The European Commission (EC) has announced that its proposed new VAT system for Intra EU B2B supplies of goods will come into force in 2022, with a transitional period scheduled to begin in 2019. Although unrelated to Brexit, the new Single VAT Area may require UK traders to make major changes to their VAT processes before the UK leaves the EU.
The ‘Single VAT Area’
The EC has released further details of its plans to replace the current system for accounting for VAT on Intra EU B2B supplies of goods with a new ‘Single VAT Area’. This is one of five proposals that make up the EU’s wider VAT Action Plan to reform VAT, first announced in 2016. The main aim of this change is to combat intra-community VAT fraud, which contributes heavily to the current ‘VAT gap’ of €150 billion.
The basic structure of the plan has already been published by the Commission, as outlined in our article in May 2016; the Single VAT Area means that:
- VAT will be charged by the vendor in Country A (country of origin), but at the rate applicable in Country B (country of consumption/destination)
- The VAT is declared and paid by the vendor in Country A via a web portal, through which the VAT will be paid over to the tax authorities in Country B.
The latest documents provide more detail of the changes that will apply during the transitional period, for example, the new concept of ‘Certified Taxable Person’, and interim simplifications intended to protect the Intra-EU VAT system before the new system comes fully into force in 2022.
Certified Taxable Person Status (CTP)
There will be a transitional period (currently planned to run from 1 January 2019 to 31 December 2021) under which Certified Taxable Persons (‘trustworthy’ purchasers certified by their national tax authority) can continue to use the current dispatch and acquisition system to account for VAT on goods they buy from other EU member states. Those that do not qualify must use the new regime from 1 January 2019.
VAT registered businesses with a place of business or fixed establishment in the EU can apply to their national tax authority for CTP status, provided they meet criteria related to:
- Good tax compliance
- An auditable system demonstrating a high level of control of the business’ operations and the flow of goods
- Evidence of financial solvency.
Those already approved for Authorise Economic Operator (AEO) status will be deemed to have met the eligibility criteria.
Subject to conditions, CTPs will also be entitled to use other simplifications related to intra-EU trade, including removal of the requirement of some member states for the supplier to register for VAT in each EU country member state where it stores call off stock for a predetermined customer, plus other easements related to chain transactions and evidence of dispatch of goods.
The Single VAT Area proposal remains subject to approval by member states so the timescale for its implementation is not yet set in stone. The Commission says that more draft legislation will be published in spring 2018.
The EU’s plans are ambitious. Assuming all member states quickly agree to the proposals, this leaves only 14 months to set up a system for approving CTP status, which the majority of businesses buying and selling goods within the EU will regard as essential.
How could this affect UK traders?
The precise impact of the Single VAT Area in the UK will depend on the timeline of Brexit. At present, the UK looks certain to still be an EU member on 1 January 2019 when the first phase comes into force and may still be in the Single Market under any transitional Brexit deal agreed with the EU when the Single VAT Area is fully implemented in 2022. Therefore, if the EU sticks to the proposed time scale, the likelihood is that UK businesses will have to participate in the new regime to some extent.
Much remains to be confirmed, but UK cross border traders can start preparing now by considering an application for AEO status. This accreditation would not only ensure acceptance as a Certified Taxable Person, but also bring other benefits, such as faster clearance of goods at ports and airports plus eligibility for various customs approvals, all of which will be vital if border controls are introduced between the UK and EU after Brexit. See Authorised Economic Operator: Is now the time to apply?
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