sense that this postponed accounting would apply to imports more generally, although certain administrative steps are needed.
Customs declarations will be required for goods brought in to the UK. An EORI number will be required for this. An EORI number is a ‘UK Economic Operator registration and Identification number’ and also links a business’s VAT number to its imported goods for import VAT purposes. This is not required if only services are traded with the EU.
The EORI number is also required if applying for import simplifications. Some of the beneficial simplifications are explained here for those moving goods to and from the EU: Customs Authorisations. We would strongly suggest specific advice if involved with moving goods cross-border in the EU as this may facilitate such processes.
It usually takes about 3 days to get an EORI number so as a precaution it would be sensible to apply for one now. The following link: Get a UK EORI number to trade within the EU explains how to do this.
Transitional simplification of import declarations
HMRC has put in place transitional simplified procedures to make it easier for businesses to import goods from the EU. These will be reviewed in 3 to 6 months, see Simplified Import Arrangements. This will remove the need to have paid all VAT and Duties in advance of clearing goods through Customs but businesses must register with HMRC to use the simplification.
Exporting goods to EU business customers
Sales of goods to the EU will continue to be zero-rated but will now be under the rules for exports (rather than the EU rules for removals).
EC sales lists and Intrastat reporting will no longer be required as Customs declarations will have to be made when moving goods and this will give the required trade data the Government needs.
The main difficulty this presents is that the destination country will treat this as an import from outside the EU, so subject to import VAT, Customs duties and Customs procedures. This will be a significant burden competitively and administratively. It also raises commercial issues with who should bear the burden of duty.
HMRC have released guidance on the Customs implications: Trading with the EU if there’s no Brexit deal and the simplifications referred to above should be considered.
Exporting goods to EU individuals
These will now be treated as an export rather than under the distance sales rules. This has three VAT implications:
- For sales from the UK under the distance sales threshold to a particular EU country, these will now no longer be subject to UK VAT. They will be zero-rated in the UK subject to evidential requirements.
- Sales exceeding the distance sales threshold to a particular EU country, will now no longer create a VAT registration requirement there if the customer acts as importer. If the UK supplier acts as the importer when the goods arrive in the EU then an EU VAT registration will be required.
- The destination country will require import VAT and customs duties to be paid on those goods. It may be that in the short-term, the EU’s Low Value Consignment Relief (LVCR), which exempts packages worth less than €22 from customs charges as they enter the EU, will assist although the EU plans to abolish this in 2021.
Goods stored and then supplied in another EU member state, will in most circumstances, create a VAT registration requirement regardless of the status of the customer (individual or business).
Vehicles brought into the UK will be subject to import VAT (subject to certain exceptions). The online Notification of Vehicle Arrivals Procedure (NOVA) will continue to be required to verify import VAT due.
VAT on low value consignments entering the UK
Goods sent to the UK from the EU as parcels by businesses will not benefit from low value consignment relief (LVCR). To ship parcels with a value up to £135, overseas suppliers will be required to register and account for import VAT quarterly unless alternative arrangements have been made with a postal operator to declare VAT. The £135 threshold reflects the fact that for shipments below this value VAT will be due but not Customs duty.
On goods sent by overseas business as a parcel with a value over £135, VAT will be collected from the recipient.
Supplying services to businesses
The place of supply rules which determine where VAT is due on services are expected to remain broadly the same for business customers. There are however likely to be changes on some issues where “use and enjoyment” override rules apply.
VAT deduction in relation to supplies of insurance and banking services
Certain supplies of insurance and banking services carry a right to VAT recovery when made to non-EU customers. It is now envisaged as part of a no deal Brexit that EU supplies will now be included within the right to recovery. This could be significant where such services are supplied cross border in the EU. This is a helpful point and could provide a notable VAT recovery benefit to business in these sectors. The recent amendment to the law has not been incorporated to the VAT no-deal Brexit guidance yet.
Supplies of services to individuals
The main rules are expected to remain the same (with the exception of electronic/digital services).
Electronic services-Mini One Stop Shop (MOSS)
Currently, where electronic/digital services such as downloads, online gaming, online learning, etc. are supplied from the UK to individuals in the EU, VAT is due in the member state where the individual is supplied. A business can register to account for VAT due in other EU member states via the UK MOSS platform.
Following a no-agreement withdrawal, it will be necessary to register for MOSS in another EU member state. The impractical alternative is to register in the individual member states where supplies are made.
Normally, a business should register for MOSS appropriately by the 10th day following a relevant sale the month before. This sits badly with the 12th April decision date for Brexit.
Cross border VAT refunds
Currently, it is possible to apply via the HMRC portal from the UK to other member states to make a VAT refund claim when VAT has been incurred overseas in the EU. In the future, this process will be more cumbersome with claims made directly through the EU member states portal instead of HMRC’s as would other non-EU refund applicants. If you want to use the EU VAT refund electronic system to submit a refund claim for 2018 this must be done before the UK leaves the EU (HMRC guidance says by 5pm on 29 March 2019 but this is likely to be out of date given the short extension to 12 April 2019).
It is clear that the government intends to maintain free movement between the UK and Ireland but what is unclear is how this will be done at this stage. Comment states that information will follow ‘in due course’. From a legal perspective the position in the event of a no-deal Brexit would be for rules described above to apply to supplies between Northern Ireland and the Republic of Ireland. It certainly cannot impose free movement rules on the EU and it would appear that without a legal framework then the best that the UK can do is to turn a blind eye to goods crossing the border although this would hardly represent a long-term solution.
Tour operators will now no longer benefit from the Tour Operators Margin Scheme as an EU simplification. Those involved in dealing with EU travel will need to register for VAT and discharge their EU VAT liabilities in that manner. Becoming established in another EU territory may allow the continued use of the margin scheme throughout the EU.
The UK has stated that the UK Tour Operators Margin Scheme will continue to operate for UK supplies.
VAT registration number validation
UK businesses will no longer be part of the EU VIES system. It will still be possible to validate the VAT number of an EU business on the VIES system and a different system will be available to check UK VAT numbers. HMRC has given assurances that this will have similar functionality to the EU system and will be launched in time for a no-deal Brexit.
The information above is a current snap-shot of the governments intentions and understanding of Brexit and is a summary only. Should any of the matters above directly affect your business and you feel that advice would be helpful please do not hesitate to get in touch with your normal Rayner Essex contact.
Please note, HMRC continue to work on their online resources and it may be that the hyperlinks above will become redundant if the website section on Brexit is restructured.
If you have any questions relating to tax and how some of the issues discussed in this article may affect you, our tax team will be happy to help. Please fill out the contact form below and we will respond.