What Will Brexit Mean for VAT?

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Rob Janering

Rob Janering Accordance, U.K.

Rob Janering, Associate Director, Accordance, U.K.

The question of the whether the U.K. will remain in a Customs Union with the EU post Brexit may be dominating the news, but equally important are the probable major changes to the VAT system. What should businesses be doing to prepare?

The U.K. cabinet cannot agree on a preferred new customs arrangement; moreover, there is no certainty that whatever model is adopted by the U.K. will be agreed to by the European Union (”EU”). How the situation will be resolved (and when) remains a difficult call to make.

However, even as this topic attracts all the headlines, many other Brexit issues are bubbling away. One of the key ones is VAT, a close but distinct cousin of customs. This is an important area because VAT is an EU tax, legislated for via the EU's VAT Directive 2006/112/EC (it is then implemented into national laws, hence the U.K. having the VAT Act 1994). Differences of opinion between taxpayers and tax authorities are ultimately arbitrated by the Court of Justice of the European Union (“CJEU”) if they cannot be resolved by the courts locally.

A New VAT System?

Given the fact that recourse to the CJEU and application of any EU laws are currently “red lines” for the U.K., it is hard to see how the U.K. can remain part of the current EU VAT system. Therefore, it is very likely that VAT in the U.K. is going to see change, in the form of a new VAT system for the U.K.

The general view is that the U.K. would almost certainly continue to have its own VAT system if it were to leave the EU (last year, VAT accounted for more than 100 billion pounds of U.K. government income). However, businesses would face some significant changes to the way they account and manage VAT once the U.K. is no longer considered to be an EU member state.

Key Changes

On the assumption that the U.K. had a completely independent VAT system post-Brexit, some of the key changes we might expect to see would be the following.

Import VAT

At the moment, when goods arrive in the U.K. from the EU there is no import VAT due. The VAT due when the goods arrive is accounted for via acquisition tax, which is a process whereby the taxpayer self-declares the VAT on its return. Importantly, there are no cash flow implications when doing this (the VAT due is generally offset as being recoverable at the same time).

When the U.K. is outside the EU VAT system this would change and import VAT would be payable. This is levied by HM Revenue & Customs (“HMRC”) and is payable at the time of import. It is only recoverable via inclusion on a VAT return, and because there is always a lag between payment, filing a return and then receiving a VAT refund, a negative cash flow position is inevitable. There may be measures to reduce the cash flow impact, but nothing has been proposed to date.

VAT Recovery

I have talked before ( http://src.bna.com/zjK) about how recovery of non-U.K. VAT costs may become harder. Currently, U.K. businesses can recover VAT incurred in other EU member states via a relatively simple system that involves submissions to HMRC, who then pass the claim to the other tax authorities on their behalf. Going forward, U.K. businesses may have to make what are known as “13th Directive” claims which enable non-EU businesses to recover VAT.

However, a 13th Directive claim involves having to submit claims to each tax authority independently, provide hard copies of invoices and work to shorter time frames for providing information. It also relies on the refunding country having a reciprocal arrangement with the country where the claimant belongs. For example, Spain doesn't provide refunds to U.S. businesses because the U.S. doesn't have a VAT system. With regard to this last point, it is unknown what the reciprocal position will be between the U.K. and EU member states and it will have to be monitored carefully.

All of these changes will put pressure on businesses to be on top of the new process from the outset in order to prevent VAT being lost if claims are not made correctly (or at all).

Fiscal Representation

At the moment, when a U.K. business has to register in another EU member state it is not required to appoint a fiscal representative (another legal entity which often takes on joint and several liabilities for any VAT due). Many EU member states request this though when a non-EU business registers. The result is that post Brexit, U.K. businesses are likely to have to appoint fiscal representatives in those countries where it is required for non-EU businesses currently: the U.K. is unlikely to receive favorable treatment. This will not only increase administration but will also increase costs: guarantees must often be paid, and there is likely to be increased compliance spend to reflect the greater risks involved.

Triangulation Simplification

This is a simplification mechanism which helps businesses to mitigate the need to register for VAT in other member states because of complex transactions. It is used when there is a three-party chain transaction taking place where the parties are VAT registered in different EU member states and the goods being sold move directly from the supplier to end customer.

Triangulation relieves the need for the intermediate business to register in the country of arrival. However, Brexit would remove the possibility for intermediary U.K. businesses to use their U.K. VAT numbers to apply the simplification. Instead, they would have to either register locally in the different EU member states of delivery of the goods, or seek to use the triangulation simplification using a non-U.K. VAT number. Again, either option would see increased compliance administration and costs.

All of these VAT changes will, almost certainly, require businesses to review and make significant alterations to their current procedures. This could see some benefits (such as a reduction in VAT registrations), but it remains to be seen whether any benefits outweigh potential negative implications.

On top of this, businesses will have to also get to grips with whatever new customs arrangement is entered into. Just this week HMRC gave evidence to the Treasury Select Committee and revealed that if the highly streamlined customs arrangement (the so-called max fac) is agreed, newly required customs declarations could cost each business 32.50 pounds per declaration—or between 17–20 billion pounds a year across the spectrum. This amount has been disputed by some parties, but it does show that any new arrangements will not come without costs.

Planning Points

The need to review supply chains and existing arrangements to ensure that, once changes are confirmed, a business can make informed decisions, has never been greater. Most supply chains will probably need reconfiguring in some respects; new compliance obligations will have to be understood; and mechanisms put in place to manage them. Starting to plan for this sooner rather than later is probably a prudent approach to take.

Rob Janering is Associate Director at Accordance, U.K.Accordance specializes in the analysis of cross-border VAT. Our consultants lead the company's compliance and reporting processes, as well as delivering cross-border VAT projects for international businesses. Accordance's compliance team consists of staff who speak all the major EU languages. If you have any questions regarding VAT recovery, please email: vatreclaim@accordancevat.com

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