UK: VAT And Customs Duty After Brexit: Preparing For The Unknown

Last Updated: 9 August 2018
Article by Kassim Meghjee and Nicola Simmons

It has been over two years since the Brexit vote. Despite recent agreement within cabinet (and the subsequent resignations), a deal is yet to be agreed with Brussels. As a result, there is still no clarity on how VAT and customs duty will apply in relation to supplies to and from the EU once Brexit takes full force. Businesses need to be prepared for change, but how? As the future is often dictated by the past, we have compared the current position against what it may become in order to assess what businesses can do to prepare.

VAT

The position now

At the moment, VAT is broadly charged on supplies between the UK and EU as follows:

Goods received in the UK from the EU are technically called intra-EU 'acquisitions'. For supplies of such goods, the VAT position is typically as follows:

  • UK VAT registered businesses receiving EU goods should not be subject to any upfront VAT cost. Instead, the UK buyer accounts for the VAT under the 'reverse charge' procedure. In practice, this means that the EU seller does not charge VAT and the UK buyer treats the supply as a supply to itself. The UK buyer records the UK VAT that would have been payable as output tax in its UK VAT return, which it can then recover as input tax in the same accounting period. Provided the UK buyer is entitled to fully recover the VAT, the transaction should not result in any VAT cost or cash flow issue.
  • UK non-VAT registered businesses or UK private individuals receiving EU goods are subject to the 'distance selling' rules. Broadly (subject to certain exceptions), this means that the UK buyer will be subject to VAT wherever the supplier is based, unless the EU supplier's annual sales to the UK exceed £70,000, in which case UK VAT is payable (and is not recoverable) by the UK buyer

Goods received in the EU from the UK are technically called intra-EU 'dispatches'.

  • If the EU buyer is VAT registered in the EU, the UK seller can zero-rate the supply, provided the goods are removed from the UK within three months from the time of sale and certain evidence is obtained. The EU buyer then accounts for VAT at the prevailing VAT rate in its home jurisdiction.
  • If the EU buyer is not VAT registered and/or is not required to be VAT registered in the EU (such as a private individual), under the distance selling rules the UK seller must charge UK VAT. However, if the value of the UK seller's distance sales to the EU recipient's jurisdiction exceeds that jurisdiction's distance selling threshold, the UK seller must register for and charge VAT in the relevant EU jurisdiction.

Goods bought and received in the EU (i.e. they are not moved to the UK) are subject to sales VAT in the member state where the goods are located.

  • If the UK VAT registered buyer is entitled to recover input VAT, they should be able to recover such non-UK sales VAT relatively easily through the electronic EU cross-border refund system. This system is made possible by virtue of the VAT information exchange system (VIES) for member states, meaning that the authorities can ascertain whether VAT has been correctly applied and paid. The time limit for applying for the refund is nine months after the end of the calendar year the VAT was paid. The UK trader should receive the refund within the time limits applied in that member state, which are ultimately prescribed by overarching EU rules.
  • If the UK VAT registered buyer on-sells those goods to private customers in that EU member state, they may have to register for, and charge, VAT in that member state.

Goods bought within EU supply chain arrangements known as 'triangulations' are subject to simplified reporting and payment systems. For example, a triangulation might typically involve a UK VAT registered supplier purchasing goods in an EU member state (such as France) to be sent directly from that EU state to its VAT registered customer in another EU member state (such as Germany). Under the normal rules, the UK seller would have to register for VAT in Germany and charge German VAT. Under the simplified EU triangulation system, the UK trader need not register for VAT in Germany and can instead simply:

  • give its VAT number to the French trader who can then zero rate that supply;
  • obtain the VAT number from the German business customer so it can zero rate its supply (provided the relevant requirements are met); and include its supply on its EC Sales list.

The German customer can in turn account for German VAT under the reverse charge (if the requirements are met). Overall, the transactions should be tax neutral for the businesses if they are entitled to full recovery of input VAT.

Intra EU services are broadly subject to VAT as follows (subject to exceptions for certain services):

  • A UK VAT registered business supplying services to VAT registered businesses in the EU is not subject to UK VAT. The EU recipient will account for the EU VAT under the 'reverse charge' procedure in its jurisdiction.
  • A UK VAT registered business supplying services to private consumers or non-VAT registered businesses in the EU must charge UK VAT on those services.
  • An EU VAT registered business supplying taxable services to VAT registered businesses in the UK should be VAT neutral using the reverse charge system. The UK recipient will account for UK VAT under the UK 'reverse charge' procedure
  • An EU VAT registered business supplying services to private consumers or non-VAT registered businesses in the UK should not charge UK VAT, but may have to charge VAT in its EU jurisdiction.

The position that may be

The UK government and EU negotiators have jointly confirmed that the existing VAT rules will continue to apply after the UK leaves the EU on 29 March 2019 until 31 December 2020. After this date, the UK could become subject to VAT requirements in one of the following two ways:

  • The UK would continue to be treated as within the EU VAT area, meaning that the treatment above would continue to apply. In light of the prescriptive transitional period fiercely negotiated in Brussels, this is unlikely to be the case after 31 December 2020.
  • The UK would leave the EU VAT area (which will be the case by law, unless a deal is reached). The UK will be treated by the EU as a 'third country' and vice versa. If this were the case:
  • Goods received in the UK from the EU will be treated as 'imports' from a third country and would therefore be subject to UK import VAT, unless a relief applies. Where applicable, the import VAT would have to be paid upfront in order for the goods to clear customs, even potentially in the case of low value goods. Whilst UK VAT registered business receiving such goods in the course of their business should be able to reclaim the import VAT on their next VAT return, this would cause a cash flow issue whilst they await refund of the import VAT from HMRC.
  • Goods received in the EU from the UK, will be treated by UK customs as 'exports' to a third country. Regardless of whether the EU buyer is VAT registered or not, a UK VAT registered seller exporting such goods to the EU should be able zero-rate the supply, provided the goods are exported by the seller within three months and certain evidence requirements are satisfied. However, the goods will likely be subject to import VAT in the buyer's EU jurisdiction, with the buyer having to pay that VAT at the point of entry. If eligible, the buyer may then be able to claim a refund. The timing for receiving that import VAT refund will vary across member states – in some jurisdictions it has been known to take years.
  • Where UK VAT registered businesses have bought and received goods in the EU and incurred sales VAT in the relevant EU member, they should still be able to recover such non-UK sales VAT from the member state. However, as above, they can only do so under the more laborious 13th Directive process, which is likely to prolong the cash flow issue.
  • In relation to UK/EU supply chain triangulations, if the simplified EU triangulation system is withdrawn, the UK trader in our example above would have to register for VAT in Germany in order: (1) for the French company to zero rate its supply to them; and (2) to charge German VAT to the customer. Obtaining an EU VAT registration may prove onerous as the UK trader may have to satisfy statutory requirements in order to qualify
  • For UK/EU services, the net VAT position under the general rules should be broadly unchanged after 31 December 2020, as the reverse charge procedure should apply regardless of whether the recipient is EU or non-EU. However, in relation to the exceptions to the general rules, the administrative requirements may be drastically different. For example, UK suppliers of digital services to EU private consumers will no longer be able to use a single VAT registration under the EU mini-one stop shop (the MOSS scheme) and may therefore have to register and file for VAT in every country in which they make such supplies.
  • On a minor positive note, the current filing obligations in relation to intrastat declarations and EC Sales Lists may no longer apply after 31 December 2020.

Customs duty

The position now

Currently, goods passing between the EU and the UK are not subject to customs duty and benefit from 'lighter touch' customs checks.

The position that may be

From 11pm on 29 March 2019, the UK will likely lose its membership to the Common Transit Convention. Whilst existing customs procedures will continue until 31 December 2020, the customs rules as we know them will no longer apply. This means that importers may become subject to additional administrative requirements, including obtaining import registrations and submitting customs declarations every time goods come in and out of the EU. The reliefs currently available may also not apply. This is likely to result in delays to the passage of goods through the UK/EU border.

As well as these additional administrative requirements, if the UK is no longer part of the European Single Market or the Customs Union, goods crossing the UK/EU border may become subject to customs duty (in the UK and in the EU). Unlike VAT, customs duty is not recoverable, though it may be deductible as a business expense.

The government previously proposed the following two options for the future customs position:

  1. A highly streamlined customs arrangement, also known as the 'maximum facilitation' (or the 'max fac') option. Under this option, the UK would trade with the EU effectively as a third party but would look to retain duty-free and administration-free access to the European Single Market, ideally without being subject to decisions by the European Court of Justice. This is the government's preferred option and is legislated for in the Taxation (Cross-border Trade) Bill 2017/19. The Bill is currently at report stage in the House of Commons.
  2. A new customs partnership with the EU, under which the UK would align its approach to customs with the EU in such a way that the UK/EU border would not be necessary. Under this option the UK would remain subject to European regulations and decisions of the ECJ.

Following negotiations at Chequers on 6 July 2018, the cabinet announced a collective stance from which to negotiate a customs deal with the EU. This third model intends to create a post-Brexit free trade area for goods, subject to a common rule book, common cross-border processes and procedures for VAT and a new 'facilitated customs arrangement' that would remove the need for customs controls at the border. According to the White Paper published on 12 July 2018, the arrangement would involve the UK applying the EU's tariffs for goods intended for the EU, and the UK's own tariffs and trade policy for goods intended for consumption in the UK. Negotiations with Brussels will commence on this footing.

If no deal is reached in Brussels, the UK and EU would treat cross border supplies in the same way as they currently treat trade with third countries. UK businesses exporting goods into the EU would be subject to the relevant member state's duty regime for third countries. On the other hand, the UK could set its own tariff s for goods imported from the EU and would be free to negotiate preferential trade deals with non-EU states.

It is also possible that the UK could become a member of the European Economic Area (EEA) and the European Free Trade Association (EFTA) under an arrangement similar to that of Norway. Norway has partial access to the European Single Market but is not part of the Customs Union. As a result, Norway is granted preferential duty treatment provided certain evidential requirements are met. Such an arrangement would likely require the UK to harmonise its laws to recognise EU requirements.

Preparing for Brexit

Things to consider from recent developments

The EU VAT system is itself due to undergo signifi cant reform by 2022, especially in relation to small and medium enterprises and e-commerce. Th ese changes are subject to ongoing discussions, in which the UK government has been openly involved.

As announced in the UK and EU's joint statement of 19 June 2018, the UK will retain access to the VIES until 31 December 2024 and the EU refund procedures will remain valid for claims submitted by 30 April 2021 and handled by 31 January 2022.

What businesses can do to prepare for Brexit

In case of the UK being treated as a 'third country' by the EU and vice versa, UK businesses importing goods from the EU may be able to mitigate the consequences of the Brexit by considering the following steps:

  • Setting up a duty deferment account with HMRC, allowing import VAT and customs duty to be paid monthly in arrears, usually subject to a bank or insurance backed guarantee.
  • Opting to fi le monthly VAT returns. Whilst this will involve additional administration and cost, it should shorten the gap between paying import VAT and reclaiming it as input tax.
  • Appointing a fi scal representative to ease the administrative and fi nancial burden.
  • Obtaining 'authorised economic operator accreditation' for goods to clear customs faster.
  • Considering a business restructure and/or reviewing supply chain options.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
TMF Group
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
TMF Group
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions