VAT after Brexit: Potential impacts in “No Deal” scenario

15th October 2018

VAT after Brexit; HMRC must prepare the UK economy and business environment for the eventuality of a “no deal” status during Brexit negotiations, including the already complex area of VAT.  We reflect on the key areas of change and complexity that could make a difference to our VAT regulatory environment as we know it.

VAT after Brexit

What exactly is no-deal? 

A ‘no deal’ Brexit means that, come March 2019, no formal agreement will have been made by the UK and EU.  This would mean that the 21-month transitionary period would be scrapped and the UK would find itself outside of the EU immediately.

Is HMRC preparing for a “no deal” impact on VAT after Brexit?

Although the majority of businesses will see no change to their VAT rules, this is an area of concern for those trading in or out of the EU, and it is important to understand how a “no deal” status may affect them in order to prepare accordingly.

To this end, there has been official guidance released by HMRC, explaining how a “no deal” would impact VAT rules for UK businesses trading within EU countries.  This government notice provides early planning on VAT to help businesses understand the potential impact of a “no deal”, and further details and actions will be released in due course.

The HMRC guidance states, “This is contingency planning for a scenario that the UK government does not expect to happen, but people should be reassured that the government is taking a responsible approach.”

What may change?

Current VAT regulation states that VAT is charged on the majority of goods and services sold within the UK and EU, and that VAT is payable by businesses when bringing goods into the UK (although rules differ depending on whether goods come from EU or non-EU countries.)

There are exemptions, including goods exported by UK businesses to non-EU countries and EU businesses. These are zero-rated, meaning UK VAT is not charged at the point of sale. Any goods exported by UK businesses to EU consumers must have either a UK or EU VAT charge, depending on the distance selling thresholds.

The UK will, of course, maintain a VAT system when it leaves the EU next year.  In the instance where “no deal” is agreed, the government will seek to keep VAT after Brexit regulation as similar as it can to current procedures, in order to provide continuity for businesses.   The HMRC guidance highlights the key areas of “no deal” impact that it expects to see for businesses when importing goods from and exporting goods to the EU, supplying services to the EU, and interacting with EU VAT IT systems.

  •  VAT on goods entering the UK as parcels sent by overseas businesses 

Low Value Consignment Relief (LVCR) will not be extended to goods entering the UK from the EU and VAT will be payable.  This includes parcels.  Parcels up to and including a value of £135 will be subject to a tech-driven solution that allows VAT to be collected directly from the overseas business selling these goods to the UK. Over the value of £135, then VAT will continue to be collected in the same way for EU parcels as parcels from non-EU countries sent to the UK.

  • UK businesses selling their own goods in an EU Member State to customers in that country

UK businesses will continue to be able to sell goods stored in an EU member state to customers in the EU.  They will need to register for VAT in any EU member state where sales take place to account for the VAT due in those countries.

  • VAT on vehicles imported into the UK

Businesses will continue to notify HMRC about vehicles brought into the UK from abroad as currently happens.  Import VAT will be due on vehicles brought into the UK from EU member states after next March.

The process will still use the Notification of Vehicle Arrival Procedures (NOVA) system, which also ensures VAT is correctly paid on imported vehicles.

  • UK businesses exporting goods to EU consumers

Distance-selling arrangements will no longer apply to UK businesses and UK businesses will be able to zero rate (not charge VAT at the point of sale) on sales of goods to EU consumers.

Current EU rules mean EU member states will treat goods that enter the EU the same as goods entering from non-EU countries – import VAT and customs duties will be due when they arrive.

  • UK businesses that access EU-wide VAT IT systems

If the UK leaves the EU in a “no deal” status, it will no longer use the EU-wide VAT IT systems.  This includes the VAT Mini One Stop Shop for digital services. Businesses can continue to claim VAT refunds from member states, but should use the existing process for non-EU businesses, and will not be able to use the EU VAT refund system. The EU VAT number validation service can still be used to check the validity of EU business VAT registration numbers.

  • Accounting for important VAT on goods imported into the UK

Postponed accounting will be introduced for import VAT on goods brought into the UK, with UK VAT-registered businesses able to account for import VAT on their VAT return rather than paying it on or after their goods arrive in the UK. This regulation will operate for both EU and non-EU countries. Existing processes for customs declarations and other such duties must still be paid.

  • UK businesses exporting goods to EU businesses

Zero-rate sales to EU businesses will still be possible for UK VAT-registered businesses, but EC sales lists will no longer require completion.

Goods arriving into the EU from the UK will be treated in the same way as those entering from current non-EU countries.

  • Place of supply rules for UK businesses supplying services into the EU 

The main VAT ‘place of supply’ rules will stay the same for UK businesses. These rules determine the country in which you need to charge and account for VAT and are currently set out by the OECD.

Whatever the outcome of ongoing Brexit negotiations, the HMRC guidance highlights that VAT after Brexit and trading with the EU may become more complicated and expensive for affected businesses.  The government agency will continue to provide advice and guidance for UK businesses to aid business planning but, if you are looking for specific advice regarding what your business could do to prepare, then please talk to one of our specialist VAT team members.

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