The UK finds itself once again in the grip of an election – although this time, it is a contest whose procedures are only open to a select few. Despite the limited numbers involved, the outcome of this decision will undoubtedly have an impact on the British public at large, and looks set to have significant ramifications for our closet neighbours.
Whilst at this stage there is one candidate shaping up to be the favourite and the most likely to assume the reins of power in the UK, the last few years in British politics have served to prove the old adage that a few weeks is a long time in politics. What is clear is that whoever is the next Prime Minister, they are likely to flex their Brexit muscles in an attempt to galvanise a fractured party and nation behind them. This, coupled with the unprecedented success of the Brexit party in the EU elections means that we are pushed ever closer to the precipice of a hard Brexit. Whether we fall off the cliff by accident, are driven off through reckless politicking or business-sense forsaken political ideology, we find ourselves a lot closer to the edge than a few weeks ago. And if it is the way out of the current impasse, there are serious implications of a hard Brexit from a VAT point of view.
As a result, businesses must ramp up their Brexit preparations and contingency planning. Accordance recently conducted polling of UK and EU businesses which revealed that businesses on both sides of the channel are experiencing Brexit paralysis, with just one in four companies taking proactive steps to address Brexit planning, and one in three saying that they have paused until they know what is happening. We also found that fewer than half of businesses think that Brexit will actually happen.
Goods and services
The first aspect to consider is the treatment of goods. Under a hard Brexit, goods will cease to move across the border under dispatch and acquisition rules, and we will return to a import and export set up. Thus, import duties and VAT will be due when goods arrive in the UK from the EU, and vice versa. This will have a seismic impact and we know it is already a concern – our polling showed that one in three businesses in both the UK and mainland Europe is concerned about incurring duty costs in the event of a hard Brexit. This is because those costs, unlike the import VAT, are non-recoverable.
Whilst this change will have an impact on almost all businesses, online retailers are among those who would be most affected. Under a hard Brexit, distance selling rules would no longer apply when goods move between the UK and EU27. Instead businesses would need to consider who is the importer or record to determine any VAT liabilities, which depending on the path taken could potentially create additional registration needs. All businesses involved in this sector must review supply chains and develop contingency plans, so as to minimise business disruption and upkeep the customer experience.
Supplies of services will likely be less impacted than supplies of goods. In the majority, B2B services are subject to the general rule; VAT is due where the customer belongs and is thus accounted for by the customer using the reverse charge mechanism. Even if we do have a hard Brexit, we don’t anticipate a sudden need for new registrations. Similarly, B2C services are unlikely to experience seismic change, with the exception of suppliers of electronic services who have been accounting for VAT using the EU’s Mini One Stop Shop (MOSS). In the event of a hard Brexit, suppliers of electronic services would have to pick an EU Member State and apply to be part of their non-EU MOSS system.
Fiscal representation enforces the need for a VAT registration to be associated with a physical representative, thus establishing a fixed point of contact in the Member State in question. Not all EU states require fiscal representatives – Germany doesn’t, for example, and France has suggested it won’t require fiscal representation for UK businesses after Brexit – but a number of EU nations have already made clear that they will. In the event of a hard Brexit, fiscal representatives would be required immediately. So for businesses who already hold VAT registrations in the EU, it’s essential to review them, determine those which may need fiscal representation after Brexit, and plan the next steps. It’s important to remember that since Fiscal Representatives are usually jointly and severally liable for the business in question, guarantees are usually required and thus costs are increased.
Currently, EU businesses use the relatively straightforward Refund Directive to secure VAT refunds from other Member States. In the event of a hard Brexit, to recover EU VAT UK businesses will have to use the 13th Directive which is much more burdensome, requires direct claims to each local authority in their local language, and has shorter time frames for claim presentation. For any businesses that currently make refund claims, putting in claims ahead of October 31st is absolutely essential. Similarly, businesses should think about which countries they are currently claiming refunds from, consider reciprocity arrangements, and ensure that all original documents are preserved as they will be needed for claims under the 13thDirective.
Triangulation, and EC sales lists and Intrastat
Triangulation is an EU simplification which many businesses trading cross border rely upon. It’s a mechanism which mitigates the need for additional registrations when there are three or more parties involved in a chain transaction. In the event of a hard Brexit, businesses will no longer be able to use UK VAT numbers to apply the simplification and mitigate the need for registration. This means a rethink of how VAT is accounted for will be needed, as well as a review of supply chains.
The glimmer of good news is that EC Sales Lists and Intrastat declarations would very probably no longer be necessary in the event of hard Brexit. In principle, this is good news as it means fewer declarations, but they may be replaced by another requirement to report.
Your Tax RepresentativeView ProfileRead Articles
Irina is a Tax Consultant specialized in VAT compliance, Intrastat, Environmental Fund and Clawback reporting. Fluent in English and Spanish, Irina assists the clients in the process of VAT registration, VAT compliance and claw-back purposes, as well as other various advisory matters that may arise.