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.


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.

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