While the UK Government and the EU have agreed a Brexit extension to keep the UK in the EU a little longer, the risk of a no-deal Brexit remains until a withdrawal deal is approved by Parliament. Businesses should therefore continue preparations for changes to the UK’s VAT system in case a no-deal Brexit occurs later in the year.
HMRC’s no-deal plans 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 making distance sales of goods, using the Tour Operators Margin Scheme, the Mini One Stop Shop for B2C supplies of digital services, or submitting refund claims for VAT incurred in EU member states.
The no-deal plan for trading with the EU
If there is no deal, the government says that businesses will have to apply the same VAT and 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. 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.
HMRC has highlighted the effect of a no-deal Brexit on a number of 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 will introduce postponed accounting for import VAT on goods brought into the UK. This would allow UK VAT registered 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.
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 case of a no-deal Brexit, the government has drafted a UK-only customs tariff and will apply duty to many some 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.
Should there be a no-deal Brexit, the EU’s distance selling regime will no longer apply to the UK. HMRC says 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 – there will be no LVCR threshold for goods arriving in the UK. However, HMRC has opened an online registration 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.
Tour Operators Margin Scheme (TOMS)
After a no-deal Brexit, the UK will no longer be part of the EU wide TOMS system for businesses who buy in and resell travel facilities as a principal or undisclosed agent.
Instead, a UK only TOMS system will be introduced, under which UK established businesses falling within TOMS must account for UK VAT on the profit margin achieved from the sale of UK travel services and treat the supply of non-UK travel services as zero-rated. It is expected that UK travel businesses will be required to account for VAT on their services in EU member states at some point after Brexit, but the EU has yet to confirm this or how such a requirement would work in practice.
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, HMRC says that the UK will no longer have a MOSS portal and all businesses will be automatically deregistered from UK MOSS. UK vendors who wish to continue using the MOSS must apply to another EU Member State to register for the VAT MOSS ‘Non-Union scheme’ as a non-EU provider. The digital services threshold of £8818 for MOSS registration will no longer apply to UK businesses.
Non-EU vendors who have chosen the UK to host their MOSS registration for the entire EU will also have to re-register in another member state, and in the UK too if they supply these services to UK consumers.
HMRC has yet to comment specifically on the position of EU vendors using MOSS to sell digital services to consumers in the UK, but it is likely that they would be required to register for VAT in the UK and declare their sales to UK customers via a UK VAT return.
EU VAT refund claims
Businesses established in one EU member state may, subject to conditions, submit claims to recover VAT they have incurred in another member state. UK businesses currently submit such claims online through the EU VAT Refund online portal, which HMRC then forwards to the member state concerned.
HMRC says that, in the event of no-deal, the UK portal will close for new claims when the UK leaves the EU. After that, UK businesses claiming VAT in the EU must apply directly to the EU member state under the ‘13th Directive’ VAT refund scheme for non-EU applicants, which requires submission of original, hard copy forms and supporting invoices.
For EU businesses claiming VAT from the UK, the UK will introduce a manual process for recovering VAT incurred before Brexit, keeping the current EU VAT Refund claim deadlines of 30 September 2019 for VAT incurred in 2018 and 30 September 2020 for VAT incurred between 1 January 2019 and the date of the UK’s exit from the EU.
For VAT incurred in the UK after Brexit, the UK will introduce its own hard copy based refund scheme similar to the 13th Directive scheme.
The border between Ireland and Northern Ireland
The UK government has outlined its approach to VAT on goods crossing the Northern Ireland border in the event of a no-deal Brexit. Import VAT will be due on goods moving from Ireland to Northern Ireland – this will apply to goods that end their journey in Northern Ireland or move through Northern Ireland on the way to Great Britain.
VAT registered businesses must account for import VAT on goods moving from Ireland to Northern Ireland on their normal VAT return – HMRC says the new arrangements will be similar to how VAT is accounted for on such imports now and that more information will be available soon.
Traders that are not registered for VAT will also be required to account for import VAT on goods moving from Ireland to Northern Ireland. HMRC says it is developing a new online service so import VAT can be declared and paid on a quarterly return, rather than for every single crossing. Such businesses will not have to register for VAT as a result of a no-deal Brexit, or start charging VAT on their sales.
What happens next?
Until a final agreement is reached on when and how Brexit will take effect, its VAT implications will be 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 – the ‘no-deal’ plan for customs declarations
BDO: No-deal Brexit: Government releases tariff with details of customs duty rates
BDO microsite: Brexit planning for business
BDO Hard Brexit Trade Assessment
BDO Insight: Why Authorised Economic Operator status is essential for manufacturers with non UK supply chains