Key proposals include postponed accounting to avoid the cash flow burden of paying import VAT on goods at the time of arrival from the EU.
There will also be major changes for businesses operating distance selling of goods and the Mini One Stop Shop for B2C supplies of digital services.
The Technical Notices
The Government has issued its first round of Technical Notices, which set out its plans in the event it fails to reach an agreement with the EU over the terms of the UK’s exit from the European Union. These include details of its proposals of how a ‘no deal Brexit’ would affect the UK’s VAT and customs rules from 29 March 2019.
If there is no deal, the government says that businesses will have to apply the same customs rules to goods moving between the UK and EU as currently apply to trade between the UK and non-EU countries – i.e. a hard border will apply. Customs declarations will be required when goods enter or leave the UK and importers will be liable to pay import VAT and/or customs duties, which will be set out in a new UK Trade Tariff. Duty rates will most likely equal the non-preferential rates currently applied by the EU (‘WTO rates’). Similarly, the EU will apply customs rules (and duty and VAT at EU rates) to goods it receives from the UK, requiring customs declarations on goods imported from the UK just as for goods imported from other non-EU territories.
While the government stresses its view that a no deal scenario is unlikely and that it expects a negotiated agreement will be reached, it says the Technical Notices are a necessary preparation for all eventualities, including ‘no deal’, until it can be certain of the outcome of the Brexit negotiations.
The Technical Notices cover three key VAT issues that are particularly important for businesses trading cross border with EU member states.
Postponed accounting for import VAT
In the event of a ‘no deal Brexit’, the government has announced that it will introduce postponed accounting for import VAT on goods brought into the UK. This would allow businesses bringing goods into the UK from both the EU and non-EU countries to account for any import VAT due on their VAT return, instead of paying it at the time the goods arrive in the UK.
Under the EU VAT system currently in force, VAT on B2B arrivals of EU goods is accounted for under the ‘reverse charge’ procedure on the buyer’s VAT return, usually as a nil net tax adjustment. However, if the UK left the EU’s VAT system without a contingency plan in place, UK importers would face a liability to pay import VAT (at 20% for many goods) at the time that the goods enter the UK from the EU. They would also have to wait until the next VAT return to recover it as input tax, putting increased pressure on cash flow and working capital. The introduction of postponed accounting, under which businesses will still be able to account for the VAT on their VAT return, is therefore a very important reassurance for UK importers.
Although this easement is intended to address the import VAT issues arising from Brexit, i.e. cash flow issues related to goods arriving from the EU, postponed accounting will also apply to non-EU imports. The government says further guidance on postponed accounting will be published in due course.
While postponed accounting is good news for UK importers, it should be noted that it is only expected to defer the liability to pay import VAT, and will not cover any customs duties that may become due. In the event of a no deal Brexit, the government says it will introduce its own customs tariff and apply duty to many imports from the EU. Payment of customs duties can only be deferred by use of:
- a deferment account, which allows businesses to pay their customs charges by a single monthly payment on the 15th day of the month following the month of import, and/or
- a customs warehousing arrangement, where goods can be stored with customs charges suspended until the time the goods are removed for use.
However, both are subject to an application process and have stringent authorisation requirements, including a bank guarantee as security for a deferment account. This would create additional compliance and administration costs for importers.
Currently, the EU VAT distance selling rules apply to online and mail order sales of goods to private customers in other EU member states. UK businesses must register for VAT in any EU member state to which they deliver goods, where their turnover exceeds the distance selling threshold set by that country – either €35,000 or €100,000. Sales below the threshold do not trigger a registration requirement and vendors instead apply and account for VAT at the rate applicable in the member state of dispatch of the goods.
The Technical Notices now confirm that the EU’s distance selling regime will no longer apply to the UK, should there be a no deal Brexit. The consequences are not spelt out in any detail, but the government does say that sales by UK operators would be zero-rated as exports from the UK, but could then face a liability for customs duty and VAT at the point of arrival into the EU. In practice, some UK distance sellers might be able to benefit from the EU’s Low Value Consignment Relief (LVCR), which exempts packages worth less than €22 from customs charges as they enter the EU, although the EU plans to abolish this in 2021.
In the reverse situation, EU businesses distance selling into the UK could be liable to customs duty and VAT at the border, and the government has confirmed that no LVCR equivalent will apply in that direction. However, the government does plan to set up an online system to allow overseas vendors to charge and account for UK VAT at the point of purchase for packages valued up to £135.
UK businesses involved in distance selling should review their current arrangements and consider setting up a VAT registration in an EU member state to deal with any customs charges and ensure smooth continuation of sales to EU customers.
Mini One Stop Shop (MOSS)
At present, UK businesses selling telecoms, broadcasting and digital services (e.g., apps, computer software, music and video downloads/streaming services, online gaming, ebooks etc) to EU consumers have the option of using the UK’s MOSS portal to account for VAT on B2C digital sales to EU customers. This allows vendors to declare VAT on sales without having to register for VAT in each EU country where sales are made.
In a ‘no deal’ scenario, the government confirms that the UK will no longer have a MOSS portal. Instead, UK vendors will instead have to choose an EU Member State in which to register for the VAT MOSS ‘Non-Union scheme’ for Non EU providers.
What happens next?
Further technical notices are expected over the next few weeks, which may include more government contingency plans affecting VAT and customs duty. In particular, the government has yet to set out its ‘no deal’ scenario for the border between Ireland and Northern Ireland, which casts uncertainty over how it can achieve the hard border between the UK and EU proposed in its Technical Notices. Meanwhile, negotiations for a withdrawal agreement between the UK and EU continue, so the VAT and customs implications of Brexit remain subject to change.
For the time being, businesses should continue to prepare for a no deal Brexit and watch out for further developments. The following BDO information may be useful:
BDO: Brexit Planning Tool
BDO Hard Brexit Trade Assessment
BDO Insight: Why Authorised Economic Operator status is essential for manufacturers with non UK supply chain
BDO Video: VAT implications of a no deal Brexit
Brexit: The no deal plan for customs declarations